s51211010q.htm


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 March 31, 2011
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  o      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 May 12, 2011, there were 4,803,459 shares of the registrant’s common stock, no par value, outstanding.
 


 
 

 
 
1ST CONSTITUTION BANCORP
 
FORM 10-Q
 
INDEX
 
 
   
Page
     
PART I.
FINANCIAL INFORMATION
 
     
1
     
   
   
 
1
     
   
   
 
2
     
   
   
 
3
     
   
   
 
4
     
 
5
     
 
 
25
     
40
     
40
     
PART II.
OTHER INFORMATION
 
     
41
     
41
     
42
 
 
PART I. FINANCIAL INFORMATION

Item 1.               Financial Statements.
 
1st Constitution Bancorp and Subsidiaries
Consolidated Balance Sheets
(unaudited)
   
March 31, 2011
   
December 31, 2010
 
ASSETS
           
CASH AND DUE FROM BANKS
  $ 114,047,708     $ 17,699,103  
                 
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS
    11,401       11,398  
                 
Total cash and cash equivalents
    114,059,109       17,710,501  
                 
INVESTMENT SECURITIES:
               
Available for sale, at fair value
    112,658,102       85,470,993  
Held to maturity (fair value of $142,264,108 and $81,712,004 at
March 31, 2011 and December 31, 2010, respectively)
    141,271,366       81,889,895  
                 
Total investment securities
    253,929,468       167,360,888  
                 
LOANS HELD FOR SALE
    4,944,106       21,219,230  
                 
LOANS
    323,728,977       411,987,339  
Less- Allowance for loan losses
    (5,750,043 )     (5,762,712 )
                 
Net loans
    317,978,934       406,224,627  
PREMISES AND EQUIPMENT, net
    10,794,590       6,148,626  
ACCRUED INTEREST RECEIVABLE
    2,453,402       2,405,741  
BANK-OWNED LIFE INSURANCE
    11,569,780       11,474,643  
OTHER REAL ESTATE OWNED
    6,358,232       4,850,818  
OTHER ASSETS
    13,000,050       7,000,155  
                 
Total assets
  $ 735,087,671     $ 644,395,229  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
LIABILITIES:
               
Deposits
               
Non-interest bearing
  $ 112,437,456     $ 92,023,123  
Interest bearing
    537,582,192       451,712,026  
                 
Total deposits
    650,019,648       543,735,149  
                 
BORROWINGS
    10,000,000       25,900,000  
REDEEMABLE SUBORDINATED DEBENTURES
    18,557,000       18,557,000  
ACCRUED INTEREST PAYABLE
    1,312,042       1,434,338  
ACCRUED EXPENSES AND OTHER LIABILITIES
    4,678,816       5,087,586  
                 
Total liabilities
    684,567,506       594,714,073  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY:
               
Common stock, no par value; 30,000,000 shares authorized; 4,812,344 and
4,812,344 shares issued and 4,803,459 and 4,803,459 shares
outstanding at March 31, 2011 and December 31, 2010, respectively
    38,963,652       38,899,855  
Retained earnings
    11,531,647       10,741,779  
Treasury Stock, at cost, 8,885 shares and 8,885 shares
at March 31, 2011 and December 31, 2010, respectively
    (62,409 )     (58,652 )
Accumulated other comprehensive income
    87,275       98,174  
                 
Total shareholders’ equity
    50,520,165       49,681,156  
                 
Total liabilities and shareholders’ equity
  $ 735,087,671     $ 644,395,229  

See accompanying notes to consolidated financial statements.
 
 
1st Constitution Bancorp and Subsidiaries
Consolidated Statements of Income
(unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
INTEREST INCOME:
           
Loans, including fees
  $ 5,354,207     $ 5,328,865  
Securities:
               
Taxable
    1,284,944       1,393,886  
Tax-exempt
    285,072       107,930  
Federal funds sold and short-term investments
    9,106       19,709  
   
Total interest income
    6,933,329       6,850,390  
   
INTEREST EXPENSE:
               
Deposits
    1,398,130       1,880,668  
   Borrowings
    106,920       266,415  
Redeemable subordinated debentures
    264,154       264,150  
Total interest expense
    1,769,204       2,411,233  
Net interest income
    5,164,125       4,439,157  
                 
PROVISION FOR LOAN LOSSES
    399,998       300,000  
Net interest income after provision for loan losses
    4,764,127       4,139,157  
   
NON-INTEREST INCOME:
               
Service charges on deposit accounts
    175,842       176,356  
Gain on sales of loans
    436,739       320,544  
Income on Bank-owned life insurance
    95,137       96,639  
Other income
    317,032       355,307  
                 
Total non-interest income
    1,024,750       948,846  
   
NON-INTEREST EXPENSE:
 
Salaries and employee benefits
    2,576,664       2,376,700  
Occupancy expense
    566,738       445,927  
FDIC insurance expense
    227,547       247,683  
Data processing expenses
    303,473       258,807  
Other operating expenses
    988,410       804,829  
Total non-interest expenses
    4,662,832       4,133,946  
                 
Income before income taxes
    1,126,045       954,057  
Income taxes
    336,177       254,799  
Net income
    789,868       699,258  
Dividends on preferred stock and accretion
    0       176,984  
Net income available to common shareholders
  $ 789,868     $ 522,274  
   
NET INCOME PER COMMON SHARE:
 
Basic 
  $ 0.16     $ 0.11  
Diluted 
  $ 0.16     $ 0.11  
See accompanying notes to consolidated financial statements.

 
1st Constitution Bancorp and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2011 and 2010
(unaudited)


   
 
 
Preferred
Stock
   
 
 
Common
Stock
   
 
 
Retained
Earnings
   
 
 
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
 
Total
Shareholders’
Equity
 
                                                 
BALANCE, January 1, 2010
  $ 11,473,262     $ 36,774,621     $ 10,307,331     $ (73,492 )   $ (1,080,669 )   $ 57,401,053  
Issuance of vested shares under employee
     benefit program (10,042 shares)
            56,165                               56,165  
Share-based compensation
            14,288                               14,288  
Dividends on preferred stock
                    (150,000 )                     (150,000 )
Accretion of discount on preferred stock
    26,984               (26,984 )                        
Comprehensive Income:                                                
    Net Income for the three months
   ended March 31, 2010
                    699,258                       699,258  
    Minimum pension liability net of tax benefit
                                    69,230       69,230  
                                                 
    Unrealized gain on securities available for sale
net of tax
                                    519,932       519,932  
    Unrealized gain on interest rate swap contract
          net of tax
                                    36,039       36,039  
                                                 
Comprehensive Income
                                            1,324,459  
                                                 
Balance, March 31, 2010
  $ 11,500,246     $ 36,845,074     $ 10,829,605     $ (73,492 )   $ (455,468 )   $ 58,645,965  
                                                 
Balance, January 1, 2011
  $ 0     $ 38,899,855     $ 10,741,779     $ (58,652 )   $ 98,174     $ 49,681,156  
Issuance of vested shares under employee
            benefit program  and exercise of stock options
            (1,651 shares)
            46,294               11,597               57,891  
Share-based compensation
            17,503                               17,503  
Treasury stock purchased (1,651 shares)
                            (15,354 )             (15,354 )
Comprehensive Income:                                                
    Net income for the three months
ended March 31, 2011
                    789,868                       789,868  
                                                 
    Minimum pension liability, net of tax benefit
                                    1,927       1,927  
                                                 
    Unrealized gain on securities available for
sale, net of tax benefit
                                    (117,197 )     (117,197 )
    Unrealized gain on interest rate swap contract,
net of tax benefit
                                    104,371       104,371  
                                                 
Comprehensive Income
                                            778,969  
                                                 
Balance, March 31, 2011
  $ 0     $ 38,963,652     $ 11,531,647     $ (62,409 )   $ 87,275     $ 50,520,165  
 
See accompanying notes to consolidated financial statements.
 

1st Constitution Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
   
Three Months Ended March 31,
 
   
2011
   
2010
 
OPERATING ACTIVITIES: 
           
     Net income 
  $ 789,868     $ 699,258  
           Adjustments to reconcile net income 
               
                to net cash provided by (used in) operating activities- 
               
           Provision for loan losses 
    399,998       300,000  
           Provision for loss on other real estate owned
    147,178       0  
           Depreciation and amortization 
    218,243       137,241  
           Net amortization of premiums and discounts on securities 
    447,515       192,923  
           Gains on sales of loans held for sale
    (436,739 )     (320,544 )
           Originations of loans held for sale 
    (25,228,512 )     (26,796,844 )
           Proceeds from sales of loans held for sale 
    41,940,375       32,306,333  
           Income on Bank – owned life insurance 
    (95,137 )     (96,639 )
           Share-based compensation expense
    90,518       49,288  
          Increase in accrued interest receivable 
    (47,647 )     (179,917 )
          (Increase) decrease in other assets
    745,772       169,351  
          Decrease in accrued interest payable 
    (215,411 )     (220,646 )
         Decrease in accrued expenses and other liabilities 
    (375,625 )     (523,663 )
 
Net cash provided by operating activities 
    16,891,852       5,716,141  
INVESTING ACTIVITIES:
               
     Purchases of securities - 
               
           Available for sale 
    (62,763,601 )     (32,936,864 )
           Held to maturity 
    (65,546,545 )     0  
     Proceeds from maturities and prepayments of securities - 
               
           Available for sale 
    35,216,978       42,312,938  
           Held to maturity 
    5,899,501       1,471,850  
     Net decrease in loans 
    85,597,345       18,483,261  
      Purchase of bank owned life insurance
    0       (750,000 )
     Capital expenditures 
    (255,029 )     (564,662 )
     Additional investment in other real estate owned
    (139,668 )     (1,650 )
     Proceeds from sales of other real estate owned
    595,363       0  
     Cash consideration received in connection
            with acquisition of branches
    101,539,588       0  
 
Net cash provided by investing activities 
    101,143,932       28,014,873  
 
FINANCING ACTIVITIES: 
               
     Exercise of stock options and issuance of vested shares
    57,891       56,165  
     Purchase of Treasury Stock
    (15,354 )     0  
     Dividend paid on preferred stock
    0       (150,000 )
    Net decrease  in demand, savings and time deposits 
    (5,829,713 )     (38,454,338 )
     Net decrease in borrowings
    (15,900,000 )     0  
 
Net cash used in financing activities 
    (21,687,176 )     (38,548,173 )
 
Increase (decrease)  in cash and cash equivalents 
    96,348,608       (4,817,159 )
 
CASH AND CASH EQUIVALENTS 
               
     AT BEGINNING OF PERIOD
    17,710,501       25,854,285  
 
CASH AND CASH EQUIVALENTS 
               
     AT END OF PERIOD 
  $ 114,059,109     $ 21,037,126  
 
SUPPLEMENTAL DISCLOSURES 
               
     OF CASH FLOW INFORMATION: 
               
           Cash paid during the period for - 
               
Interest 
  $ 1,984,615     $ 2,631,879  
Income taxes 
    -       -  
Non-cash investing activities
               
Real estate acquired in full satisfaction of loans in foreclosure
  $ 2,110,287     $ 0  
See accompanying notes to consolidated financial statements.
 
 
1st Constitution Bancorp and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 (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 Delaware, Inc., 1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc. 1ST Constitution Title Agency, LLC, Riverside Lofts, LLC 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, 2010, filed with the SEC on March 23, 2011.
 
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 March 31, 2011 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)  Acquisition of Unaffiliated Branches

On March 25, 2011, the Bank acquired certain deposit and other liabilities, real estate and related assets of the Rocky Hill, Hillsborough and Hopewell, New Jersey branch banking offices from another financial institution for a purchase price of $9.85 million (the “Acquisition”).  The Acquisition was completed pursuant to the terms and conditions of the Branch Purchase and Assumption Agreement and Agreement for Purchase dated as of December 30, 2010, which was previously disclosed on a Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on January 3, 2011.

The Company accounted for this transaction using applicable accounting guidance regarding business combinations. The fair value of savings and transaction deposit accounts acquired was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  A core deposit intangible was ascribed to the value of non-maturity deposits based upon an independent third party evaluation which was prepared using the actual characteristics of the deposits and assumptions we believe to be reasonable.  Certificates of deposit accounts were valued utilizing a discounted cash flows analysis based upon the underlying accounts’ contractual maturities and interest rates.  The present value of the projected cash flow was then determined using discount rates based upon certificate of deposit interest rates available in the marketplace for accounts with similar terms. The fair value of the three branch buildings was determined via appraisals performed by qualified independent third party appraisers. The fair value of loans acquired, all of which were performing, was assumed to approximate amortized cost based upon the small size and nature of those loans. The fair value amounts stated above are preliminary estimates and are subject to adjustment but are not expected to be materially different than those disclosed. 
 

As a result of the Acquisition, the three branches became branches of the Bank.  Included in the Acquisition were the assumption of deposit liabilities of $111.9 million, primarily consisting of demand deposits, and the acquisition of cash of approximately $101.5 million,  fixed assets of approximately $4.6 million, which includes, without limitation, ownership of the real estate and improvements upon which the branches are situated, and loans of $862,000.  The Bank recorded goodwill of approximately $3.2 million and a core deposit intangible asset of approximately $1.7 million as a result of the Acquisition.

(3)  Net Income Per Common Share
 
Basic net income per common share is calculated by dividing net income less dividends and discount accretion on preferred stock by the weighted average number of common shares outstanding during each period.
 
Diluted net income per common share is calculated by dividing net income less dividends and discount accretion on preferred stock by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of potential 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 16, 2010 and paid on February 2, 2011 to shareholders of record on January 18, 2011.
 
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 March 31,
2011
 
   
 
 
Income
   
Weighted-
average
shares
   
 
Per share
Amount
 
Basic EPS
                 
Net income
 
$
789,868
             
Preferred stock dividends and accretion
   
0
             
Income available to common shareholders
   
789,868
     
4,802,615
   
$
0.16
 
                         
Effect of dilutive securities
                       
Stock options and unvested stock awards
           
89,453
         
                         
Diluted EPS
                       
Income available to common shareholders
      Plus assumed conversion
 
$
789,868
     
4,892,068
   
$
0.16
 
 
   
Three Months Ended March 31,
2010
 
   
 
 
Income
   
Weighted-
average
shares
   
 
Per share
Amount
 
Basic EPS
                 
Net income
 
$
699,258
             
Preferred stock dividends and accretion
   
(176,984
)
           
Income available to common shareholders
   
522,274
     
4,751,339
   
$
0.11
 
                         
Effect of dilutive securities
                       
Stock options and unvested stock awards
           
5,996
         
                         
Diluted EPS
                       
Net income available to common shareholders
      Plus assumed conversion
 
$
522,274
     
4,757,335
   
$
0.11
 
 
 
(4)           Investment Securities
 
 Amortized cost, gross unrealized gains and losses, and the estimated fair value by security type are as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2011 
 
Cost
   
Gains
   
Losses
   
Value
 
                         
Available for sale-
                       
U. S. Treasury securities and
                       
    obligations of U.S. Government
                       
    sponsored corporations (“GSE”) and agencies
 
$
31,366,918
   
$
24,496
   
$
(58,430
)
 
$
31,332,984
 
Residential collateralized
    mortgage obligations – GSE
   
16,835,632
     
341,947
     
(9,876
)
   
17,167,703
 
Residential collateralized
     mortgage obligations – non-GSE
   
5,175,527
     
86,160
     
(12,222
)
   
5,249,465
 
Residential mortgage
     backed securities – GSE
   
48,029,899
     
1,160,174
     
(150,921
)
   
49,039,152
 
Obligations of State and
                               
    Political subdivisions
   
5,388,857
     
81,729
     
(64,682
)
   
5,405,904
 
Trust preferred debt securities – single issuer
   
2,461,096
     
0
     
(438,609
)
   
2,022,487
 
Corporate Debt Securities
   
1,482,605
     
8,202
     
0
     
1,490,807
 
Restricted stock
   
924,600
     
0
     
0
     
924,600
 
Mutual fund
   
25,000
     
0
     
0
     
25,000
 
                                 
   
$
111,690,134
   
$
1,702,708
   
$
(734,740
)
 
$
112,658,102
 

March 31, 2011
 
 
 
 
 
Amortized
Cost
   
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Income
   
 
 
 
 
Carrying
Value
   
 
 
 
Gross
Unrealized
Gains
   
 
 
 
Gross
Unrealized
Losses
   
 
 
 
 
Fair
Value
 
Held to maturity-
                                   
    U. S. Treasury securities and
                                   
         obligations of U.S. Government
                                   
         sponsored corporations (“GSE”) and
              agencies
  $ 19,158,760     $ 0     $ 19,158,760     $ 38,360     $ (34,465 )   $ 19,162,655  
    Residential collateralized
        Mortgage obligations – GSE
    8,819,534       0       8,819,534       63,059       (16,194 )     8,866,399  
    Residential mortgage backed
        Securities – GSE
    39,864,463       0       39,864,463       278,206       (44,054 )     40,098,615  
    Residential mortgage backed
        Securities – non-GSE
    15,393,765       0       15,393,765       199,368       0       15,593,133  
Obligations of State and
                                               
      Political subdivisions
    30,856,207       0       30,856,207       738,297       (93,691 )     31,500,813  
Trust preferred debt securities – pooled
    644,495       (500,944 )     143,551       0       (140,938 )     2,613  
Corporate debt securities
    27,035,086       0       27,035,086       93,839       (89,045 )     27,039,880  
                                                 
    $ 141,772,310     $ (500,944 )   $ 141,271,366     $ 1,411,129     $ (418,387 )   $ 142,264,108  
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2010
 
Cost
   
Gains
   
Losses
   
Value
 
                         
Available for sale-
                   
U. S. Treasury securities and
                       
obligations of U.S. Government
                       
sponsored corporations (“GSE”) and agencies
 
$
34,299,374
   
$
60,189
   
$
0
   
$
34,359,563
 
         Residential collateralized mortgage obligations- GSE
   
18,653,850
     
483,908
     
0
     
19,137,758
 
         Residential collateralized mortgage obligations-
             non GSE
   
5,677,577
     
113,496
     
(29,751
)
   
5,761,322
 
Residential mortgage backed securities – GSE
   
16,963,589
     
1,206,146
     
0
     
18,169,735
 
Obligations of State and
                               
Political subdivisions
   
3,110,145
     
23,768
     
(112,485
)
   
3,021,428
 
         Trust preferred debt securities
   
2,460,380
     
0
     
(602,877
)
   
1,857,503
 
         Corporate debt securities
   
1,495,438
     
4,973
     
(1,827
)
   
1,498,584
 
         Restricted stock
   
1,640,100
     
0
     
0
     
1,640,100
 
         Mutual fund
   
25,000
     
0
     
0
     
25,000
 
                                 
   
$
84,325,453
   
$
1,892,480
   
$
(746,940
)
 
$
85,470,993
 
                                 

December 31, 2010
 
 
 
 
 
 
Amortized
Cost
   
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Income
   
 
 
 
 
 
Carrying
Value
   
 
 
 
 
Gross
Unrealized
Gains
   
 
 
 
 
Gross
Unrealized
Losses
   
 
 
 
 
 
Fair
Value
 
Held to maturity-
                                   
    U. S. Treasury securities and
                                   
         obligations of U.S. Government
                                   
         sponsored corporations (“GSE”) and
              agencies
  $ 23,170,741     $ 0     $ 23,170,741     $ 93,600     $ (50,721 )   $ 23,213,620  
    Residential collateralized
        mortgage obligations – GSE
    2,520,690       0       2,520,690       84,253       0       2,604,943  
    Residential mortgage backed
        securities – GSE
    9,344,517       0       9,344,517       131,443       (41,711 )     9,434,249  
Obligations of State and
                                               
      Political subdivisions
    19,467,404       0       19,467,404       245,290       (352,534 )     19,360,160  
Trust preferred debt securities – pooled
    642,478       (500,944 )     141,534       0       (137,361 )     4,173  
Corporate debt securities
    27,245,009       0       27,245,009       67,696       (217,846 )     27,094,859  
                                                 
    $ 82,390,839     $ (500,944 )   $ 81,889,895     $ 622,282     $ (800,173 )   $ 81,712,004  
 

Restricted stock at March 31, 2011 and December 31, 2010 consists of $909,600 and $1,625,100, 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 March 31, 2011, 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.”

   
Amortized
Cost
   
Fair
Value
 
Available for sale-
     
     Due in one year or less
 
$
5,489,353
   
$
5,508,907
 
     Due after one year through five years
   
12,813,219
     
12,841,698
 
     Due after five years through ten years
   
22,866,413
     
23,216,050
 
     Due after ten years
   
70,521,149
     
71,091,447
 
Total
 
$
111,690,134
   
$
112,658,102
 
                 
Held to maturity-
               
     Due in one year or less
 
$
2,839,312
   
$
2,841,036
 
     Due after one year through five years
   
43,619,379
     
43,705,186
 
     Due after five years through ten years
   
21,032,969
     
21,448,137
 
     Due after ten years
   
74,280,650
     
74,269,749
 
Total
 
$
141,772,310
   
$
142,264,108
 

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 March 31, 2011 and December 31, 2010 are as follows:

March 31, 2011
       
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
 
19
   
$
26,409,895
   
$
(92,895
)
 
$
0
   
$
0
   
$
26,409,895
   
$
(92,895
)
                                                       
Residential collateralized mortgage
     obligations - GSE
 
6
     
9,703,759
     
(26,070
)
   
0
     
0
     
9,703,759
     
(26,070
)
                                                       
Residential collateralized mortgage
       obligations – non-GSE
 
2
     
1,860,851
     
(10,687
)
   
350,719
     
(1,535
)
   
2,211,570
     
(12,222
)
                                                       
Residential mortgage backed
      Securities - GSE
 
28
     
39,251,493
     
(194,975
)
   
0
     
0
     
39,251,493
     
(194,975
)
                                                       
Obligations of State and Political
    Subdivisions
 
13
     
6,448,847
     
(109,914
)
   
964,634
     
(48,459
)
   
7,413,481
     
(158,373
)
                                                       
Trust preferred debt securities –
        single issuer
 
4
     
0
     
0
     
2,022,487
     
(438,609
)
   
2,022,487
     
(438,609
)
                                                       
Trust preferred debt securities –
        single issuer - pooled
 
1
     
0
     
0
     
2,613
     
(641,882
)
   
2,613
     
(641,882
)
                                                       
Corporate Debt Securities
 
32
     
17,192,880 
     
(89,045
   
0
     
0
     
17,192,880
     
(89,045
)
                                                       
  Total temporarily impaired securities
 
105
   
$
100,867,725
   
$
(523,586
)
 
$
3,340,453
   
$
(1,130,485
)
 
$
104,208,178
   
$
(1,654,071
)
 
 
December 31, 2010
       
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. Government sponsored
     corporations and agencies
  6     $ 5,120,020     $ (50,721 )   $ -     $ -     $ 5,120,020     $ (50,721 )
                                                       
Residential collateralized mortgage
     Obligations – Non-GSE
  2       2,035,105       (21,478 )     372,747       (8,273 )     2,407,852       (29,751 )
                                                       
Residential mortgage backed securities
     GSE
  4       4,393,707       (41,711 )     -       -       4,393,707       (41,711 )
                                                       
Obligations of State and Political
     Subdivisions
  31       11,124,090       (378,918 )     927,538       (86,101 )     12,051,628       (465,019 )
                                                       
Trust preferred debt securities –
        Single issuer
  4       0       0       1,857,503       (602,877 )     1,857,503       (602,877 )
                                                       
Trust preferred debt securities –
        Pooled
  1       0       0       4,173       (638,305 )     4,173       (638,305 )
                                                       
Corporate debt securities
  45       24,917,591       (219,673 )     0       0       24,917,591       (219,673 )
                                                       
  Total temporarily impaired securities
  93     $ 47,590,513     $ (712,501 )   $ 3,161,961     $ (1,335,556 )   $ 50,752,474     $ (2,048,057 )
                                                       

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 generally 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.

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 that mature in 2027, all of which were single-issuer securities.   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.  None of the corporate issuers have 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 security – 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 charge of $864,727 of which $363,783 was determined to be a credit loss and charged to operations and $500,944 was recognized in other comprehensive income (loss) component of shareholders’ equity.

A number of factors or combinations of factors could cause management to conclude in one or more future reporting periods that an unrealized loss that exists with respect to 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 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 months ended
March 31, 2011
   
Three months ended
March 31, 2010
 
Balance at beginning of period
  $ 364     $ 364  
Change during the period
    -       -  
Balance at end of period
  $ 364     $ 364  

(5)  Loans and Allowance for Loan Losses

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 March 31, 2011:
 
   
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
  $ 4,459,663     $ 0     $ 4,092,421     $ 8,552,084     $ 56,086,773     $ 64,638,857     $ 0     $ 4,092,421  
   Commercial Business
    519,832       0       665,132       1,184,964       46,741,004       47,925,968       0       1,138,045  
   Commercial Real
       Estate
    1,185,224       0       1,407,644       2,592,868       90,975,362       93,568,230       0       1,407,545  
   Mortgage Warehouse
        Lines
    0       0       0       0       92,947,939       92,947,939       0       0  
                                                                 
   Residential Real Estate
    526,544       0       0       526,544       10,144,798       10,671,342       0       0  
                                                                 
Consumer
                                                               
   Loans to Individuals
    0       0       77,858       77,858       12,952,904       13,030,762       0       77,858  
   Other
    0       0       0       0       236,274       236,274       0       0  
                                                                 
Deferred Loan Fees
    0       0       0       0       709,605       709,605       0       0  
                                                                 
Total
  $ 6,691,263     $ 0     $ 6,243,055     $ 12,934,318     $ 310,794,659     $ 323,728,977     $ 0     $ 6,715,869  
 
 
The following table provides an aging of the loan portfolio by loan class at December 31, 2010:
 
 
   
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
  $ 0     $ 0     $ 6,569,296     $ 6,569,296     $ 61,321,407     $ 67,890,703     $ 0     $ 6,569,296  
   Commercial Business
    113,801       60,526       605,208       779,335       53,953,637       54,733,172       0       750,623  
   Commercial Real Estate
    3,179,541       0       1,411,390       4,590,931       90,686,883       95,277,814       0       1,411,390  
   Mortgage Warehouse
       Lines
    0       0       0       0       169,575,899       169,575,899       0       0  
                                                                 
   Residential Real Estate
    173,708       0       0       173,708       10,261,330       10,435,038       0       0  
                                                                 
Consumer
                                                               
   Loans to Individuals
    0       0       77,858       77,858       13,271,178       13,349,036       0       77,858  
   Other
    0       0       0       0       181,924       181,924       0       0  
                                                                 
Deferred Loan Fees
    0       0       0       0       543,753       543,753       0       0  
                                                                 
Total
  $ 3,467,050     $ 60,526     $ 8,663,752     $ 12,191,328     $ 399,796,011     $ 411,987,339     $ 0     $ 8,809,167  
 
 
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 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, 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 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 to 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 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.
 

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.

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 and 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 after 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.

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 March 31, 2011.

Commercial Credit Exposure - By
Internally Assigned Grade
 
Construction
   
Commercial
Business
   
Commercial
Real Estate
   
Mortgage
Warehouse
Lines
   
Residential
Real Estate
 
                               
Grade:
                             
Pass
  $ 51,383,732     $ 45,219,025     $ 83,039,694     $ 92,947,939     $ 10,151,732  
Special Mention
    4,690,186       1,273,473       6,769,612       0       0  
Substandard
    8,564,939       1,253,733       3,095,174       0       519,610  
Doubtful
    0       179,737       663,750       0       0  
Total
  $ 64,638,857     $ 47,925,968     $ 93,568,230     $ 92,947,939     $ 10,671,342  
                                         
Consumer Credit Exposure -
By Payment Activity
 
Loans To
Individuals
   
Other
                         
                                         
Performing
  $ 12,952,904     $ 236,274                          
Nonperforming
    77,858       0                          
Total
  $ 13,030,762     $ 236,274                          

The following table provides a breakdown of the loan portfolio by credit quality indictor at December 31, 2010.
 
Commercial Credit Exposure - By
Internally Assigned Grade
 
Construction
   
Commercial
Business
   
Commercial
Real Estate
   
Mortgage
Warehouse
Lines
   
Residential
Real Estate
 
                               
Grade:
                             
Pass
  $ 52,445,421     $ 52,587,444     $ 85,122,509     $ 169,575,899     $ 10,435,038  
Special Mention
    4,482,569       433,377       3,668,243       0       0  
Substandard
    10,962,713       1,499,461       5,823,312       0       0  
Doubtful
    0       212,890       663,750       0       0  
Total
  $ 67,890,703     $ 54,733,172     $ 95,277,814     $ 169,575,899     $ 10,435,038  
                                         
Consumer Credit Exposure -
By Payment Activity
 
Loans To
Individuals
   
Other
                         
                                         
Performing
  $ 13,271,178     $ 181,924                          
Nonperforming
    77,858       0                          
Total
  $ 13,349,036     $ 181,924                          
 

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 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 March 31, 2011 and December 31, 2010:

Period-End Balances By Impairment Method – March 31, 2011
                                     
         
Commercial
   
Commercial
   
Mortgage
   
Residential
                     
Deferred
   
Total
 
   
Construction
   
Business
   
Real Estate
   
Warehouse
   
Real Estate
   
Consumer
   
Other
   
Unallocated
   
Fees
       
Allowance for loan losses:
                                                           
Ending Balance
  $ 2,561,217     $ 870,154     $ 1,405,433     $ 418,266     $ 77,605     $ 190,467     $ 2,481     $ 224,420     $ 0     $ 5,750,043  
                                                                                 
Ending Balance
                                                                               
  Individually evaluated
     for impairment
    904,432       216,995       306,173       0       11,619       77,858       0       0       0       1,517,077  
  Collectively evaluated
      for impairment
    1,656,785       653,159       1,099,260       418,266       65,986       112,609       2,481       224,420       0       4,232,966  
                                                                                 
Loans receivables:
                                                                               
Ending Balance
  $ 64,638,857     $ 47,925,968     $ 93,568,230     $ 92,947,939     $ 10,671,342     $ 13,030,762     $ 236,274       0       709,605     $ 323,728,977  
  Individually evaluated
        for impairment
    4,092,421       1,138,045       1,407,545       0       519,610       77,858       0       0       0       7,235,479  
  Collectively evaluated
       for impairment
    60,546,436       46,787,923       92,160,685       92,947,939       10,151,732       12,952,904       236,274       0       709,605       316,493,498  
 
 
Period-End Balances By Impairment Method – December 31, 2010
                                     
         
Commercial
   
Commercial
   
Mortgage
   
Residential
                     
Deferred
   
Total
 
   
Construction
   
Business
   
Real Estate
   
Warehouse
   
Real Estate
   
Consumer
   
Other
   
Unallocated
   
Fees
       
Allowance for loan losses:
                                                           
Ending Balance
  $ 1,744,068     $ 971,994     $ 1,723,865     $ 763,092     $ 67,828     $ 192,457     $ 1,910     $ 297,498     $ 0     $ 5,762,712  
                                                                                 
Ending Balance
                                                                               
  Individually evaluated
     for impairment
    45,000       180,525       271,382       0       0       77,858       0       0       0       574,765  
  Collectively evaluated
      for impairment
    1,699,068       791,469       1,452,483       763,092       67,828       114,599       1,910       297,498       0       5,187,947  
                                                                                 
Loans receivables:
                                                                               
Ending Balance
  $ 67,890,703     $ 54,733,172     $ 95,277,814     $ 169,575,899     $ 10,435,038     $ 13,271,178     $ 181,924       0       543,753     $ 411,987,339  
  Individually evaluated
        for impairment
    4,142,137       3,177,782       1,411,390       0       0       77,858       0       0       0       8,809,167  
  Collectively evaluated
       for impairment
    63,748,566       51,555,390       93,866,424       169,575,899       10,435,038       13,271,178       181,924       0       543,753       403,178,172  
 
 
The allowance for loan loss by loan class at both March 31, 2011 and December 31, 2010, and related activity for the three months ended March 31, 2011, are as follows:

   
Construction
   
Commercial
Business
   
Commercial
Real Estate
   
Mortgage
Warehouse
   
Residential
Real Estate
   
Consumer
   
Other
   
Unallocated
   
Total
 
Balance - December 31, 2010
  $ 1,744,068     $ 971,994     $ 1,723,865     $ 763,092     $ 67,828     $ 192,457     $ 1,910     $ 297,498     $ 5,762,712  
Provision charged to operations
    1,183,736       (55,760 )     (318,432 )     (344,826 )     9,777       (1,990 )     571       (73,078 )     399,998  
Loans charged off
    (366,588 )     (46,319 )     -       -       -       -       -       -       (412,907 )
Recoveries of loans charged off
    -       239       -       -       -       -       -       -       239  
Balance - March 31, 2011
  $ 2,561,217     $ 870,154     $ 1,405,433     $ 418,266     $ 77,605     $ 190,467     $ 2,481     $ 224,420     $ 5,750,042  

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.
 
 
Impaired Loans Receivables (By Class) – March 31, 2011
   
Recorded
Investment
   
 
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance:
                             
                               
Commercial
                             
   Construction
  $ 170,921     $ 189,921     $ --     $ 2,779,171     $ --  
   Commercial Business
    478,609       490,299       --       443,643       --  
   Commercial Real Estate
    359,192       359,192       --       424,298       --  
   Mortgage Warehouse Lines
    --       --       --       --       --  
      1,008,722       1,039,412       --       3,647,112       -  
Residential Real Estate
    --       --       --       --       1,516  
                                         
Consumer
                                       
   Loans to Individuals
    --       --       --       --       --  
   Other
    --       --       --       --       --  
      -       -       -       -       -  
 With no related allowance:
    1,008,722       1,039,412       -       3,647,112       1,516  
                                         
With a related allowance:
                                       
                                         
Commercial
                                       
   Construction
    3,921,500       3,997,000       904,432       2,931,167       --  
   Commercial Business
    659,436       659,436       216,995       463,058       --  
   Commercial Real Estate
    1,048,353       1,048,353       306,173       984,370       --  
   Mortgage Warehouse Lines
    --       --       --       --       --  
      5,629,289       5,704,789       1,427,600       4,378,595       --  
Residential Real Estate
    519,610       519,610       11,619       346,709       --  
                                         
Consumer
                                       
   Loans to Individuals
    77,858       77,858       77,858       77,858       --  
   Other
    --       --       --       --       --  
      77,858       77,858       77,858       77,858       --  
With a related allowance:
    6,226,757       6,302,257       1,517,077       4,803,162       --  
                                         
Total:
                                       
   Commercial
    6,638,011       6,744,201       1,427,600       8,025,707       --  
   Residential Real Estate
    519,610       519,610       11,619       346,709       1,516  
   Consumer
    77,858       77,858       77,858       77,858       --  
    $ 7,235,479     $ 7,341,669     $ 1,517,077     $ 8,450,274     $ 1,516  
 


Impaired Loans Receivables (By Class) – December 31, 2010
                   
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
                   
With no related allowance:
                 
                   
Commercial
                 
   Construction
  $ 4,409,296     $ 4,453,796     $ --  
   Commercial Business
    385,370       394,654       --  
   Commercial Real Estate
    554,986       554,986       --  
   Mortgage Warehouse Lines
    --       --       --  
      5,349,652       5,403,436       --  
                         
Residential Real Estate
    --       --       --  
                         
Consumer
                       
   Loans to Individuals
    --       --       --  
   Other
    --       --       --  
      --       --       --  
      5,349,652       5,403,436       --  
                         
With an allowance:
                       
                         
Commercial
                       
   Construction
    2,160,000       2,160,000       45,000  
   Commercial Business
    365,253       365,253       180,525  
   Commercial Real Estate
    856,404       856,404       271,382  
   Mortgage Warehouse Lines
    --       --       --  
      3,381,657       3,381,657       496,907  
Residential Real Estate
    --       --       --  
                         
Consumer
                       
   Loans to Individuals
    77,858       77,858       77,858  
   Other
    --       --       --  
      77,858       77,858       77,858  
      3,459,515       3,459,515       574,765  
                         
Total:
                       
   Commercial
    8,731,309       8,785,093       496,907  
   Residential Real Estate
    --       --       --  
   Consumer
    77,858       77,858       77,858  
    $ 8,809,167     $ 8,862,951     $ 574,765  

(6)  Share-Based Compensation

The Company establishes fair value for its equity awards to determine its cost and recognizes the related expense for stock options over the vesting period using the straight-line method.  The grant date fair value for stock options is calculated using the Black-Scholes option valuation model.
 
 
The Company’s stock-based incentive plans (the “Stock Plans”) authorize the issuance of an aggregate of 1,236,375 shares of Company common stock 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.  As of March 31, 2011, there were 202,603 shares of common stock (as adjusted for the 5% stock dividend declared December 16, 2010 and paid February 2, 2011 to shareholders of record on January 18, 2011) available for future grants under the Stock Plans.
 
Stock-based compensation expense related to Options was $17,503 and $14,288 for the three months ended March 31, 2011 and 2010, respectively.

Transactions under the Stock Plans during the three months ended March 31, 2011 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, 2011
    156,244     $ 10.74              
Granted
    27,930       8.34              
Exercised
    (1,709 )     5.85              
Forfeited
    -       -              
Expired
    -       -              
Outstanding at March 31, 2011
    182,465     $ 10.42       6.0     $ 70,145  
                                 
Exercisable at March 31, 2011
    131,952     $ 11.13       4.9     $ 53,671  

The total intrinsic value (market value on date of exercise less grant price) of options exercised during the three months ended March 31, 2011 was $4,491.

The fair value of each option and the significant weighted average assumptions used to calculate the fair value of the options granted for the three months ended March 31, 2011 are as follows:

 
Fair value of options granted
  $ 3.24  
Risk-free rate of return
    1.99 %
Expected option life in years
    7  
Expected volatility
    33.02 %
Expected dividends (1)
    -  
 
(1) To date, the Company has not paid cash dividends on its common stock.

As of March 31, 2011, there was approximately $157,684 of unrecognized compensation cost related to nonvested stock options based compensation arrangements granted under the Stock Plans. That cost is expected to be recognized over the next four years.

The following table summarizes nonvested restricted shares for the three months ended March 31, 2011 (as adjusted to reflect the 5% stock dividend declared in December 2010).
 

         
Average
 
   
Number of
   
Grant Date
 
Non-vested shares
 
Shares
   
Fair Value
 
Non-vested at January 1, 2011
    109,518     $ 7.70  
Granted
    30,855       7.91  
Vested
    (5,895 )     9.07  
Forfeited
    -       -  
Non-vested at March 31, 2011
    134,478     $ 7.69  
                 
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 $73,015 and $35,000 for the three months ended March 31, 2011 and 2010.

As of March 31, 2011, there was approximately $ 824,744 of unrecognized compensation cost related to nonvested stock grants that will be recognized over the next three years.

(7)  Benefit Plans
 
The Company has a 401(k) plan which covers substantially all employees with six months or more of service.  The Company’s contributions to the 401(k) plan are expensed as incurred.
 
The Company also provides retirement benefits to certain employees under supplemental executive retirement plans (the “SERPs”).  The SERPs are unfunded and the Company accrues actuarial determined benefit costs over the estimated service period of the employees in the SERPs.  The Company recognizes the over funded or under funded status of a defined benefit post-retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and 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 SERPs for the three months ended March 31, 2011 and 2010 are as follows:
 
 
Three months ended
March 31,
 
 
2011
 
2010
 
         
Service cost
$ 68,425     $ 56,514  
Interest cost
  57,057       48,435  
Actuarial (gain) loss recognized
  (2,062     38,517  
Prior service cost recognized
  19,859       24,858  
  $ 143,279     $ 168,324  
 
 
(8)  Other Comprehensive Income and Accumulated Other Comprehensive Income
 
The components of accumulated other comprehensive income and their related income tax effects were as follows:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Unrealized holding gains on
           
securities available for sale
 
$
967,968
   
$
1,145,540
 
Related income tax effect
   
(329,108
)
   
(389,483
)
     
638,860
     
756,057
 
                 
Unrealized impairment loss
      On held to maturity security
   
(500,944
)
   
(500,944
)
Related income tax effect
   
170,321
     
170,321
 
     
(330,623
)
   
(330,623
)
                 
Unrealized loss on interest rate swap contract
   
(179,773
)
   
(353,552
)
Related income tax effect
   
72,582
     
141,990
 
     
(107,191
)
   
(211,562
)
                 
Pension liability
   
(188,320
)
   
(191,539
)
Related income tax effect
   
74,549
     
75,841
 
     
(113,771
)
   
(115,698
)
                 
Accumulated other comprehensive income
 
$
87,275
   
$
98,174
 

The components of accumulated other comprehensive income, net of tax, which is a component of shareholders’ equity, were as follows:

   
Net Unrealized
 Gains
on Available for
Sale Securities
   
Net Unrealized
 Impairment Loss
 On Held to
Maturity Security
   
Net Change in
Fair Value of
Interest Rate
Swap Contract
   
Net Change
Related to Defined
 Benefit Pension
Plans
   
Accumulated
Other
Comprehensive
Income
 
Balances, December 31, 2010
 
$
756,057
   
$
(330,623
)
 
$
(211,562
)
 
$
(115,698
)
 
$
98,174
 
                                         
Net change
   
(117,197
)
   
-
     
104,371
     
1,927
     
(10,899
)
                                         
Balance, March 31, 2011
 
$
638,860
   
$
(330,623
)
 
$
(107,191
)
 
$
(113,771
)
 
$
87,275
 

 (9)  Recent Accounting Pronouncements
 
In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-02”).  ASU 2011-02 provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring within the scope of ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors.  The amended guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. It is not anticipated that this guidance will affect the Company’s consolidated financial position or results of operations.

In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2010-2 (“ASU 2011-01”), which indefinitely deferred disclosures about troubled debt restructures.  ASU 2011-02 changed the effective date of the disclosures from “indefinite” to interim and annual periods beginning on or after June 15, 2011.  This guidance will not affect the Company’s consolidated financial position or results of operations.

In December 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). For reporting units with zero or negative carrying amounts, ASU 2010-28 adds a requirement to Step 1 of the goodwill impairment test that any adverse qualitative factors should be considered in determining whether it is more likely than not that goodwill impairment exists. If it is more likely than not that goodwill impairment exists, the second step of the goodwill impairment test shall be performed.  For public entities, the amended guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2010, with early adoption not permitted.  The adoption of this guidance did not affect the Company’s consolidated financial position or results of operations.
 

 (10)  Fair Value Disclosures
 
U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows:
 
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value.
 
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 Level 2 Inputs.  For these 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.

Derivatives – Interest Rate Swap.  Derivatives are reported at fair value utilizing Level 2 Inputs.  The Company obtains dealer quotations to value its interest rate swap.
 
 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
   
Level 1
Inputs
   
Level 2
Inputs
   
Level 3
Inputs
   
Total Fair
Value
 
March 31, 2011:
                       
  Securities available for sale:
                               
  U. S. Treasury securities and
                               
      obligations of U.S. Government
                               
      sponsored corporations (“GSE”) and agencies
   
-
   
$
31,332,984
     
-
   
$
31,332,984
 
  Residential collateralized mortgage obligations- GSE
   
-
     
17,167,703
     
-
     
17,167,703
 
  Residential collateralized mortgage obligations - non GSE
   
-
     
5,249,465
     
-
     
5,249,465
 
  Residential mortgage backed securities – GSE
   
-
     
49,039,152
     
-
     
49,039,152
 
  Obligations of State and Political subdivisions
   
-
     
5,405,904
     
-
     
5,405,904
 
  Trust preferred debt securities – single issuer
   
-
     
2,022,487
     
-
     
2,022,487
 
  Corporate debt securities
   
-
     
1,490,807
     
-
     
1,490,807
 
  Restricted stock
   
-
     
924,600
     
-
     
924,600
 
  Mutual fund
   
-
     
25,000
     
-
     
25,000
 
                                 
  Derivative liabilities
   
-
     
(179,773
)
   
-
     
(179,773
)
                                 
December 31, 2010:
                               
  Securities available for sale:
                               
  U. S. Treasury securities and
                               
      obligations of U.S. Government
                               
      sponsored corporations (“GSE”) and agencies
   
-
   
$
34,359,563
     
-
   
$
34,359,563
 
  Residential collateralized mortgage obligations- GSE
   
-
     
19,137,758
     
-
     
19,137,758
 
  Residential collateralized mortgage obligations - non GSE
   
-
     
5,761,322
     
-
     
5,761,322
 
  Residential mortgage backed securities – GSE
   
-
     
18,169,735
     
-
     
18,169,735
 
  Obligations of State and Political subdivisions
   
-
     
3,021,428
     
-
     
3,021,428
 
  Trust preferred debt securities – single issuer
   
-
     
1,857,503
     
-
     
1,857,503
 
  Corporate debt securities
   
-
     
1,498,584
     
-
     
1,498,584
 
  Restricted stock
   
-
     
1,640,100
     
-
     
1,640,100
 
  Mutual fund
   
-
     
25,000
     
-
     
25,000
 
                                 
  Derivative liabilities
   
-
     
(353,552
)
   
-
     
(353,552
)

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 March 31, 2011 and December 31, 2010 are as follows:

   
Level 1
Inputs
   
Level 2
Inputs
   
Level 3
Inputs
   
Total Fair
Value
 
March 31, 2011:
                       
Impaired loans
   
-
     
-
   
$
4,709,680
   
$
4,709,680
 
Other real estate owned
   
-
     
-
     
945,020
     
945,020
 
                                 
                                 
December 31, 2010:
                               
Impaired loans
   
-
     
-
   
$
2,884,750
   
$
2,884,750
 
Other real estate owned
   
-
     
-
     
243,023
     
243,023
 

Impaired loans measured at fair value and included in the above table, consisted of 13 loans having an aggregate principal balance of $6,226,757 and specific loan loss allowances of $1,517,077 at March 31, 2011 and seven loans at December 31, 2010, having an aggregate principal balance of $3,459,515 and specific loan loss allowances of $574,765.
 
 
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.
 
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 the recorded book balances, were as follows:
 
   
March 31, 2011
   
December 31, 2010
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
Value
   
Fair Value
   
Value
   
Fair Value
 
                         
Cash and cash equivalents
 
$
114,059,109
     
114,059,109
   
$
17,710,501
   
$
$17,710,501
 
Securities available for sale 
   
112,658,102
     
112,658,102
     
85,470,993
     
85,470,993
 
Securities held to maturity 
   
141,271,366
     
142,264,106
     
81,889,895
     
81,712,003
 
Loans held for sale 
   
4,944,106
     
4,994,106
     
21,219,230
     
21,219,230
 
Gross loans 
   
323,728,977
     
322,647,000
     
411,987,339
     
410,144,000
 
Accrued interest receivable
   
2,453,402
     
2,453,402
     
2,405,741
     
2,405,741
 
Deposits 
   
(650,019,648
   
(651,331,000
   
(543,735,149
   
(545,225,000
Other borrowings 
   
(10,000,000
   
(12,069,000
   
(25,900,000
   
(27,979,000
Redeemable subordinated debentures 
   
(18,557,000
   
(18,557,000
   
(18,557,000
   
(18,557,000
Interest rate swap contract 
   
(179,773
   
(179,773
   
(353,552
)
   
(353,552
)
Accrued interest payable
   
(1,312,042
)
   
(1,312,042
)
   
(1,434,338
)
   
(1,434,338
)
Loan commitments and standby letters of credit as of March 31, 2011 and December 31, 2010 are based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit is nominal.
 
(11)           Derivative Financial Instruments
The use of derivative financial instruments creates exposure to credit risk.  This credit risk relates to losses that would be recognized if the counterparts fail to perform their obligations under the contracts.  As part of the Company’s interest rate risk management process, the Company entered into an interest rate derivative contract effective November 27, 2007.  Interest rate derivative contracts are typically used to limit the variability of the Company’s net interest income that could result due to shifts in interest rates.  This derivative interest rate contract was an interest rate swap used to modify the repricing characteristics of a specific liability.  At March 31, 2011, and December 31, 2010, the Company’s position in derivative contracts consisted entirely of this interest rate swap.  
 
 
Maturity
 
Hedged Liability
Notional
Amounts
Swap Fixed
Interest Rates
Swap Variable
Interest Rates
         
June 15, 2011
Subordinated Debenture
$18,000,000
5.87%
3 month LIBOR plus
165 basis points

During 2006, the Company issued trust preferred securities to fund loan growth and generate liquidity.  In conjunction with the trust preferred securities issuance, the Company entered into a $18.0 million pay fixed swap designated as fair value hedges that was used to convert floating rate quarterly interest payments indexed to three month LIBOR, based on common notional amounts and maturity dates.  The pay fixed swap changed the repricing characteristics of the quarterly interest payments from floating rate to fixed rate.   The fair value of the pay fixed swap outstanding at March 31, 2011 and December 31, 2010 was ($179,773) and ($353,552), respectively, and was recorded in other liabilities in the consolidated balance sheets, with the change in fair value, net of deferred taxes, recorded through Other Comprehensive Income.   

 
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 March 31, 2011 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three month period ended March 31, 2011 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 Operations) for the year ended December 31, 2010, as filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2011.
 
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 Delaware, Inc., 1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st Constitution Title Agency, LLC, Riverside Lofts, LLC 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 subsidiaries, 1st Constitution Investment Company of Delaware, Inc. and 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.
 
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 speak 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 23, 2011, such as the overall economy and the interest rate environment; the ability of customers to repay their obligations; the adequacy of the allowance for loan losses; competition; significant changes in accounting, tax or regulatory practices and requirements; certain interest rate risks; risks associated with investments in mortgage-backed securities; and risks associated with speculative construction lending. Although management has taken certain steps to mitigate any negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and could have an adverse effect on profitability. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as required by law.
 
Recent Developments

On March 25, 2011, the Bank acquired certain deposit and other liabilities, real estate and related assets of the Rocky Hill, Hillsborough and Hopewell, New Jersey branch banking offices from another financial institution for a purchase price of $9.85 million (the “Acquisition”).  The Acquisition was completed pursuant to the terms and conditions of the Branch Purchase and Assumption Agreement and Agreement for Purchase dated as of December 30, 2010, which was previously disclosed on a Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on January 3, 2011.

As a result of the Acquisition, the three branches became branches of the Bank.  Included in the Acquisition were the assumption of deposit liabilities of $111.9 million, primarily consisting of demand deposits, and the acquisition of cash of approximately $101.5 million,  fixed assets of approximately $4.6 million, which includes, without limitation, ownership of the real estate and improvements upon which the branches are situated, and loans of $862,000.  The Bank recorded goodwill of approximately $3.2 million and a core deposit intangible asset of approximately $1.7 million as a result of the Acquisition.
 

RESULTS OF OPERATIONS
 
Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
 
Summary
 
The Company realized net income of $789,868 for the three months ended March 31, 2011, an increase of $90,610, or 13.0%, from the $699,258 reported for the three months ended March 31, 2010.  The increase is due primarily to increases in net interest income and non-interest income.  Net income per diluted common share was $0.16 for the three months ended March 31, 2011 compared to net income per diluted common share of $0.11 for the three months ended March 31, 2010.  Net income available to common shareholders increased from $522,274 for the three months ended March 31, 2010 to $789,868 for the three months ended March 31, 2011 for the reasons indicated above.  Net income available to common shareholders for the three months ended March 31, 2010 reflected an aggregate of $176,984, attributable to dividends and discount accretion related to the preferred stock issued to the United States Department of the Treasury (the “Treasury”) under the TARP Capital Purchase Program in December 2008.  On October 27, 2010, the Company repurchased from the Treasury all of the outstanding shares of the Company’s preferred stock issued to the Treasury for an aggregate purchase price (including accrued and unpaid dividends) of $12,120,000.  All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 16, 2010 and paid on February 2, 2011 to shareholders of record on January 18, 2011.

Key performance ratios improved for the three months ended March 31, 2011 due to higher net income for that period compared to the three months ended March 31, 2010.  Return on average assets and return on average equity were 0.49% and 6.49% for the three months ended March 31, 2011 compared to 0.43% and 4.86%, respectively, for the three months ended March 31, 2010.
 
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 March 31, 2011 was 3.54% as compared to the 2.93% net interest margin recorded for the three months ended March 31, 2010, an increase of 61 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 83.4% of the Company’s net revenues for the three month period ended March 31, 2011 and 82.4% of net revenues for the three-month period ended March 31, 2010. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
 
The following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on related items, and the Company’s average yield or rate for the three month periods ended March 31, 2011 and 2010. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.
 
 
Average Balance Sheets with Resultant Interest and Rates
 
(yields on a tax-equivalent basis)
 
Three months ended March 31, 2011
   
Three months ended March 31, 2010
 
   
Average
Balance
   
Interest
   
Average
Rate
   
Average
Balance
   
Interest
   
Average
Rate
 
Assets:
                                   
Federal Funds Sold/Short-Term Investments
 
$
14,984,566
   
$
9,106
     
0.25
%
 
$
33,468,885
   
$
19,709
     
0.24
%
Investment Securities:
                                               
Taxable
   
204,398,959
     
1,284,944
     
2.55
%
   
215,869,321
     
1,393,886
     
2.62
%
Tax-exempt
   
32,125,900
     
421,907
     
5.33
%
   
11,141,881
     
159,737
     
5.81
%
Total
   
236,524,859
     
1,706,851
     
2.93
%
   
227,011,202
     
1,553,623
     
2.78
%
                                                 
Loan Portfolio:
                                               
Construction
   
66,996,941
     
943,097
     
5.71
%
   
75,945,075
     
1,130,873
     
6.04
%
Residential real estate
   
10,487,786
     
170,146
     
6.58
%
   
10,993,906
     
150,048
     
5.54
%
Home Equity
   
12,380,893
     
175,411
     
5.75
%
   
14,279,859
     
207,612
     
5.90
%
Commercial and commercial real estate
   
135,025,788
     
2,270,946
     
6.82
%
   
140,028,435
     
2,314,906
     
6.70
%
Mortgage warehouse lines
   
101,779,484
     
1,178,776
     
4.70
%
   
86,430,196
     
1,002,820
     
4.71
%
Installment
   
421,663
     
7,450
     
7.17
%
   
654,263
     
12,058
     
7.47
%
All Other Loans
   
28,432,869
     
608,381
     
8.68
%
   
33,019,974
     
510,548
     
6.27
%
Total
   
355,525,424
     
5,354,207
     
6.11
%
   
361,351,708
     
5,328,865
     
5.98
%
                                                 
Total Interest-Earning Assets
   
607,034,849
     
7,070,164
     
4.72
%
   
621,831,795
     
6,902,197
     
4.50
%
                                                 
Allowance for Loan Losses
   
(6,050,453
)
                   
(4,681,971
)
               
Cash and Due From Bank
   
17,307,166
                     
10,529,273
                 
Other Assets
   
34,107,247
                     
28,143,654
                 
Total Assets
 
$
652,398,809
                   
$
655,822,751
                 
 
Interest-Bearing Liabilities:
                                               
Money Market and NOW Accounts
 
$
136,295,377
   
$
373,313
     
1.11
%
 
$
121,295,956
   
$
506,120
     
1.69
%
Savings Accounts
   
172,918,852
     
375,488
     
0.88
%
   
180,685,199
     
547,258
     
1.23
%
Certificates of Deposit
   
153,113,579
     
649,329
     
1.72
%
   
166,844,079
     
827,290
     
2.01
%
Other Borrowed Funds
   
13,895,000
     
106,920
     
3.12
%
   
22,552,111
     
266,415
     
4.79
%
Trust Preferred Securities
   
18,557,000
     
264,154
     
5.77
%
   
18,557,000
     
264,150
     
5.77
%
Total Interest-Bearing Liabilities
   
494,779,808
     
1,769,204
     
1.45
%
   
509,934,345
     
2,411,233
     
1.92
%
                                                 
Net Interest Spread
                   
3.27
%
                   
2.58
%
                                                 
Demand Deposits
   
96,658,478
                     
80,196,321
                 
Other Liabilities
   
11,578,464
                     
8,108,614
                 
Total Liabilities
   
603,016,750
                     
598,239,280
                 
Shareholders’ Equity
   
49,382,059
                     
57,583,471
                 
Total Liabilities and Shareholders’
Equity
 
$
652,398,809
                   
$
655,822,751
                 
                                                 
Net Interest Margin
         
$
5,300,960
     
3.54
%
         
$
4,490,964
     
2.93
%
                                                 
 
The Company’s net interest income increased on a tax-equivalent basis by $809,996, or 18.0%, to $5,300,960 for the three months ended March 31, 2011 from the $4,490,964 reported for the three months ended March 31, 2010. The principal factors contributing to the increase in net interest income was an increase in average rate earned on interest earnings assets and a decrease in the average rate paid on interest earning liabilities.
 
 
Average interest earning assets decreased by $14,796,946, or 2.4%, to $607,034,849 for the three month period ended March 31, 2011 from $621,831,795 for the three month period ended March 31, 2010.  However, the overall yield on interest earning assets, on a tax-equivalent basis, increased 22 basis points to 4.72% for the three month period ended March 31, 2011 when compared to 4.50% for the three month period ended March 31, 2010.
 
Average interest bearing liabilities decreased by $15,154,537, or 3.0%, to $494,779,808 for the three month period ended March 31, 2011 from $509,934,345 for the three month period ended March 31, 2010.  Overall, the cost of total interest bearing liabilities decreased 47 basis points to 1.45% for the three months ended March 31, 2011 compared to 1.92% for the three months ended March 31, 2010.
 
The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.54% for the three months ended March 31, 2011 compared to 2.93% the three months ended March 31, 2010.  
 
Non-Interest Income
 
Total non-interest income for the three months ended March 31, 2011 was $1,024,750, an increase of $75,904, or 8.0%, over non-interest income of $948,846 for the three months ended March 31, 2010.
 
Service charges on deposit accounts represents a consistent source of non-interest income. Service charge revenues decreased modestly to $175,842 for the three months ended March 31, 2011 from the $176,356 for the three months ended March 31, 2010. 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 2011 compared to the first three months of 2010.
 
Gain on sales of loans held for sale increased by $116,195, or 36.2%, to $436,739 for the three months ended March 31, 2011 when compared to $320,544 for the three months ended March 31, 2010.  The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market.  The volume of mortgage loan sales increased for the first three months of 2011 compared to the first three months of 2010.
 
Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $95,137 for the three months ended March 31, 2011 compared to $96,639 for the three months ended March 31, 2010, a decrease of $1,502 for the first quarter of 2011 as compared to the first quarter of 2010. 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 and Automated Teller Machine fees for non-Bank customers. Decreased customer demand for these services contributed to the other income component of non-interest income amounting to $317,032 for the three months ended March 31, 2011, compared to $355,307 for the three months ended March 31, 2010, a decrease of $38,275 for the first quarter of 2011 as compared to the first quarter of 2010.
 
Non-Interest Expense
 
Non-interest expenses increased by $528,885, or 12.8%, to $4,662,832 for the three months ended March 31, 2011 from $4,133,947 for the three months ended March 31, 2010. The following table presents the major components of non-interest expenses for the three months ended March 31, 2011 and 2010.
 
 
Non-interest Expenses
           
   
Three months ended March 31,
 
   
2011
   
2010
 
Salaries and employee benefits
 
$
2,576,664
   
$
2,376,700
 
Occupancy expenses
   
566,738
     
445,927
 
Data processing services
   
303,473
     
258,807
 
Equipment expense
   
170,802
     
151,985
 
Marketing
   
27,966
     
23,450
 
Regulatory, professional and other fees
   
198,152
     
172,584
 
Office expense
   
137,826
     
169,593
 
FDIC insurance expense
   
227,547
     
247,683
 
Directors’ fees
   
27,000
     
26,500
 
Other real estate owned expenses
   
236,381
     
17,790
 
All other expenses
   
190,283
     
242,928
 
   
$
4,662,832
   
$
4,133,947
 
                 
 
Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $199,964, or 8.4%, to $2,576,664 for the three months ended March 31, 2011 compared to $2,376,700 for the three months ended March 31, 2010. The increase in salaries and employee benefits for the three months ended March 31, 2011 was a result of an increase in the number of employees, regular merit increases and increased health care costs. Staffing levels overall increased to 144 full-time equivalent employees at March 31, 2011 as compared to 124 full-time equivalent employees at March 31, 2010.  The number of full-time equivalent employees at March 31, 2011 includes 13 full-time equivalent employees added as a result of the March 25, 2011 Acquisition.
 
Marketing expense increased by $4,516, or 19.3%, to $27,966 for the three months ended March 31, 2011 compared to $23,450 for the three months ended March 31, 2010 as the Bank resumed the use of radio broadcast media in promoting products and services during the first three months of 2011.
 
Regulatory, professional and other fees increased by $25,568, or 14.8%, to $198,152 for the three months ended March 31, 2011 compared to $172,584 for the three months ended March 31, 2010.  During the first three months of 2011, the Company incurred professional fees in connection with the Acquisition, which was completed on March 25, 2011.
 
Occupancy expenses increased by $120,811, or 27.1%, to $566,738 for the three months ended March 31, 2011 compared to $445,927 for the three months ended March 31, 2010.  The increase in expense was primarily attributable to increased depreciation, property taxes and maintenance costs in maintaining the Bank’s branch properties.  In addition, the Bank’s Lawrenceville, New Jersey branch office opened in May 2010 and operating expenses for this branch office are included in those of the 2011 first quarter and not in the first quarter 2010 operating expenses.
 
The cost of data processing services has increased to $303,473 for the three months ended March 31, 2011 from $258,807 for the three months ended March 31, 2010, as additional expenses were incurred to convert the three new branch offices acquired in March 2011 to the Bank’s data systems.
 
Other real estate owned expenses increased by $218,591, to $236,381 for the three months ended March 31, 2011 compared to $17,790 for the three months ended March 31, 2010 as the Company wrote down the carrying value of properties held as other real estate by $147,178 during the first three months of 2011 based on current appraisals.
 
All other expenses decreased by $52,645, or 21.7%, to $190,283 for the three months ended March 31, 2011 compared to $242,928 for the three months ended March 31, 2010 as current year decreases occurred in correspondent bank fees, maintenance agreements and ATM operating expenses.  All other expenses are comprised of a variety of operating expenses and fees as well as expenses associated with lending activities.
 
 
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 75.3% for the three months ended March 31, 2011, compared to 76.7% for the three months ended March 31, 2010.  The decrease in the efficiency ratio is due to the above-noted decreases in non-interest expenses.
 
Income Taxes
 
Income tax expense increased by $81,378 to $336,177 for the three months ended March 31, 2011 from $254,799 for the three months ended March 31, 2010.  The increase was primarily due to a higher level of pretax income for the first quarter of 2011 as compared to the first quarter of 2010.  

Financial Condition
 
March 31, 2011 Compared with December 31, 2010
 
Total consolidated assets at March 31, 2011 were $735,087,671, representing an increase of $90,692,442, or 14.1%, from total consolidated assets of $644,395,229 at December 31, 2010.  The increase in assets was primarily attributable to the purchase of the three branch banking offices from Amboy Bank completed on March 25, 2011.   As a result of the Acquisition, the three branches became branches of the Bank.  Included in the Acquisition were the assumption of deposit liabilities of $111.9 million, primarily consisting of demand deposits, and the acquisition of cash of approximately $101.5 million,  fixed assets of approximately $4.6 million, which includes, without limitation, ownership of the real estate and improvements upon which the branches are situated, and loans of $862,000.  The Bank recorded goodwill of approximately $3.2 million and a core deposit intangible asset of approximately $1.7 million as a result of the Acquisition.
 
Cash and Cash Equivalents
 
Cash and cash equivalents at March 31, 2011 totaled $114,059,109 compared to $17,710,501 at December 31, 2010. Cash and cash equivalents at March 31, 2011 consisted of cash and due from banks of $114,047,708 and Federal funds sold/short term investments of $11,401. The corresponding balances at December 31, 2010 were $17,699,103 and $11,398, respectively.  The current period increase was primarily due to the cash inflow of approximately $101.5 million resulting from the Acquisition, which closed on March 25, 2011.  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 March 31, 2011 amounted to $4,944,106 compared to $21,219,230 at December 31, 2010. The primary cause for this decrease was a high volume of sales of existing loans held for sale combined with a lower volume of mortgage loan refinance activity during the first three months of 2011 compared with the level of activity during the last three months of 2010. The amount of loans originated for sale was $25,228,512 for the first three months of 2011 compared with $26,796,844 for the last three months of 2010.
 
Investment Securities
 
Investment securities represented 34.5% of total assets at March 31, 2011 and 26.0% at December 31, 2010. Total investment securities increased $86,568,580, or 51.7%, to $253,929,468 at March 31, 2011 from $167,360,888 at December 31, 2010.  Purchases of investments totaled $128,310,146 during the three months ended March 31, 2011, which exceeded proceeds from calls and repayments totaling $41,116,479 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 March 31, 2011, securities available for sale totaled $112,658,102, which is an increase of $27,187,109, or 31.8%, from securities available for sale totaling $85,470,993 at December 31, 2010.
 
 
At March 31, 2011, the securities available for sale portfolio had net unrealized gains of $967,968, compared to net unrealized gains of $1,145,540 at December 31, 2010.  These unrealized gains are reflected, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income.
 
Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive intent and ability to hold to maturity.  At March 31, 2011, securities held to maturity were $141,271,366, an increase of $59,381,471, or 72.5%, from $81,889,895 at December 31, 2010.  The fair value of the held to maturity portfolio at March 31, 2010 was $142,264,108.
 
Due to the continued uncertain economic environment that includes historically low levels of market interest rates, proceeds from maturities and prepayments of securities during the first three months of 2011 were reinvested primarily in the low risk tax-exempt obligations of states and political subdivision bonds (with credit support) component of the Bank’s held to maturity portfolio.  It is management’s intention to hold these tax-exempt securities to their maturity.
 
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 March 31, 2011 and December 31, 2010. 
 
Loan Portfolio Composition
 
March 31, 2011
   
December 31, 2010
 
Component
 
Amount
   
%
of total
   
Amount
   
%
of total
 
Construction loans
  $ 64,638,857       20%     $ 67,890,703       16%  
Residential real estate loans
    10,671,342       3%       10,435,038       3%  
Commercial business
    47,925,968       15%       54,733,172       13%  
Commercial real estate
    93,568,230       29%       95,277,814       23%  
Mortgage warehouse lines
    92,947,939       29%       169,575,899       41%  
Loans to individuals
    13,030,762       4%       13,349,036       3%  
Deferred loan fees and costs
    709,605       0%       543,753       0%  
All other loans
    236,274       0%       181,924       0%  
    $ 323,728,977       100%     $ 411,987,339       100%  

The loan portfolio decreased by $88,258,362, or 21.4%, to $323,728,977 at March 31, 2011, compared to $411,987,339 at December 31, 2010.  The mortgage warehouse lines portfolio decreased by $76,627,960, or 45.2%, to $92,947,939 at March 31, 2011 compared to $169,575,899 at December 31, 2010.  This component’s decrease at March 31, 2011 compared to December 31, 2010 was principally the result of the discontinuation of the Federal government’s first-time home buyer tax credit program combined with a current period increase in market rates for mortgage loans.
 
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.
 
 
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, (2) loans which are contractually past due 90 days or more as to interest and principal payments but have not been classified as non-accrual, and (3) loans whose terms have been restructured to provide a reduction or deferral of interest and/or principal because of a deterioration in the financial position of the borrower.
 
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 $2,093,298 to $6,715,869 at March 31, 2011 from $8,809,167 at December 31, 2010, as the disruptions in the financial system and the real estate market during the past two years have negatively affected certain of the Bank’s construction borrowers.  The major segments of non-accrual loans consist of commercial loans, commercial real estate loans and SBA loan, which are in the process of collection and residential real estate which is either in foreclosure or under contract to close after March 31, 2011.  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 2.04% at March 31, 2011 from 2.14% at December 31, 2010.  Loan quality is still considered to be sound. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.

  
           
Non-Performing Assets and Loans
 
March 31,
   
December 31,
 
   
2011
   
2010
 
Non-Performing loans:
           
Loans 90 days or more past due and still accruing
  $ 0     $ 0  
Non-accrual loans
    6,715,869       8,809,167  
Total non-performing loans
    6,715,869       8,809,167  
Other real estate owned
    6,358,232       4,850,818  
Total non-performing assets
  $ 13,074,101     $ 13,659,985  
                 
Non-performing loans to total loans
    2.04 %     2.14 %
Non-performing assets to total assets
    1.78 %     2.12 %
 
Non-performing assets decreased by $585,884 to $13,074,101 at March 31, 2011 from $13,659,985 at December 31, 2010.  Other real estate owned increased by $1,507,414 to $6,358,232 at March 31, 2011 from $4,850,818 at December 31, 2010.  Since December 31, 2010, the Bank has added approximately $2,249,955 to other real estate owned and sold and transferred out of other real estate owned properties totaling approximately $595,363.  In addition, during the three months ended March 31, 2011, the Bank recorded a provision for loss on other real estate owned of $147,178.
 
 
Non-performing assets represented 1.78% of total assets at March 31, 2011 and 2.12% at December 31, 2010.
 
The Bank had no loans classified as restructured loans at March 31, 2011 or December 31, 2010.
 
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 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 to 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 doubtful or high 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:
 
 
·
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. 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 loan loss reserves.  In general, for non-homogeneous loans not individually assessed, and for homogeneous 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 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 to the allowance for loan losses.

The specific reserve for impaired loans is established for specific loans which have been identified by management as being high risk loan assets. These impaired loans are 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.

 
The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
 
Allowance for Loan Losses
                 
   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
Balance, beginning of period
  $ 5,762,712     $ 4,505,387     $ 4,505,387  
                         
Provision charged to operating expenses
    399,998       2,325,000       300,000  
                         
Loans charged off :
                       
   Construction loans
    (366,588 )     (450,000 )     -  
   Residential real estate loans
    -       -       -  
   Commercial and commercial real estate
    (46,319 )     (609,468 )     -  
   Loans to individuals
    0       (22,087 )     (16,988 )
   Lease financing
    0       -       (365 )
   All other loans
    -       -       -  
      (412,907 )     (1,081,555 )     (17,354 )
Recoveries
                       
   Construction loans
    -       -       -  
   Residential real estate loans
    -       -       -  
   Commercial and commercial real estate
    239       13,880       3,264  
   Loans to individuals
    -       -       -  
   Lease financing
    -       -       -  
   All other loans
    -       -       -  
      239       13,880       3,264  
                         
Net (charge offs) / recoveries
    (412,668 )     (1,067,675 )     (14,090 )
                         
Balance, end of period
  $ 5,750,042     $ 5,762,712     $ 4,791,297  
                         
Loans :
                       
   At period end
  $ 323,728,977     $ 411,987,339     $ 361,448,384  
   Average during the period
    338,835,413       387,575,677       340,637,863  
   Net charge offs to average loans outstanding
         (annualized)
    (0.12 %)     (0.28 %)     0.00 %
                         
Allowance for loan losses to :
                       
   Total loans at period end
    1.78 %     1.40 %     1.33 %
   Non-performing loans
    85.62 %     65.78 %     56.15 %
                         

The Company’s provision for loan losses was $399,998 for the three months ended March 31, 2011 and $300,000 for the three months ended March 31, 2010.  While the risk profile of the loan portfolio was reduced by an $88,258,362 decrease in the total loan portfolio at March 31, 2011 compared to the December 31, 2010 balance and non-performing loans decreased by $2,093,199 from December 31, 2010 to March 31, 2011, the continuing adverse economic conditions that resulted in depreciation of collateral values securing construction and commercial loans necessitated the recorded provision.  Also, management replenished the reserves to compensate for the current period net charge-offs.  Net charge offs/recoveries amounted to a net charge-off of $412,668 for the three months ended March 31, 2011.

 
At March 31, 2011, the allowance for loan losses was $5,750,042 compared to $5,762,712 at December 31, 2010, a decrease of $12,670.  The ratio of the allowance for loan losses to total loans at March 31, 2011 and December 31, 2010 was 1.78% and 1.40%, respectively.  The allowance for loan losses as a percentage of non-performing loans was 65.78% at December 31, 2010, compared to 85.62% at March 31, 2011. Management believes the quality of the loan portfolio remains sound considering the economic climate and economy in the State of New Jersey and that the allowance for loan losses is adequate in relation to credit risk exposure levels.
 
Deposits
 
Deposits, which include demand deposits (interest bearing and non-interest bearing), savings deposits and time deposits, are a fundamental and cost-effective source of funding.  The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition.  The Bank offers a variety of products designed to attract and retain customers, with the Bank’s primary focus being on building and expanding long-term relationships.
 
The following table summarizes deposits at March 31, 2011 and December 31, 2010.

   
March 31, 2011
   
December 31, 2010
 
Demand
           
    Non-interest bearing
 
$
112,437,456
   
$
92,023,123
 
    Interest bearing
   
182,758,572
     
129,869,045
 
Savings
   
190,201,772
     
165,388,564
 
Time
   
164,621,848
     
156,454,417
 
   
$
650,019,648
   
$
548,735,149
 
                 

At March 31, 2011, total deposits were $650,019,648, an increase of $106,284,499, or 19.5%, from $543,735,149 at December 31, 2010.  The current period increase was due to the March 25, 2011 Acquisition, in which the Bank assumed deposit liabilities of $111.9 million.

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 March 31, 2011, consisting soley of FHLB long-term borrowings, and $25,900,000 at December 31, 2010, consisting of long-term FHLB borrowings of $10,000,000 and overnight funds purchased of $15,900,000.
 
The Bank has a fixed rate convertible advance from the FHLB in the amounts 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 $839,009, or 1.7%, to $50,520,165 at March 31, 2011, from $49,681,156 at December 31, 2010.  Tangible book value per common share decreased by $0.43, or 4.4%, to $9.30 at March 31, 2011 from $9.73 at December 31, 2010.  The current period decrease in tangible book value per common share was the result of an increase of $5.0 million in goodwill and intangible assets as a result of the March 25, 2011 Acquisition  The ratio of shareholders’ equity to total assets was 6.87% and 7.71% at March 31, 2011 and December 31, 2010, respectively.  The increase in shareholders’ equity was primarily the result of net income available to common stockholders of $789,868 for the three months ended March 31, 2011.
 
 
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 2010 and 2009 and paid in 2011 and 2010, respectively.  
 
The Company’s common stock is quoted on the Nasdaq Global Market under the symbol “FCCY”.
 
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 March 31, 2011 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 March 31, 2011 and December 31, 2010 are as follows:
 
   
Actual
   
For Capital
Adequacy Purposes
   
To Be Well Capitalized
Under Prompt
Corrective Action
Provision
 
   
Amount
   
Ratio
   
Amount
     
Ratio
   
Amount
     
Ratio
 
As of March 31, 2011
                                       
Company
                                       
Total Capital to Risk Weighted Assets
 
$
67,880,407
     
15.96%
   
$
34,033,424
     
>8%
     
N/A
     
N/A
 
Tier 1 Capital to Risk Weighted Assets
   
61,376,559
     
14.43%
     
17,016,712
     
>4%
     
N/A
     
N/A
 
Tier 1 Capital to Average Assets
   
61,376,559
     
9.49%
     
25,861,933
     
>4%
     
N/A
     
N/A
 
Bank
                                               
Total Capital to Risk Weighted Assets
 
$
65,129,998
     
15.34%
   
$
33,976,080
     
>8%
   
$
42,470,100
     
>10%
 
Tier 1 Capital to Risk Weighted Assets
   
59,831,998
     
14.09%
     
16,988,040
     
>4%
     
25,482,060
     
>6%
 
Tier 1 Capital to Average Assets
   
59,831,998
     
9.29%
     
25,767,859
     
>4%
     
32,209,824
     
>5%
 

 
As of December 31, 2010
                                       
Company
                                       
Total Capital to Risk Weighted Assets
 
$
72,736,033
     
14.43%
   
$
40,335,354
     
>8%
     
N/A
     
N/A
 
Tier 1 Capital to Risk Weighted Assets
   
65,484,454
     
12.99%
     
20,167,677
     
>4%
     
N/A
     
N/A
 
Tier 1 Capital to Average Assets
   
65,484,454
     
  9.63%
     
27,196,758
     
>4%
     
N/A
     
N/A
 
Bank
                                               
Total Capital to Risk Weighted Assets
 
$
70,084,660
     
13.92%
   
$
40,272,800
     
>8%
   
$
50,341,000
     
>10%
 
Tier 1 Capital to Risk Weighted Assets
   
64,321,948
     
12.78%
     
20,136,400
     
>4%
     
30,204,600
     
>6%
 
Tier 1 Capital to Average Assets
   
64,321,948
     
9.51%
     
27,054,854
     
>4%
     
33,818,567
     
>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, 2011, 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.
 
 
Liquidity
 
At March 31, 2011, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied.
 
Liquidity management refers to the Company’s ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers.  In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank’s ability to meet its liquidity needs.  On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale.  Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities.  On the liability side, the primary source of liquidity is the ability to generate core deposits.  Short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of 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 $322,174,000, of its total assets at December 31, 2010.  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 March 31, 2011, the balance of cash and cash equivalents was $114,059,109.
 
Net cash provided by operating activities totaled $16,891,852 for the three months ended March 31, 2011 compared to net cash provided by operations of $5,716,141 for the three months ended March 31, 2010.  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 $101,539,588 for the three months ended March 31, 2011 compared to net cash provided by investing activities of $28,014,873 for the three months ended March 31, 2010.  The increase for the 2011 period compared to the 2010 period resulted from $101,539,588 in cash and cash equivalents acquired from the purchase of three branch offices.
 
Net cash used in financing activities totaled $21,687,176 for the three months ended March 31, 2011 compared to net cash used in financing activities of $38,548,173 for the three months ended March 31, 2011.  The cash used in the 2010 period resulted primarily from a decrease in demand, savings and time deposits.
 
The securities portfolios are also a source of liquidity, providing cash flows from maturities and periodic repayments of principal.  For the three months ended March 31, 2011, prepayments and maturities of investment securities totaled $41,116,479.  Another source of liquidity is the loan portfolio, which provides a flow of payments and maturities.
 
 
39

 
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. 
 
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 design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.  Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
 
The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
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 March 31, 2011, 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
                       
January 1, 2011
January 31, 2011
   
-
     
-
     
-
     
170,222
 
February 1, 2011
February 28, 2011
   
-
     
-
     
-
     
170,222
 
March 1, 2011
March 31, 2011
   
-
     
-
     
-
     
170,222
 
 
Total
   
-
     
-
     
-
     
170,222
 
              
(1)
The Company’s common stock repurchase program covers a maximum of 195,076 shares of common stock of the Company, representing 5% of the outstanding common stock of the Company on July 21, 2005, as adjusted for the subsequent common stock dividends.
 
 
Item 6.
 
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
   
             
*           Filed herewith.
 
 
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: May 16, 2011         
By:
/s/ ROBERT F. MANGANO
 
   
Robert F. Mangano
 
   
President and Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
       
Date: May 16, 2011    
By:
/s/ JOSEPH M. REARDON 
 
   
Joseph M. Reardon
 
   
Senior Vice President and Treasurer
 
   
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
42