Edgar Filing: 1ST CONSTITUTION BANCORP

a51013210q.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, 2013

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

For the transition period from _____ to _____

Commission file Number: 000-32891

1ST CONSTITUTION BANCORP

(Exact Name of Registrant as Specified in Its Charter)

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

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

(609) 655-4500

(Issuer’s Telephone Number, Including Area Code)

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

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

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

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

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

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

As of May 7, 2013, there were 5,991,182 shares of the registrant’s common stock, no par value, outstanding.

1ST CONSTITUTION BANCORP

FORM 10-Q

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Balance Sheets
	(unaudited) at March 31, 2013
	and December 31, 2012	1

	Consolidated Statements of Income
	(unaudited) for the Three Months Ended
	March 31, 2013 and March 31, 2012	2

	Consolidated Statements of Comprehensive Income
	(unaudited) for the Three Months Ended
	March 31, 2013 and March 31, 2012	3

	Consolidated Statements of Changes in Shareholders’ Equity
	(unaudited) for the Three Months Ended
	March 31, 2013 and March 31, 2012	4

	Consolidated Statements of Cash Flows
	(unaudited) for the Three Months Ended
	March 31, 2013 and March 31, 2012	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	48

PART II.	OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 6.	Exhibits	50

SIGNATURES		51

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

1st Constitution Bancorp and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	March 31, 2013			December 31, 2012
ASSETS
CASH AND DUE FROM BANKS	$	101,428,004		$	14,033,501
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS		11,423			11,420
Total cash and cash equivalents		101,439,427			14,044,921
INVESTMENT SECURITIES:
Available for sale, at fair value		116,412,431			109,840,965
Held to maturity (fair value of $110,944,296 and $121,839,363 at March 31, 2013 and December 31, 2012, respectively)		105,587,937			116,027,900
Total investment securities		222,000,368			225,868,865
LOANS HELD FOR SALE		30,717,012			35,960,262
LOANS		415,037,282			521,814,110
Less- Allowance for loan losses		(6,023,283	)		(7,151,212	)
Net loans		409,013,999			514,662,898
PREMISES AND EQUIPMENT, net		10,494,684			10,630,295
ACCRUED INTEREST RECEIVABLE		2,413,766			2,872,099
BANK-OWNED LIFE INSURANCE		15,139,114			15,026,506
OTHER REAL ESTATE OWNED		8,294,887			8,332,601
OTHER ASSETS		13,052,201			13,569,935
Total assets	$	812,565,458		$	840,968,382
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits
Non-interest bearing	$	137,679,243		$	152,334,759
Interest bearing		573,250,514			555,354,716
Total deposits		710,929,757			707,689,475
BORROWINGS		10,000,000			42,400,000
REDEEMABLE SUBORDINATED DEBENTURES		18,557,000			18,557,000
ACCRUED INTEREST PAYABLE		1,010,481			1,057,779
ACCRUED EXPENSES AND OTHER LIABILITIES		5,955,140			6,210,596
Total liabilities		746,452,378			775,914,850
COMMITMENTS AND CONTINGENCIES		-			-

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value; 5,000,000 shares authorized, none issued		-			-
Common Stock, no par value; 30,000,000 shares authorized; 6,004,623 and 5,985,275 shares issued and 5,992,398 and 5,977,924 shares outstanding as of March 31,2013 and December 31, 2012, respectively		48,928,602			48,716,032
Retained earnings		16,919,611			15,594,293
Treasury Stock, at cost, 12,225 shares and 7,351 shares at March 31, 2013 and December 31, 2012, respectively		(108,316	)		(61,086	)
Accumulated other comprehensive income		373,183			804,293
Total shareholders’ equity		66,113,080			65,053,532
Total liabilities and shareholders’ equity	$	812,565,458		$	840,968,382

See accompanying notes to consolidated financial statements.

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1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended March 31,
	2013		2012
INTEREST INCOME:
Loans, including fees	$	5,972,195	$	6,414,459
Securities:
Taxable		937,085		1,184,205
Tax-exempt		512,878		420,569
Federal funds sold and short-term investments		49,680		15,034
Total interest income		7,471,838		8,034,267

INTEREST EXPENSE:
Deposits		956,336		1,186,474
Borrowings		103,273		117,922
Redeemable subordinated debentures		87,873		99,312
Total interest expense		1,147,482		1,403,708

Net interest income		6,324,356		6,630,559
PROVISION FOR LOAN LOSSES		-		599,998
Net interest income after provision for loan losses		6,324,356		6,030,561

NON-INTEREST INCOME:
Service charges on deposit accounts		223,066		227,972
Gain on sales of loans		731,709		468,217
Income on Bank-owned life insurance		112,608		111,922
Other income		541,180		357,054
Total non-interest income		1,608,563		1,165,165

NON-INTEREST EXPENSES:
Salaries and employee benefits		3,352,863		2,940,350
Occupancy expense		677,806		723,786
FDIC insurance expense		19,687		147,393
Data processing expenses		301,382		263,575
Other real estate owned expenses		545,505		377,627
Other operating expenses		1,185,725		1,159,786
Total non-interest expenses		6,082,968		5,612,517

Income before income taxes		1,849,951		1,583,209
INCOME TAXES		524,633		416,477
Net income	$	1,325,318	$	1,166,732

NET INCOME PER COMMON SHARE:
Basic	$	0.22	$	0.22
Diluted	$	0.22	$	0.22

See accompanying notes to consolidated financial statements.

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1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three months ended March 31,
	2013			2012
Net Income	$	1,325,318		$	1,166,732

Other comprehensive income (loss) net of tax

Unrealized holding gains (losses) on securities available for sale		(433,035	)		9,795

Pension liability		1,925			1,926

Other comprehensive (loss) income		(431,110	)		11,721

Comprehensive income	$	894,208		$	1,178,453

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

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1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2013 and 2012

(Unaudited)

	Common Stock		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive (Loss) Income			Total Shareholders’ Equity

Balance, January 1, 2012	$	40,847,929	$	13,070,606	$	(10,222	)	$	1,091,462		$	54,999,775

Exercise of stock options and issuance of vested shares under employee benefit program		140,798										140,798

Share-based compensation		23,540										23,540

Net Income for the three month ended March 31, 2012				1,166,732								1,166,732

Other comprehensive income									11,721			11,721
Balance, March 31, 2012	$	41,012,267	$	14,237,338	$	(10,222	)	$	1,103,183		$	56,342,566

Balance, January 1, 2013	$	48,716,032	$	15,594,293	$	(61,086	)	$	804,293		$	65,053,532
Exercise of stock options and issuance of vested shares under employee benefit program		187,383										187,383

Share-based compensation		25,187										25,187
Treasury stock purchased						(47,230	)					(47,230	)
Net income for the three months ended March 31, 2013				1,325,318								1,325,318

Other comprehensive (loss)									(431,110	)		(431,110	)

Balance March 31, 2013	$	48,928,602	$	16,919,611	$	(108,316	)	$	373,183		$	66,113,080

See accompanying notes to consolidated financial statements.

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1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	1,325,318		$	1,166,732
Adjustments to reconcile net income to net cash provided by operating activities-
Provision for loan losses		-			599,998
Provision for loss on other real estate owned		662,918			211,644
Depreciation and amortization		270,912			267,576
Net amortization of premiums and discounts on securities		314,201			366,528
Gains on sales of other real estate owned		(308,010	)		0
Gains on sales of loans held for sale		(731,709	)		(468,217	)
Originations of loans held for sale		(44,012,744	)		(41,388,684	)
Proceeds from sales of loans held for sale		49,987,702			43,593,884
Income on Bank – owned life insurance		(112,608	)		(111,922	)
Share-based compensation expense		170,114			111,362
Decrease (increase) in accrued interest receivable		458,333			473,125
(Increase)decrease in other assets		531,820			98,912
Decrease in accrued interest payable		(47,298	)		(111,778	)
(Decrease) increase in accrued expenses and other liabilities		(255,455	)		155,781
Net cash provided by operating activities		8,253,494			4,964,941
INVESTING ACTIVITIES:
Purchases of securities -
Available for sale		(12,761,368	)		(18,134,939	)
Held to maturity		0			0
Proceeds from maturities and prepayments of securities -
Available for sale		5,417,275			20,607,265
Held to maturity		10,241,275			11,520,563
Net decrease in loans		103,647,874			36,657,075
Capital expenditures		(68,309	)		(549,282	)
Additional investment in other real estate owned		0			(81,812	)
Proceeds from sales of other real estate owned		1,683,830			439,784
Net cash provided by investing activities		108,160,577			50,458,654
FINANCING ACTIVITIES:
Exercise of stock options and issuance of vested shares		187,383			140,798
Purchase of Treasury Stock		(47,230)			0
Net increase (decrease) in demand, savings and time deposits		3,240,282			34,701,473
Net (decrease) in borrowings		(32,400,000	)		(78,300,000	)
Net cash used in financing activities		(29,019,565	)		(43,457,729	)
Increase in cash and cash equivalents		87,394,506			11,965,866
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD		14,044,921			15,195,259
CASH AND CASH EQUIVALENTS
AT END OF PERIOD	$	101,439,427			27,161,125
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Cash paid during the period for -
Interest	$	1,194,780			1,515,486
Income taxes		750,000			-
Non-cash investing activities
Real estate acquired in full satisfaction of loans in foreclosure	$	2,001,025			-

See accompanying notes to consolidated financial statements.

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1st Constitution Bancorp and Subsidiaries

Notes To Consolidated Financial Statements

March 31, 2013 (Unaudited)

(1) Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include 1ST Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1ST Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1ST Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1ST Constitution Title Agency, LLC, 204 South Newman Street Corp. and 249 New York Avenue, LLC. 1ST Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation. The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2012, filed with the SEC on March 22, 2013.

In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2013 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

(2) Net Income Per Common Share

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period.

Diluted net income per common share is calculated by dividing net income stock by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of potential common stock warrants, common stock options and unvested restricted stock awards (as defined below), using the treasury stock method. All share information has been adjusted for the effect of a 5% common stock dividend declared December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.

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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, 2013
	Net Income		Weighted- average shares		Per share amount
Basic earnings per common share:
Net income	$	1,325,318	5,895,763		$	0.22

Effect of dilutive securities:
Stock options and unvested stock awards				139,016

Diluted EPS:
Net income plus assumed conversion	$	1,325,318		6,034,779	$	0.22

	Three Months Ended March 31, 2012
	Net Income		Weighted- average shares		Per share amount
Basic earnings per common share:
Net income	$	1,166,732		5,350,995		$	0.22
Effect of Dilutive Securities:
Stock options and unvested stock awards				57,177
Diluted EPS:
Net income plus assumed conversions	$	1,166,732		5,408,172		$	0.22

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(3) Investment Securities

Amortized cost, gross unrealized gains and losses, and the estimated fair value by security type are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
March 31, 2013	Cost		Gains		Losses			Value
Available for sale-
U. S. Treasury securities and
obligations of U.S. Government
sponsored corporations (“GSE”) and agencies	$	29,378,446	$	125,742	$	(118,378	)	$	29,385,810
Residential collateralized mortgage obligations- GSE		5,454,770		246,106		-			5,700,876
Residential collateralized mortgage obligations- non GSE		3,513,795		114,969		(5,000	)		3,623,764
Residential mortgage backed securities – GSE		34,255,964		1,414,668		(74,160	)		35,596,472
Obligations of State and Political subdivisions		21,377,112		346,434		(915,558	)		20,807,988
Trust preferred debt securities – single issuer		2,466,720		-		(403,320	)		2,063,400
Corporate debt securities		17,754,471		426,326		(6,976	)		18,173,821
Restricted stock		1,035,300		-		-			1,035,300
Mutual fund		25,000		-		-			25,000
	$	115,261,578	$	2,674,245	$	(1,523,392	)	$	116,412,431

March 31, 2013	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held to maturity-
U. S. Treasury securities and
obligations of U.S. Government
sponsored corporations (“GSE”) and agencies	$	3,061,691	$	-		$	3,061,691	$	27,959	$	-		$	3,089,650
Residential collateralized mortgage obligations – GSE		18,272,430		-			18,272,430		955,869		-			19,228,299
Residential collateralized mortgage obligations – non – GSE		12,833,053		-			12,833,053		748,440		-			13,581,493
Residential mortgage backed securities – GSE		18,580,528		-			18,580,528		777,182		(46,743	)		19,310,967
Obligations of State and
political subdivisions		42,145,369		-			42,145,369		2,839,436		-			44,984,805
Trust preferred debt securities-pooled		656,662		(500,944	)		155,718		-		(9,566	)		146,152
Corporate debt securities		10,539,148		-			10,539,148		63,782		-			10,602,930
	$	106,088,881	$	(500,944	)	$	105,587,937	$	5,412,668	$	(56,309	)	$	110,944,296

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

Available for sale-
U. S. Treasury securities and
obligations of U.S. Government
sponsored corporations (“GSE”) and agencies		$	29,384,595		$	137,847		$	(26,907	)		$	29,495,535
Residential collateralized mortgage obligations- GSE			6,349,310			283,355			-				6,632,665
Residential collateralized mortgage obligations- non GSE			3,811,933			119,323			(7,074	)			3,924,182
Residential mortgage backed securities - GSE			24,912,948			1,576,387			-				26,489,335
Obligations of State and Political subdivisions			20,793,222			375,416			(486,337	)			20.682,301
Trust preferred debt securities-single issuer			2,466,009			-			(467,643	)			1,998,366
Corporate debt securities			17,797,681			325,731			(23,131	)			18,100,281
Restricted stock			2,493,300			-			-				2,493,300
Mutual fund			25,000			-			-				25,000
		$	108,033,998		$	2,818,059		$	(1,011,092	)		$	109,840,965

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

	$	116,528,844	$	(500,944	)	$	116,027,900	$	5,825,079	$	(13,616	)	$	121,839,363

Restricted stock at March 31, 2013 and December 31, 2012 consists of $1,020,300 and $2,478,300, respectively, of Federal Home Loan Bank of New York stock and $15,000 of Atlantic Central Bankers Bank stock.

The amortized cost and estimated fair value of investment securities at March 31, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Restricted stock is included in “Available for sale - Due in one year or less.”

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	Amortized Cost		Fair Value
Available for sale-
Due in one year or less
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies	$	12,000,753	$	12,017,350
Residential mortgage backed securities-GSE		77,981		82,064
Corporate Debt Securities		1,409,492		1,416,248
Restricted Stock		1,035,300		1,035,300
Mutual Fund		25,000		25,000
	$	14,548,526	$	14,575,962
Due after one year through five years
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”)and agencies	$	4,962,759	$	5,057,400
Residential mortgage backed securities-GSE		4,068,483		4,047,840
Obligations of State and Political subdivisions		484,040		486,059
Corporate Debt Securities		15,258,848		15,677,974
	$	24,774,130	$	25,269,273
Due after five years through ten years
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies	$	12,414,934	$	12,311,060
Residential collateralized mortgage obligations -GSE		35,919		39,031
Residential mortgage backed Securities - GSE		9,925,740		10,123,009
Obligations of State and Political Subdivisions		3,000,269		3,241,492
	$	25,376,862	$	25,714,592
Due after ten years
Residential collateralized mortgage obligations -GSE	$	5,418,851	$	5,661,845
Residential collateralized mortgage obligations –non GSE		3,513,795		3,623,764
Residential mortgage backed securities - GSE		20,183,760		21,343,559
Obligations of State and Political subdivisions		17,892,803		17,080,437
Corporate Debt Securities		1,086,131		1,079,599
Trust Preferred Debt Securities		2,466,720		2,063,400
	$	50,562,060	$	50,852,604

Total	$	115,261,578	$	116,412,431

Held to maturity-
Due in one year or less
U.S. Treasury securities and obligations of US Government sponsored Corporations (“GSE”) and agencies	$	1,500,222	$	1,506,120
Obligations of State and Political subdivisions		2,944,274		2,978,956
Corporate Debt Securities		9,521,371		9,558,625
	$	13,965,867	$	14,043,701

Due after one year through five years
U.S. Treasury securities and obligations of US Government sponsored corporations (“GSE”) and agencies	$	1,561,469	$	1,583,530
Obligations of State and Political subdivisions		5,846,991		6,114,721
Corporate Debt Securities		1,017,777		1,044,305
	$	8,426,237	$	8,742,556

Due after five years through ten years
Residential collateralized mortgage obligations – GSE	$	212,257	$	216,176
Residential mortgage backed securities – GSE		3,045,103		3,174,896
Obligations of State and Political subdivisions		23,078,823		24,734,110
	$	26,336,183	$	28,125,182
Due after ten years
Residential collateralized mortgage obligations - GSE		18,060,173		19,012,123
Residential collateralized mortgage obligations – non GSE		12,833,053		13,581,493
Residential mortgage backed securities - GSE		15,535,425		16,136,071
Obligations of State and Political subdivisions		10,275,281		11,157,018
Trust Preferred Debt Securities - Pooled		656,662		146,152
	$	57,360,594	$	60,032,857


Total	$	106,088,881	$	110,944,296

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



March 31, 2013		Less than 12 months					12 months or longer					Total
	Number of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies	2	$	10,741,220	$	(118,378	)	$	-	$	-		$	10,741,220	$	(118,378	)

Residential collateralized mortgage obligations – non-GSE	2		976,498		(851	)		147,632		(4,149)			1,124,130		(5,000	)

Residential mortgage backed Securities - GSE	11		12,632,001		(120,903	)		-		-			12,632,001		(120,903	)

Obligations of State and Political Subdivisions	46		15,080,685		(915,558	)		-		-			15,080,685		(915,558	)

Trust preferred debt securities – single issuer	4		-		-			2,063,400		(403,320	)		2,063,400		(403,320	)

Trust preferred debt securities – pooled	1		-		-			146,152		(510,510	)		146,152		(510,510	)

Corporate Debt Securities	2		1,079,600		(6,532	)		517,185		(444	)		1,596,785		(6,976	)

Total temporarily impaired securities	68	$	40,510,004	$	(1,162,222	)	$	2,874,369	$	(918,423	)	$	43,384,373	$	(2,080,645	)

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December 31, 2012		Less than 12 months					12 months or longer					Total
	Number of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. Government sponsored corporations (GSE) and agencies	1	$	9,842,200	$	(26,907	)	$	-	$	-		$	9,842,200	$	(26,907	)

Residential collateralized mortgage Obligations – non-GSE	3		1,960,237		(4,516	)		156,505		(2,847	)		2,116,742		(7,363	)

Residential mortgage backed securities GSE	2		3,989,675		(944	)		-		-			3,989,675		(944	)

Obligations of State and Political Subdivisions	37		12,794,007		(486,337	)		-		-			12,794,007		(486,337	)

Trust preferred debt securities – single issuer	4		-		-			1,998,366		(467,643	)		1,998,366		(467,643	)

Trust preferred debt securities – Pooled	1		-		-			146,080		(510,582	)		146,080		(510,582	)

Corporate debt securities	5		3,176,328		(25,876	)		-		-			3,176,328		(25,876	)

Total temporarily impaired securities	53	$	31,762,447	$	(544,580	)	$	2,300,951	$	(981,072	)	$	34,063,398	$	(1,525,652	)

U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies: The unrealized losses on investments in these securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity, these investments are not considered other-than temporarily impaired.

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

Obligations of State and Political Subdivisions: The unrealized losses or investments in these securities were caused by interest rate increases. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

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

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

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

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

On a quarterly basis, management evaluates this security to determine if any additional other-than-temporary impairment is required. As of March 31, 2013, our evaluation was as follows:

We obtained the PRETSL XXV Depository Institutions Issuer List as of March 31, 2013 from the FTN Financial Corp. (“FTN”) website and reviewed the financial ratios and capital levels of each individual financial institution issuer.

We sorted the financial institutions on the issuer list to develop three “buckets” (or categories) for further deferred/default analysis based upon the indicated “Texas Ratio.” The Texas Ratio is calculated by dividing the institution’s Non-Performing Assets plus loans 90 days past due by the combined total of Tangible Equity plus the Allowance for Loan Losses. The three buckets consisted of those institutions with a Texas Ratio of:

(1)

Above 100;

(2)

75 to 100; and

(3)

Below 75.

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

(1)

Above 100 - 100% default; 0% recovery;

(2)

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

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(3)

Below 75 – no deferral/default.

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

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

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

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

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

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

The following table sets forth information with respect to this security at March 31, 2013:

Security	Class	Amortized Cost	Fair Value	Unrealized (Loss) and OTTI	Percent of Underlying Collateral Performing	Percent of Underlying Collateral In Deferral (1)	Percent of Underlying Collateral In Default (1)	Expected Deferrals and Defaults as a % of Remaining Performing Collateral	Moody's S&P / Ratings	Excess Subordination (2)
										Amount	% of Current Performing Collateral
PreTSL XXV	B-1	$656,662	$146,152	($510,510)	67.6%	13.7%	18.7%	14.3%	C/ NR	$122,000	23.0%

Notes to table above:

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

(2)

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

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

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

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

(4) Allowance for Loan Losses and Credit Quality Disclosure

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

The following table provides an aging of the loan portfolio by loan class at March 31, 2013:

	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Accruing		Nonaccrual Loans

Commercial
Construction	$	-	$	-	$	156,000	$	156,000	$	41,187,971	$	41,343,971	$	-	$	156,000
Commercial Business		88,971		-		490,532		579,503		49,991,120		50,570,623		-		490,532
Commercial Real Estate		618,135		-		861,748		1,479,883		102,034,714		103,514,597		-		1,202,516
Mortgage Warehouse Lines		-		-		-		-		198,147,590		198,147,590		-		-

Residential Real Estate		451,783		-		33,494		485,277		10,474,824		10,960,101		-		165,802

Consumer
Loans to Individuals		96,510		-		-		96,510		9,279,135		9,375,645		-		-
Other		-		-		-		-		171,550		171,550		-		-

Deferred Loan Fees		-		-		-		-		953,205		953,205		-		-

Total	$	1,255,399	$	-	$	1,541,774	$	2,797,173	$	412,240,109	$	415,037,282	$	-	$	2,014,850

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

	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Accruing		Nonaccrual Loans

Commercial
Construction	$	-	$	-	$	1,581,031	$	1,581,031	$	54,110,362	$	55,691,393	$	-	$	1,581,031
Commercial Business		202,451		70,192		518,912		791,555		57,073,881		57,865,436		-		629,821
Commercial Real Estate		-		-		3,137,553		3,137,553		99,275,141		102,412,694		-		3,478,605
Mortgage Warehouse Lines		-		-		-		-		284,127,530		284,127,530		-		-

Residential Real Estate		320,729		34,975		-		355,704		10,541,603		10,897,307		-		134,193

Consumer
Loans to Individuals		49,243		-		139,852		189,095		9,454,290		9,643,385		84,948		54,904
Other		-		-		-		-		189,279		189,279		-		-

Deferred Loan Fees		-		-		-		-		987,086		987,086		-		-

Total	$	572,423	$	105,167	$	5,377,348	$	6,054,938	$	515,759,172	$	521,814,110	$	84,948	$	5,878,554

Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements. These elements include a specific reserve for impaired loans, an allocated reserve, and an unallocated portion.

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

General economic conditions.

Trends in charge-offs.

Trends and levels of delinquent loans.

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

Trends in volume and terms of loans.

Levels of allowance for specific classified loans.

Credit concentrations.

The methodology includes the segregation of the loan portfolio into loan types with a further segregation into risk rating categories, such as special mention, substandard, doubtful, and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. It is this process that produces the watch list. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans 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.

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

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

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

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

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

Commercial

Consumer

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

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

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

Consumer credit scores

Internal credit risk grades

Loan-to-value ratios

Collateral

Collection experience

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

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

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

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

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

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

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

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

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

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

Commercial Credit Exposure - By Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate

Grade:
Pass	$	36,898,345	$	48,262,759	$	78,991,274	$	198,147,590	$	10,794,299
Special Mention		0		1,066,940		19,570,092		0		165,802
Substandard		4,445,626		1,097,775		4,953,231		0		0
Doubtful		0		143,149		0		0		0
Total	$	41,343,971	$	50,570,623	$	103,514,597	$	198,147,590	$	10,960,101

Consumer Credit Exposure - By Payment Activity	Loans To Individuals		Other

Performing	$	9,375,645	$	171,550
Nonperforming		0		0
Total	$	9,375,645	$	171,550

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

Commercial Credit Exposure - By Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate

Grade:
Pass	$	49,373,827	$	55,498,613	$	76,096,964	$	284,127,530	$	10,763,114
Special Mention		0		1,019,586		19,060,621		0		134,193
Substandard		5,777,494		1,064,799		7,255,109		0		0
Doubtful		540,072		282,438		0		0		0
Total	$	55,691,393	$	57,865,436	$	102,412,694	$	284,127,530	$	10,897,307

Consumer Credit Exposure - By Payment Activity	Loans To Individuals		Other

Performing	$	9,454,288	$	189,279
Nonperforming		189,097		0
Total	$	9,643,385	$	189,279

Impaired Loans Disclosures

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

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

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Period-End Allowance for Credit Losses by Impairment Method March 31,2013
					Commercial		Mortgage		Residential								Loan		Total
	Construction		Commercial		Real Estate		Warehouse		Real Estate		Consumer		Other		Unallocated		Costs
Allowance for credit losses:
Ending Balance	$	1,210,289	$	817,181	$	2,130,198	$	990,738	$	112,365	$	102,334	$	2,059	$	658,119	$	-	$	6,023,283

Ending Balance
Individually evaluated for impairment		-		173,155		286,826		-		21,693		-		-		-		-		481,674
Collectively evaluated for impairment	$	1,210,289	$	644,026	$	1,843,372	$	990,738	$	90,672	$	102,334	$	2,059	$	658,119	$	-	$	5,541,609

Loans receivables:
Ending Balance	$	41,343,971	$	50,570,623	$	103,514,597	$	198,147,590	$	10,960,101	$	9,375,645	$	171,550	$	-	$	953,205	$	415,037,282
Individually evaluated for impairment		970,091		777,391		1,672,053		-		165,802		-		-		-		-		3,585,337
Collectively evaluated for impairment	$	40,373,880	$	49,793,232	$	101,842,544	$	198,147,590	$	10,794,299	$	9,375,645	$	171,550	$	-	$	953,205	$	411,451,945

Period-End Allowance for Credit Losses by Impairment Method December 31, 2012
					Commercial		Mortgage		Residential								Loan		Total
	Construction		Commercial		Real Estate		Warehouse		Real Estate		Consumer		Other		Unallocated		Costs
Allowance for credit losses:
Ending Balance	$	1,990,292	$	972,789	$	2,262,221	$	1,420,638	$	112,103	$	102,583	$	2,271	$	288,315	$	-	$	7,151,212

Ending Balance
Individually evaluated for impairment		569,579		253,598		447,193		-		21,693		-		-		-		-		1,292,063
Collectively evaluated for impairment	$	1,420,713	$	719,191	$	1,815,028	$	1,420,638	$	90,410	$	102,583	$	2,271	$	288,315	$	-	$	5,859,149

Loans receivables:
Ending Balance	$	55,691,393	$	57,865,436	$	102,412,694	$	284,127,530	$	10,897,307	$	9,643,385	$	189,279	$	-	$	987,086	$	521,814,110
Individually evaluated for impairment		2,842,031		906,526		3,952,546		-		134,193		54,904		-		-		-		7,890,200
Collectively evaluated for impairment	$	52,849,362	$	56,958,910	$	98,460,148	$	284,127,530	$	10,763,114	$	9,588,481	$	189,279	$	-	$	987,086	$	513,923,910

The activity in the allowance for loan loss by loan class for the three months ended March 31, 2013 and 2012 was as follows:

	Construction			Commercial Business				Commercial Real Estate			Mortgage Warehouse			Residential Real Estate		Consumer			Other			Unallocated		Total
Balance - December 31, 2012	$	1,990,292			$	972,789		$	2,262,221		$	1,420,638		$	112,103	$	102,583		$	2,271		$	288,315	$	7,151,212
Provision charged to operations		(218,010)				(18,319)			245,769			(429,900	)		262		50,606			(212)			369,804		-
Loans charged off		(561,993	)			(139,289	)		(384,688	)		-			-		(50,855	)		-			-		(1,136,825	)
Recoveries of loans charged off		-				2,000			6,895			-			-		-			-			-		8,895
Balance - March 31, 2013	$	1,210,289			$	817,181		$	2,130,197		$	990,738		$	112,365	$	102,334		$	2,059		$	658,119	$	6,023,282


Balance - December 31, 2011	$	1,054,695			$	934,642		$	1,597,702		$	1,122,056		$	91,076	$	187,352		$	2,377		$	544,550	$	5,534,450
Provision charged to operations		217,501				15,757			241,180			(115,451	)		148,497		22,076			6,803			63,635		599,998
Loans charged off		(32,650	)			(144,827	)		-			-			-		(77,858	)		(6,001	)		-		(261,336	)
Recoveries of loans charged off		3,403				5,427			-			-			-		-			-			-		8,830
Balance - March 31, 2012	$	1,242,949			$	810,999		$	1,838,882		$	1,006,605		$	239,573	$	131,570		$	3,179		$	608,185	$	5,881,942

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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, 2013
							Three months ended
							March 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:

Commercial
Construction	$	970,091	$	1,454,077	$	-	$	1,270,340	$	17,903
Commercial Business		154,104		208,416		-		313,089		1,257
Commercial Real Estate		-		-		-				-
Mortgage Warehouse Lines		-		-		-				-
Subtotal		1,124,195		1,662,493		-		1,583,429		19,160
Residential Real Estate		33,494		33,494		-		22,329		-

Consumer
Loans to Individuals		-		-		-		45,079		-
Other		-		-		-		-		-
Subtotal		-		-		-		45,079		-
With no related allowance:	$	1,157,689	$	1,695,987	$	-	$	1,650,837	$	19,160

With an allowance:

Commercial
Construction	$	-	$	-	$	-	$	987,411	$	-
Commercial Business		623,287		786,114		173,155		552,611		9,576
Commercial Real Estate		1,672,053		1,718,539		286,826		2,421,681		8,800
Mortgage Warehouse Lines		-		-		-		-		-
Subtotal		2,295,340		2,504,653		459,981		3,961,703		18,376
Residential Real Estate		132,308		132,308		21,693		132,716		-

Consumer
Loans to Individuals		-		-		-		16,952		-
Other		-		-		-		-		-
Subtotal		-		-		-		16,952		-
With an allowance:		2,427,648		2,636,961		481,674		4,111,371		18,376

Total:
Commercial		3,419,535		4,167,146		459,981		5,545,132		37,536
Residential Real Estate		165,802		165,802		21,693		155,045		-
Consumer		-		-		-		62,031		-
Total	$	3,585,337	$	4,332,948	$	481,674	$	5,762,208	$	37,536

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Impaired Loans Receivables (By Class)							Year to date
December 31 , 2012							12/31/2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

With no related allowance:

Commercial
Construction	$	1,360,914	$	1,360,914	$	-	$	412,716	$	-
Commercial Business		387,950		430,632		-		474,839		9,490
Commercial Real Estate		-		-		-		321,743		-
Mortgage Warehouse Lines		-		-		-				-
Subtotal		1,748,864		1,791,546		-		1,209,298		9,490

Residential Real Estate		-		-		-		23.600		-

Consumer
Loans to Individuals		54,904		54,904		-		54,904		-
Other		-		-		-		-		-
Subtotal		54,904		54,904		-		54,904		-

Subtotal with no Related Allowance		1,803,768		1,846,450		-		1,287,802		-


With an allowance:

Commercial
Construction		1,481,117		1,481,117		569,579		123,426		-
Commercial Business		518,576		663,403		253,598		456,541		15,746
Commercial Real Estate		3,952,546		3,999,032		447,193		2,964,744		29,291
Mortgage Warehouse Lines		-		-		-		-		-
Subtotal		5,952,239		6,143,552		1,270,370		3,544,711		45,037

Residential Real Estate		134,193		134,193		21,693		287,395		-

Consumer
Loans to Individuals		-		-		-		-		-
Other		-		-		-		-		-
Subtotal		-		-		-		-		-

Subtotal with an Allowance		6,086,432		6,277,745		1,292,063		3,832,106		45,037
Total:
Commercial		7,701,103		7,935,098		1,270,370		4,754,009		54,527
Residential Real Estate		134,193		134,193		21,693		310,995		-
Consumer		54,904		54,904		-		54,904		-
Total	$	7,890,200	$	8,124,195	$	1,292,063	$	5,119,908	$	54,527

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Impaired Loans Receivables (By Class) – March 31, 2012

							Three months ended March 31, 2012
	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		-		-		-		-		-
Subtotal		1,008,722		1,039,412		-		3,647,112		-
Residential Real Estate		-		-		-		-		1,516

Consumer
Loans to Individuals		-		-		-		-		-
Other		-		-		-		-		-
Subtotal		-		-		-		-		-
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		-		-		-		-		-
Subtotal		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		-		-		-		-		-
Subtotal		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		-
Total	$	7,235,479	$	7,341,669	$	1,517,077	$	8,450,274	$	1,516

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

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If the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial statements and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may only be offered for that time period. Where possible, the Bank would attempt to obtain additional collateral and/or secondary repayment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

The Bank adopted Accounting Standards Update (“ASU”) No. 2011-02 on July 1, 2011. ASU No. 2011-02 provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, ASU No. 2011-02 requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties. As a result of our adoption of ASU No. 2011-02, we reassessed the terms and restructurings. The following table is a breakdown of troubled debt restructurings, all of which are classified as impaired, which occurred during the three months ended March 31, 2013.

Modifications

During the three months ended March 31, 2013

	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial	-	$	-	$	-

If the Bank determines that a borrower has suffered deterioration in their financial condition, a restructuring of the loan terms may occur. Such loan restructurings may include, but are not limited to, reductions in principal or interest, reductions in interest rates, and extensions of the maturity date. When modifications are implemented, such loans meet the definition of a troubled debt restructuring. Most of the modifications employed by the Bank during the three month period ended March 31, 2013 have resulted in lower amortization payments for a limited time period without any reduction in the interest rate. The lower payments are determined by an analysis of the borrower’s cash flow ability to meet the modified terms while anticipating an improved financial condition to enable a resumption of the original payment terms.

(5) Share-Based Compensation

The Company’s stock based incentive plans (“Stock Plans”) authorize the issuance of an aggregate of 1,363,102 shares of common stock (as adjusted for subsequent stock dividends) pursuant to awards that may be granted in the form of stock options to purchase common stock (“Options”) and awards of shares of common stock (“Stock Awards”). The purpose of the Stock Plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, employees and other persons to promote the success of the Company. Under the Stock Plans, options have a term of ten years after the date of grant subject to earlier termination in certain circumstances. Options are granted with an exercise price at the then fair market value of the Company’s common stock. The grant date fair value is calculated using the Black – Scholes option valuation model. As of March 31, 2013, there were 74,355 shares of common stock (as adjusted for the 5% stock dividend declared December 20, 2012 and paid January 31, 2013 to shareholders of record on January 14, 2013) available for future grants under the Stock Plans.

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Stock-based compensation expense related to options was $25,187 and $23,540 for the three months ended March 31, 2013 and 2012, respectively.

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

					Weighted
					Average
			Weighted		Remaining		Aggregate
	Number of		Average		Contractual		Intrinsic
Stock Options	Shares		Exercise Price		Term (years)		Value
Outstanding at January 1, 2013		221,894	$	8.91
Granted		25,305		8.06
Exercised		-		-
Forfeited		-		-
Expired		-		-
Outstanding at March 31, 2013		247,199	$	8.82		6.1	$	178,837

Exercisable at March 31, 2013		184,215	$	9.42		5.2	$	151,575

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, 2013 are as follows:

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

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

As of March 31, 2013, there was approximately $192,764 of unrecognized compensation cost related to nonvested stock option- based compensation arrangements granted under the Company’s stock incentive plans. That cost is expected to be recognized over the next four years.

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

				Average
	Number of			Grant Date
Non-vested shares	Shares			Fair Value
Non-vested at January 1, 2013		140,575		$	6.41
Granted		19,633			8.42
Vested		(9,307	)		8.33
Forfeited		-			-
Non-vested at March 31, 2013		150,901		$	6.55

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

Stock based compensation expense related to stock grants was $144,927 and $87,822 for the three months ended March 31, 2013 and 2012.

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As of March 31, 2013, there was approximately $891,191 of unrecognized compensation cost related to non-vested stock grants that will be recognized over the next three years.

(6) Benefit Plans

The Bank has a 401(k) plan which covers substantially all employees with six months or more of service. The Bank’s contributions to the 401(k) plan are expensed as incurred.

The Company also provides retirement benefits to certain employees under a supplemental executive retirement plan. The plan is unfunded and the Company accrues actuarial determined benefit costs over the estimated service period of the employees in the plan. The Company recognizes the over funded or 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 supplemental executive retirement plan for the three months ended March 31, 2013 and 2012 were as follows:

	Three months ended March 31,
	2013				2012

Service cost		$	183,718			$	68,425
Interest cost			133,722				57,057
Actuarial (gain) loss recognized			(179,829	)			(2,062	)
Prior service cost recognized			5,669				19,859
		$	143,280			$	143,279

(7) Other Comprehensive Income and Accumulated Other Comprehensive Income

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

	Before-Tax Amount			Income Tax Effect			Net-of-Tax Amount

Three Months Ended March 31, 2013:
Unrealized gains on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(781,961	)	$	348,926		$	(433,035	)
Reclassification adjustment for (gains) realized in income		0			0			0
Other comprehensive loss on available-for-sale securities		(781,961	)		348,926			(433,035	)

Unfunded pension liability:
Changes from plan actuarial gains and losses included in other comprehensive income		3,220			(1,295	)		1,925
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		0			0			0
Other comprehensive gain on unfunded retirement obligations		3,220			(1,295	)		1,925

Total other comprehensive loss	$	(778,741	)	$	347,631		$	(431,110	)

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	Before-Tax Amount		Income Tax Effect			Net-of-Tax Amount

Three Months Ended March 31, 2012:
Unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	14,841	$	(5,046	)	$	9,795
Reclassification adjustment for losses realized in income		0		0			0
Other comprehensive gain on available-for-sale securities		14,841		(5,046	)		9,795

Unfunded pension liability:
Changes from plan actuarial gains and losses included in other comprehensive income		3,220		(1,294	)		1,926
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		0		0			0
Other comprehensive gain on unfunded retirement obligations		3,220		(1,294	)		1,926

Total other comprehensive income	$	18,061	$	(6,340	)	$	11,721

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

	Unrealized Holding Gains (Losses) on Available for Sale Securities			Unrealized Impairment Loss on Held to Maturity Security			Unfunded Pension Liability			Accumulated Other Comprehensive Income

Three Months Ended March 31, 2013:
Balance, beginning of period	$	1,235,204		$	(330,623	)	$	(100,288	)	$	804,293
Other comprehensive income before reclassifications		(433,035	)		0			2,025			(431,110	)
Amounts reclassified from accumulated other comprehensive income		0			0			0			0
Other comprehensive income		(433,035	)		0			2,025			(431,110	)
Balance, end of period	$	802,169		$	(330,623	)	$	(98,363	)	$	373,183

	Unrealized Holding Gains (Losses) on Available for Sale Securities		Unrealized Impairment Loss on Held to Maturity Security			Unfunded Pension Liability			Accumulated Other Comprehensive Income

Three Months Ended March 31, 2012:
Balance, beginning of period	$	1,530,078	$	(330,623	)	$	(107,993	)	$	1,091,462
Other comprehensive income before reclassifications		9,795		0			1,926			11,721
Amounts reclassified from accumulated other comprehensive income		0		0			0			11,721
Other comprehensive income		9,795		0			1,926			(431,110	)
Balance, end of period	$	1,539,873	$	(330,623	)	$	(106,067	)	$	1,103,183

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

For the Three Months Ended March 31, 2013 (In Thousands)
Details about Accumulated Other Comprehensive Income Components	Reclassified from Accumulated Other Comprehensive Income		Affected Line Item in the Consolidated Statements of Income

Unrealized gains (losses) on available-for- sale securities	$	0	Total other-than-temporary impairment losses on Available-for-sale securities
		0	Realized gains on available-for-sale securities, net
		0	Total before tax
		0	Income tax (expense) benefit
		0	Net of tax
Unfunded pension liability
Prior service cost		0	Salaries and employee benefits
Actuarial loss		0	Salaries and employee benefits
		0	Total before tax
		0	Income tax (expense) benefit
		0	Net of tax
Total reclassifications for the period, net of tax	$	0

(8) Recent Accounting Pronouncements

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

On December 19, 2011, the FASB issued Accounting Standards Update (ASU) 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This new guidance affects all entities with financial instruments or derivatives that are either presented on a net basis in the balance sheet or subject to an enforceable master netting arrangement or a similar arrangement. The ASU does not change existing offsetting criteria in U.S. generally accepted accounting principles (U.S. GAAP) or the permitted balance sheet presentation for items meeting the criteria. To help financial statement users better assess the effect or potential effect of offsetting arrangements on an entity’s financial position, the new guidance requires disclosures in the financial statement notes that provide both net and gross information about assets and liabilities that have been offset and the related arrangements.

The new disclosure requirements in the ASU are intended to enhance comparability between financial statements prepared using U.S. GAAP and those prepared in accordance with international Financial Reporting Standards (IFRS). The eligibility criteria for offsetting are different in U.S. GAAP and IFRS. In January 2011, the FASB and the International Accounting Standards Board issued an exposure draft proposing new common criteria for offsetting, but the boards could not agree. The FASB voted to retain existing U.S. GAAP guidance on offsetting and to require expanded disclosures for financial instruments and derivative instruments that are either offset in the balance sheet or eligible for offset subject to a master netting arrangement or similar arrangement.

The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods. The FASB has published a short recap highlighting the significant issues the ASU addresses. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial position or results of operations.

ASU 2011-05, 2001-12 and 2013-12 (Presentation of Comprehensive Income)

The provisions of ASU 2011-05 amend FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of shareholders’ equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous GAAP, all three presentations were acceptable. Regardless of the presentation selected, the reporting entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities. The Company adopted this update on January 1, 2012 and the new Consolidated Statements of Comprehensive Income are included in these financial statements.

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ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (“AOCI”) in Accounting Standards Update No. 2011-05,” was issued by the FASB on December 23, 2011. This ASU defers the implementation of only those provisions in ASU 2011-05, dealing with the presentation of items reclassified out of AOCI.

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

(9) Fair Value Disclosures

U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1:

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

Level 2:

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

Level 3:

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

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and counterparty creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective value or reflective of future values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing quoted market prices on nationally recognized exchanges (Level 1) or by using Level 2 Inputs. For Level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.

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Impaired loans. Loans included in the following table are those which the Company has measured and recognized impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based on the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less specific valuation allowances.

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

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
March 31, 2013:
Securities available for sale:
U. S. Treasury securities and
obligations of U.S. Government
sponsored corporations (“GSE”) and agencies	$	27,815,970	$	1,569,840	$	-	$	29,385,810
Residential collateralized mortgage obligations- GSE		-		5,700,876		-		5,700,876
Residential collateralized mortgage obligations - non GSE		-		3,623,764		-		3,623,764
Residential mortgage backed securities – GSE		-		35,596,472		-		35,596,472
Obligations of State and Political subdivisions		-		20,807,988		-		20,807,988
Trust preferred debt securities – single issuer		-		2,063,400		-		2,063,400
Corporate debt securities		-		18,173,821		-		18,173,821
Restricted stock		-		1,035,300		-		1,035,300
Mutual fund		-		25,000		-		25,000

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

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis at March 31, 2013 and December 31, 2012 were as follows:

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	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
March 31, 2013:
Impaired loans	$	-	$	-	$	1,945,974	$	1,945,974
Other real estate owned		-		-		4,083,203		4,083,203


December 31, 2012:
Impaired loans	$	-	$	-	$	4,794,369	$	4,794,369
Other real estate owned		-		-		6,568,781		6,568,781

Impaired loans measured at fair value and included in the above table consisted of 10 loans having an aggregate recorded investment of $2,427,648 and specific loan loss allowances of $481,674 at March 31, 2013 and 16 loans at December 31, 2012, having an aggregate recorded investment of $6,086,432 and specific loan loss allowances of $1,292,063.

The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range of Adjustments
March 31, 2013
Impaired loans	$	1,945,974	Appraisal of	Appraisal
			collateral (1)	adjustments (2)		5-50%
Other real estate owned	$	4,083,203	Appraisal of	Appraisal
			collateral (1)	adjustments (2)		8-60%
December 31, 2012
Impaired loans	$	4,794,369	Appraisal of	Appraisal
			collateral (1)	adjustments (2)		5-50%
Other real estate owned	$	6,568,781	Appraisal of	Appraisal
			collateral (1)	adjustments (2)		8-60%

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

include various Level 3 inputs which are not identifiable.

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

The fair value of other real estate owned was determined using appraisals, which may be discounted based on management’s review and changes in market conditions.

The following is a summary of fair value versus the carrying value of all the Company’s financial instruments. For the Company and the Bank, as for most financial institutions, the bulk of its assets and liabilities are considered financial instruments. Many of the financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used for the purpose of this note. Changes in assumptions could significantly affect these estimates.

Estimated fair values have been determined by using the best available data and an estimation methodology suitable for each category of financial instruments as follows:

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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 carrying amounts of financial assets and liabilities were as follows:

March 31, 2013
		Carrying	Level 1		Level 2		Level 3		Fair
		Value	Inputs		Inputs		Inputs		Value

Cash and cash equivalents	$	101,439,427	$	101,439,427	$	-	$	-	$	101,439,427
Securities available for sale		116,412,431		29,495,535		80,345,430		-		116,412,431
Securities held to maturity		105,587,937		-		110,944,296		-		110,944,296
Loans held for sale		30,717,012		30,717,012		-		-		30,717,012
Loans		409,013,999		-		-		410,674,717		410,674,717
Accrued interest receivable		2,413,766		2,413,766		-		-		2,413,766
Deposits		(710,929,757)		-		(712,787,000)		-		(712,787,000)
Borrowings		(10,000,000)		-		(11,399,000)		-		(11,399,000)
Redeemable subordinated debentures		(18,557,000)		-		(18,557,000)		-		(18,557,000)
Accrued interest payable		(1,010,481)		(1,010,481)		-		-		(1,010,481)

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December 31, 2012
	Carrying			Level 1		Level 2			Level 3		Fair
	Value			Inputs		Inputs			Inputs		Value

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

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

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

The purpose of this discussion and analysis of the operating results and financial condition at March 31, 2013 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, 2013 are not necessarily indicative of results to be attained for any other period.

This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Company’s Form 10-K (Management’s Discussion and Analysis of Financial Condition and Results of Operation) for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2013.

General

Throughout the following sections, the “Company” refers to 1st Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1st Constitution Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries, 1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st Constitution Title Agency, LLC, 204 South Newman Street Corp. and 249 New York Avenue, LLC. 1st Constitution Capital Trust II, (“Trust II”) a subsidiary of the Company, is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary.

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of the Bank, a full service commercial bank which began operations in August 1989, and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.

The Bank operates fourteen branches, and manages an investment portfolio through its subsidiary, 1st Constitution Investment Company of New Jersey, Inc. FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.

Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company to raise additional regulatory capital.

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Forward-Looking Statements

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

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

RESULTS OF OPERATIONS

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Summary

The Company reported net income of $1,325,318 for the three months ended March 31, 2013, an increase of $158,586, or 13.6%, from the $1,166,732 reported for the three months ended March 31, 2012. The increase was due primarily to a decrease of $599,998 in the loan loss provision, an increase of $443,398 in non-interest income and a reduction in FDIC insurance expense of $127,706, offset primarily by an increase of $412,513 in Salaries and employee benefits and an increase in Other real estate owned expenses of $167,878. Net income per diluted common share was $0.22 for the three months ended March 31, 2013 and 2012. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.

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

Key performance ratios remained strong for the three months ended March 31, 2013 due to higher net income for that period compared to the three months ended March 31, 2012. Return on average assets and return on average equity were 0.65% and 8.21% for the three months ended March 31, 2013 compared to 0.62% and 8.46%, respectively, for the three months ended March 31, 2012.

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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, 2013 was 3.53% as compared to the 3.98% net interest margin recorded for the three months ended March 31, 2012, a decrease of 45 basis points. This decrease in the Company’s net interest margin for the three months ended March 31, 2013 compared with the comparable 2012 period was primarily due to two factors: (1) the expected seasonal decline in the balance of outstanding mortgage warehouse lines and (2) the unexpected amount of loan prepayments in construction loans and commercial business loans. The repayment of these loans provided excess liquidity that was allocated to much lower yielding overnight fund balances. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging interest rate environment.

Earnings Analysis

Net Interest Income

Net interest income, the Company’s largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 79.7% of the Company’s net revenues for the three month period ended March 31, 2013 and 85.1% of net revenues for the three-month period ended March 31, 2012. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.

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, 2013 and 2012. 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, 2013							Three months ended March 31, 2012
	Average Balance		Interest		Average Yield			Average Balance			Interest		Average Yield
Assets:
Federal Funds Sold/Short-Term Investments	$	85,173,422	$	49,680		0.24	%	$	25,778,075		$	15,034		0.23	%
Investment Securities:
Taxable		159,023,828		937,085		2.39	%		169,451,907			1,184,204		2.81	%
Tax-exempt		63,549,292		759,060		4.84	%		52,496,087			622,442		4.77	%
Total		222,573,120		1,696,145		3.09	%		221,947,994			1,806,646		3.27	%

Loan Portfolio:
Construction		44,654,565		680,811		6.18	%		51,229,408			886,115		6.96	%
Residential real estate		10,920,962		144,890		5.38	%		12,553,551			160,487		5.14	%
Home Equity		9,222,618		124,683		5.48	%		11,017,237			155,074		5.66	%
Commercial and commercial real estate		143,147,048		2,527,366		7.16	%		142,809,968			2,618,799		7.38	%
Mortgage warehouse lines		189,436,939		2,189,236		4.69	%		192,404,738			2,289,469		4.79	%
Installment		255,018		4,391		6.98	%		414,501			6,927		6.72	%
All Other Loans		49,279,947		300,818		2.48	%		32,488,520			297,588		3.68	%
Total		446,917,097		5,972,195		5.42	%		442,917,923			6,414,459		5.82	%

Total Interest-Earning Assets		754,663,639		7,718,020		4.15	%		690,643,992			8,236,139		4.80	%

Allowance for Loan Losses		(7,363,842)							(5,759,191	)
Cash and Due From Bank		30,994,778							17,525,148
Other Assets		51,277,385							53,200,991
Total Assets	$	829,571,960						$	755,610,940

Liabilities and Shareholders’ Equity:
Money Market and NOW Accounts	$	231,758,247	$	217,524		0.38	%	$	204,819,526		$	306,804		0.60	%
Savings Accounts		209,362,823		236,745		0.46	%		188,803,014			318,354		0.68	%
Certificates of Deposit		141,505,368		502,067		1.44	%		144,509,899			561,316		1.56	%
Other Borrowed Funds		11,155,000		103,273		3.75	%		22,069,231			117,922		2.15	%
Trust Preferred Securities		18,557,000		87,873		1.92	%		18,557,000			99,312		2.15	%
Total Interest-Bearing Liabilities		612,338,438		1,147,482		0.76	%		578,758,670			1,403,708		0.98	%

Net Interest Spread						3.39	%							3.82	%

Demand Deposits		141,764,416							112,977,065
Other Liabilities		9,973,569							8,426,611
Total Liabilities		764,076,423							700,162,346
Shareholders’ Equity		65,495,537							55,448,594
Total Liabilities and Shareholders’ Equity	$	829,571,960						$	755,610,940
Net Interest Margin			$	6,570,538		3.53	%				$	6,832,431		3.98	%

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The Company’s net interest income decreased on a tax-equivalent basis by $261,893, or 3.8%, to $6,570,538 for the three months ended March 31, 2013 from the $6,832,431 reported for the three months ended March 31, 2012. This decrease in the Company’s net interest margin for the three months ended March 31, 2013 compared with the comparable 2012 period was primarily due to two factors: (1) the expected seasonal decline in the balance of outstanding mortgage warehouse lines and (2) the unexpected amount of loans prepayments in construction loans and commercial business loans. The repayment of these loans provided excess liquidity that was allocated to much lower yielding overnight fund balances.

Average interest earning assets increased by $64,019,647, or 9.3%, to $754,663,639 for the three month period ended March 31, 2013 from $690,643,992 for the three month period ended March 31, 2012. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 65 basis points to 4.15% for the three month period ended March 31, 2013 when compared to 4.80% for the three month period ended March 31, 2012.

Average interest bearing liabilities increased by $33,579,768, or 5.8%, to $612,338,438 for the three month period ended March 31, 2013 from $578,758,670 for the three month period ended March 31, 2012. Overall, the cost of total interest bearing liabilities decreased 22 basis points to 0.76% for the three months ended March 31, 2013 compared to 0.98% for the three months ended March 31, 2012.

The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.53% for the three months ended March 31, 2013 compared to 3.98% the three months ended March 31, 2012.

Provision for Loan Losses

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

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At March 31, 2013, non-performing loans decreased by $3,948,652, or 66.2%, to $2,014,850 and the ratio of non-performing loans to total loans was 0.49% at March 31, 2013 compared to 1.14% at December 31, 2012. At March 31, 2013, the loan portfolio balance was $415,037,282, which represented a decrease of $106,776,828 compared to the December 31, 2012 balance of $521,814,110. In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions. Using this evaluation process, the Company recorded no provision for loan losses for the three months ended March 31, 2013 compared to $599,998 for the three months ended March 31, 2012.

Non-Interest Income

Total non-interest income for the three months ended March 31, 2013 was $1,608,563, an increase of $443,398, or 38.1%, over non-interest income of $1,165,165 for the three months ended March 31, 2012.

Service charges on deposit accounts represent a consistent source of non-interest income. Service charge revenues decreased nominally to $223,066 for the three months ended March 31, 2013 from $227,972 for the three months ended March 31, 2012. This decrease was the result of a lower volume of uncollected funds and overdraft fees collected on deposit accounts during the first three months of 2013 compared to the first three months of 2012.

Gain on sales of loans held for sale increased by $263,492, or 56.3%, to $731,709 for the three months ended March 31, 2013 when compared to $468,217 for the three months ended March 31, 2012. The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market. The current low interest rate environment for mortgage loans resulted in a higher volume of mortgage originations. The resulting volume of mortgage loan sales increased for the first three months of 2013 compared to the first three months of 2012.

Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $112,608 for the three months ended March 31, 2013 compared to $111,922 for the three months ended March 31, 2012. The Bank purchased tax-free BOLI assets to partially offset the cost of employee benefit plans and reduce the Company’s overall effective tax rate.

The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rental, wire transfer service fees and Automated Teller Machine fees for non-Bank customers. Increased customer demand for these services contributed to the other income component of non-interest income amounting to $541,180 for the three months ended March 31, 2013, compared to $357,054 for the three months ended March 31, 2012, an increase of $184,126 for the first quarter of 2013 as compared to the first quarter of 2012.

Non-Interest Expense

Non-interest expenses increased by $470,451, or 8.4%, to $6,082,968 for the three months ended March 31, 2013 from $5,612,517 for the three months ended March 31, 2012. The following table presents the major components of non-interest expenses for the three months ended March 31, 2013 and 2012.

Non-interest Expenses
	Three months ended March 31,
	2013		2012
Salaries and employee benefits	$	3,352,863	$	2,940,350
Occupancy expenses		677,806		723,786
Data processing services		301,382		263,575
Equipment expense		311,648		271,963
Marketing		47,583		45,035
Regulatory, professional and other fees		194,993		182,708
Office expense		186,648		77,667
FDIC insurance expense		19,687		147,393
Directors’ fees		32,000		24,000
Other real estate owned expenses		545,505		377,627
Amortization of intangible assets		66,992		66,992
Other expenses		345,861		394,553
Total	$	6,082,968	$	5,612,517

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Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $412,513, or 14.0%, to $3,352,863 for the three months ended March 31, 2013 compared to $2,940,350 for the three months ended March 31, 2012. The increase in salaries and employee benefits for the three months ended March 31, 2013 was a result of regular merit increases and increased health care costs.

Occupancy expenses decreased by $45,980, or 6.4%, to $677,806 for the three months ended March 31, 2013 compared to $723,786 for the three months ended March 31, 2012. The decrease in expense was primarily attributable to a decrease in property taxes resulting from a successful appeal process and lower maintenance costs in maintaining the Bank’s branch properties.

The cost of data processing services increased to $301,382 for the three months ended March 31, 2013 from $263,575 for the three months ended March 31, 2012 as additional expenses were incurred in connection with a 2013 initiative to upgrade the software capabilities in branch offices in order to fully implement the Bank’s expanding mobile banking systems.

Equipment expense increased by $39,685, or 14.6%, to $311,648 for the three months ended March 31, 2013 compared to $271,963 for the three months ended March 31, 2012 primarily due to increased costs associated with the number of maintenance contracts and supplies on equipment in connection with the expansion of mobile banking capabilities as compared with the prior period.

Office expense increased by $108,981 to $186,648 for the three months ended March 31, 2013 compared to $77,667 for the three months ended March 31, 2012 as the Bank incurred additional expenses in connection with the 2013 initiative that includes expansion of the web-based menu of interactive products and services made available to customers during the first three months of 2013.

Regulatory, professional and other fees increased by $12,285, or 6.7%, to $194,993 for the three months ended March 31, 2013 compared to $182,708 for the three months ended March 31, 2012. During the first three months of 2013, the Company incurred professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements.

FDIC insurance expense decreased to $19,687 for the three months ended March 31, 2013 compared to $147,393 for the three months ended March 31, 2012 as a result of the changes required by the Dodd-Frank Act with respect to FDIC assessment rules.

Other real estate owned expenses increased by $167,878 to $545,505 for the three months ended March 31, 2013 compared to $377,627 for the three months ended March 31, 2012 as the Company incurred increased loss provisions, property taxes, maintenance and other expenses on repossessed properties during the three months ended March 31, 2013 than were incurred during the same period in 2012.

All other expenses decreased by $48,692 to $345,861 for the three months ended March 31, 2013 compared to $394,553 for the three months ended March 31, 2012 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 increased to 76.7% for the three months ended March 31, 2013, compared to 72.0% for the three months ended March 31, 2012.

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Income Taxes

Income tax expense increased by $108,156 to $524,633 for the three months ended March 31, 2013 from $416,477 for the three months ended March 31, 2012. The increase was primarily due to a higher level of pretax income for the first quarter of 2013 as compared to the first quarter of 2012.

Financial Condition

March 31, 2013 Compared with December 31, 2012

Total consolidated assets at March 31, 2013 were $812,565,458, representing a decrease of $28,402,924, or 3.4%, from total consolidated assets of $840,968,382 at December 31, 2012.

Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2013 totaled $101,439,427 compared to $14,044,921 at December 31, 2012. Cash and cash equivalents at March 31, 2013 consisted of cash and due from banks of $101,428,004 and Federal funds sold/short term investments of $11,423. The corresponding balances at December 31, 2012 were $14,033,501 and $11,420, respectively. To the extent that the Bank did not utilize the funds for loan originations or securities purchases, the cash inflows accumulated in cash and cash equivalents.

Loans Held for Sale

Loans held for sale at March 31, 2013 amounted to $30,717,012 compared to $35,960,262 at December 31, 2012. As indicated in the Consolidated Statements of Cash Flows, the amount of loans originated for sale was $44,012,744 for the three months ended March 31, 2013.

Investment Securities

Investment securities represented 27.3% of total assets at March 31, 2013 and 26.9% at December 31, 2012. Total investment securities decreased $3,868,497, or 1.7%, to $222,000,368 at March 31, 2013 from $225,868,865 at December 31, 2012. Purchases of investments totaled $12,761,368 during the three months ended March 31, 2013, and proceeds from calls and repayments totaled $15,658,550 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, 2013, securities available for sale totaled $116,412,431, which is an increase of $6,571,466, or 6.0%, from securities available for sale totaling $109,840,965 at December 31, 2012.

At March 31, 2013, the securities available for sale portfolio had net unrealized gains of $1,150,853 compared to net unrealized gains of $1,806,967 at December 31, 2012. 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, 2013, securities held to maturity were $105,587,937, a decrease of $10,439,963, or 9.0%, from $116,027,900 at December 31, 2012. The fair value of the held to maturity portfolio at March 31, 2013 was $110,944,295.

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

Loans

The loan portfolio, which represents our largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. The Bank’s primary lending focus continues to be mortgage warehouse lines, construction loans, commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans.

The following table sets forth the classification of loans by major category at March 31, 2013 and December 31, 2012.

Loan Portfolio Composition Component	March 31, 2013				December 31, 2012
Loan Portfolio Composition Component	Amount		Percentage of Total		Amount		Percentage of Total
Construction loans	$	41,343,971		10%	$	55,691,393		11%
Residential real estate loans		10,960,101		3%		10,897,307		2%
Commercial business		50,570,623		12%		57,865,436		11%
Commercial real estate		103,514,597		25%		102,412,694		20%
Mortgage warehouse lines		198,147,590		48%		284,127,530		54%
Loans to individuals		9,375,645		2%		9,643,385		2%
Deferred loan costs		953,205		0%		987,086		0%
All other loans		171,550		0%		189,279		0%
	$	415,037,282		100%	$	521,814,110		100%

The loan portfolio decreased by $106,776,828, or 20.5%, to $415,037,282 at March 31, 2013 compared to $521,814,110 at December 31, 2012. This decrease in the loan portfolio was primarily the result of two factors: (1) the expected seasonal decrease in outstanding Mortgage warehouse lines during the first quarter and (2) the unexpected increase in loan prepayments in the Construction loan and Commercial business components of the loan portfolio.

The Mortgage warehouse lines component of the loan portfolio decreased by $85,979,940, or 30.3%, compared to $284,127,530 at December 31, 2012.

The Bank’s Mortgage Warehouse Funding Group offers a revolving line of credit that is available to licensed mortgage banking companies (the “Warehouse Line of Credit”) and that we believe has been successful from inception in 2008. The Warehouse Line of Credit is used by mortgage bankers to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest (the spread between our borrowing cost and the rate charged to the client) and a transaction fee are collected by the Bank at the time of repayment. Additionally, customers of the Warehouse Line of Credit are required to maintain deposit relationships with the Bank that, on average, represent 10% to 15% of the loan balances.

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The Bank’s Construction loans and Commercial business portfolios decreased by $14,347,422 and $7,294,813, respectively. During the first three months of 2013, the Bank received $13,737,207 in prepayments for the Construction loan portfolio and $2,625,563 in prepayments for the Commercial business portfolio. In the current highly competitive marketplace for commercial and construction loans, developing new lending relationships and limiting the amount of loan prepayments will be essential for maintaining the loan portfolio.

The ability of the Company to enter into larger loan relationships and management’s philosophy of relationship banking are key factors in the Company’s strategy for loan growth. The ultimate collectability of the loan portfolio and recovery of the carrying amount of real estate are subject to changes in the Company’s market region’s economic environment and real estate market.

Non-Performing Assets

Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are composed of (1) loans on a non-accrual basis and (2) loans which are contractually past due 90 days or more as to interest and principal payments but which have not been classified as non-accrual. Included in non-accrual loans are loans whose terms have been restructured to provide a reduction or deferral of interest and/or principal because of deterioration in the financial position of the borrower and which have not performed in accordance with the restructured terms.

The Bank’s policy with regard to non-accrual loans is that generally, loans are placed on a non-accrual status when they are 90 days past due, unless these loans are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or interest is in doubt. Consumer loans are generally charged off after they become 120 days past due. Subsequent payments on loans in non-accrual status are credited to income only if collection of principal is not in doubt.

Non-performing loans decreased by $3,948,652 to $2,014,850 at March 31, 2013 from $5,963,502 at December 31, 2012. The major segments of non-accrual loans consist of commercial real estate loans and SBA loans, which are in the process of collection. The table below sets forth non-performing assets and risk elements in the Bank’s portfolio for the periods indicated.

As the table demonstrates, non-performing loans to total loans decreased to 0.49% at March 31, 2013 from 1.14% at December 31, 2012. Loan quality is considered to be sound. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.

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Non-Performing Assets	March 31,			December 31,
	2013			2012
Non-Performing loans:
Loans 90 days or more past due and still accruing	$	-		$	84,948
Non-accrual loans		2,014,850			5,878,554
Total non-performing loans		2,014,850			5,963,502
Other real estate owned		8,294,887			8,332,601
Total non-performing assets	$	10,309,737		$	14,296,103

Non-performing loans to total loans		0.49	%		1.14	%
Non-performing loans to total loans excluding mortgage warehouse lines		0.93	%		2.51	%
Non-performing assets to total assets		1.27	%		1.70	%
Non-performing assets to total assets excluding mortgage warehouse lines		1.68	%		2.57	%

Non-performing assets decreased by $3,986,366 to $10,309,737 at March 31, 2013 from $14,296,103 at December 31, 2012. Other real estate owned decreased by $37,714 to $8,294,887 at March 31, 2013 from $8,332,601 at December 31, 2012. Since December 31, 2012, the Bank sold and transferred out of other real estate owned properties totaling approximately $1,375,820. In addition, during the three months ended March 31, 2013, the Bank recorded a provision for loss on other real estate owned of $662,918.

At March 31, 2013, the Bank had seven loans totaling $1,968,323 which were troubled debt restructurings. Three of these loans totaling $397,836 are included in the above table as non-accrual loans; the remaining four loans totaling $1,570,487 are considered performing.

Non-performing assets represented 1.27% of total assets at March 31, 2013 and 1.70% at December 31, 2012.

Management takes a proactive approach in addressing delinquent loans. The Company’s President meets weekly with all loan officers to review the status of credits past-due 10 days or more. An action plan is discussed for delinquent loans to determine the steps necessary to induce the borrower to cure the delinquency and restore the loan to a current status. Also, delinquency notices are system generated when loans are five days past-due and again at 15 days past-due.

In most cases, the Company’s collateral is real estate and when the collateral is foreclosed upon, the real estate is carried at the lower of fair market value less the estimated selling costs or the initially recorded amount. The amount, if any, by which the recorded amount of the loan exceeds the fair market value of the collateral, less estimated selling costs, is a loss which is charged to the allowance for loan losses at the time of foreclosure or repossession. Resolution of a past-due loan can be delayed if the borrower files a bankruptcy petition because a collection action cannot be continued unless the Company first obtains relief from the automatic stay provided by the bankruptcy code.

Allowance for Loan Losses and Related Provision

The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.

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All, or part, of the principal balance of commercial and commercial real estate loans, and construction loans are charged off against the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements. These elements may include a specific reserve for impaired risk loans, an allocated reserve, and an unallocated portion.

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

General economic conditions.

Trends in charge-offs.

Trends and levels of delinquent loans.

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

Trends in volume and terms of loans.

Levels of allowance for specific classified loans.

Credit concentrations.

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

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

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

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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
	Three Months Ended March 31,			Year Ended December 31,			Three Months Ended March 31,
	2013			2012			2012
Balance, beginning of period	$	7,151,212		$	5,534,450		$	5,534,450

Provision charged to operating expenses		-			2,149,992			599,998

Loans charged off :
Construction loans		(561,993	)		(57,650	)		(32,650	)
Residential real estate loans		-			(130,694	)		(77,858	)
Commercial and commercial real estate		(483,966	)		(275,888	)		(150,828	)
Loans to individuals		(90,865	)		(83,859	)		-
Lease financing		-			-			-
All other loans		-			-			-
		(1,136,824	)		(548,091	)		(261,336	)
Recoveries
Construction loans		-			3,403			3,403
Residential real estate loans		-			-			-
Commercial and commercial real estate		8,895			11,458			5,427
Loans to individuals		-			-			-
Lease financing		-			-			-
All other loans		-			-			-
		8,895			14,861			8,830

Net (charge offs) / recoveries		(1,127,929	)		(533,230	)		(252,506	)

Balance, end of period	$	6,023,283		$	7,151,212		$	5,881,942

Loans :
At period end	$	415,037,282		$	521,814,110		$	438,522,190
Average during the period		412,089,628			444,064,283			442,972,574
Net charge offs to average loans outstanding		(0.27	%)		(0.12	%)		(0.06	%)

Allowance for loan losses to :
Total loans at year end		1.45	%		1.37	%		1.34	%
Total loans at year end excluding mortgage warehouse lines		2.78	%		2.41	%		2.48	%
Non-performing loans		298.94	%		119.92	%		198.51	%

The Company recorded no provision for loan losses for the three months ended March 31, 2013 and $599,998 for the three months ended March 31, 2012. In addition to the results of management’s comprehensive review of the adequacy of the allowance, the decision for no current provision was further supported by the risk profile of the loan portfolio being reduced by a $106,779,828 decrease in the total loan portfolio at March 31, 2013 compared to the December 31, 2012 balance and a 66.2% decrease in non-performing loans at March 31, 2013 compared to December 31, 2012. Net charge offs/recoveries amounted to a net charge-off of $1,127,929 for the three months ended March 31, 2013.

At March 31, 2013, the allowance for loan losses was $6,023,283 compared to $7,151,212 at December 31, 2012, a decrease of $1,127,929. The ratio of the allowance for loan losses to total loans at March 31, 2013 and December 31, 2012 was 1.45% and 1.37%, respectively. The allowance for loan losses as a percentage of non-performing loans was 298.94% at March 31, 2013, compared to 119.92% at December 31, 2012. Management believes that the quality of the loan portfolio remains sound considering the economic climate and economy in the State of New Jersey and that the allowance for loan losses is adequate in relation to credit risk exposure levels.

Deposits

Deposits, which include demand deposits (interest bearing and non-interest bearing), savings deposits and time deposits, are a fundamental and cost-effective source of funding. The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition. The Bank offers a variety of products designed to attract and retain customers, with the Bank’s primary focus being on the building and expanding of long-term relationships.

The following table summarizes deposits at March 31, 2013 and December 31, 2012.

	March 31, 2013		December 31, 2012
Demand
Non-interest bearing	$	137,679,243	$	152,334,759
Interest bearing		223,921,924		211,475,765
Savings		206,634,642		202,261,035
Time		142,693,948		141,617,916
	$	710,929,757	$	707,689,475

At March 31, 2013, total deposits were $710,929,757, an increase of $3,240,282, or 0.5%, from $707,689,475 at December 31, 2012.

Borrowings

Borrowings are mainly comprised of Federal Home Loan Bank (“FHLB”) borrowings and overnight funds purchased. These borrowings are primarily used to fund asset growth not supported by deposit generation. The balance of borrowings was $10,000,000 at March 31, 2013, consisting solely of FHLB long-term borrowings, and $42,400,000 at December 31, 2012, consisting of long-term FHLB borrowings of $10,000,000 and overnight funds purchased of $32,400,000.

The Bank has a fixed rate convertible advance from the FHLB in the amount of $10,000,000 that bears interest at the rate of 4.08%. This advance may be called by the FHLB quarterly at the option of the FHLB if rates rise and the rate earned by the FHLB is no longer a “market” rate. This advance is fully secured by marketable securities.

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Shareholders’ Equity and Dividends

Shareholders’ equity increased by $1,059,548, or 1.6%, to $66,113,080 at March 31, 2013 from $65,053,532 at December 31, 2012. Tangible book value per common share increased by $0.16, or 1.6%, to $10.18 at March 31, 2013 from $10.02 at December 31, 2012. The current period increase in tangible book value per common share was the result of net income of $1,325,317 for the three months ended March 31, 2013. The ratio of shareholders’ equity to total assets was 8.14% at March 31, 2013 and 7.74% at December 31, 2012, respectively. The increase in shareholders’ equity was primarily the result of net income of $1,325,317 for the three months ended March 31, 2013.

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

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

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, 2013 is set forth under Part II, Item 2 of this report, “Unregistered Sales of Equity Securities and Use of Proceeds.”

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

			Actual		For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio	Amount		Ratio
As of March 31, 2013
Company
Total Capital to Risk Weighted Assets	$	81,466,630		15.93%	$	40,913,360	>8%		N/A	N/A
Tier 1 Capital to Risk Weighted Assets		75,443,347		14.75%		20,456,680	>4%		N/A	N/A
Tier 1 Capital to Average Assets		75,443,347		9.19%		32,851,016	>4%		N/A	N/A
Bank
Total Capital to Risk Weighted Assets	$	78,932,468		15.43%	$	40,913,360	>8%	$	51,141,700	>10%
Tier 1 Capital to Risk Weighted Assets		72,909,185		14.26%		20,456,680	>4%		30,685,020	>6%
Tier 1 Capital to Average Assets		72,909,185		8.92%		32,685,298	>4%		40,856,623	>5%

As of December 31, 2012
Company
Total Capital to Risk Weighted Assets	$	81,213,909	12.98%	$	50,044,960	>8%		N/A	N/A
Tier 1 Capital to Risk Weighted Assets		74,062,697	11.84%		25,022,480	>4%		N/A	N/A
Tier 1 Capital to Average Assets		74,062,697	9.29%		31,881,576	>4%		N/A	N/A
Bank
Total Capital to Risk Weighted Assets	$	78,621,740	12.57%	$	50,044,960	>8%	$	62,556,200	>10%
Tier 1 Capital to Risk Weighted Assets		71,470,528	11.43%		25,022,480	>4%		37,533,720	>6%
Tier 1 Capital to Average Assets		71,470,528	9.05%		31,604,458	>4%		39,505,573	>5%

The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1 capital to risk weighted assets ratio of 4.0% and a total capital to risk weighted assets ratio of 8.0%. To be considered “well capitalized,” an institution must have a minimum Tier 1 leverage ratio of 5.0%. At March 31, 2013, the ratios of the Company exceeded the ratios required to be considered well capitalized. It is management’s goal to monitor and maintain adequate capital levels to continue to support asset growth and continue its status as a well capitalized institution.

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Liquidity

At March 31, 2013, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied.

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 $406,283,229, of its total assets at March 31, 2013. In addition, the aggregate outstanding principal amount of the Bank’s advances, letters of credit, the dollar amount of the FHLB’s minimum collateral requirement for off-balance sheet financial contracts and advance commitments cannot exceed 30 percent of the Bank’s total assets, unless the Bank obtains approval from FHLB’s Board of Directors or its Executive Committee. These limits are further restricted by a member’s ability to provide eligible collateral to support its obligations to FHLB as well as the ability to meet the FHLB’s stock requirement. The Bank also maintains an unsecured federal funds line of $20,000,000 with a correspondent bank.

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At March 31, 2013, the balance of cash and cash equivalents was $101,439,427.

Net cash provided by operating activities totaled $8,253,494 for the three months ended March 31, 2013 compared to net cash provided by operations of $4,964,941 for the three months ended March 31, 2012. The primary source of funds is net income from operations adjusted for activity related to loans originated for sale, the provision for loan losses, depreciation expenses, and net amortization of premiums on securities.

Net cash provided by investing activities totaled $108,160,577 for the three months ended March 31, 2013 compared to net cash provided by investing activities of $50,458,654 for the three months ended March 31, 2012. The increase for the 2013 period resulted from a reduction of $106,776,828 in the loan portfolio primarily through repayments.

Net cash used in financing activities totaled $29,019,565 for the three months ended March 31, 2013 compared to net cash used in financing activities of $43,457,729 for the three months ended March 31, 2012.

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, 2013, prepayments and maturities of investment securities totaled $15,658,550. Another source of liquidity is the loan portfolio, which provides a flow of payments and maturities.

Interest Rate Sensitivity Analysis

The largest component of the Company’s total income is net interest income, and the majority of the Company’s financial instruments are composed of interest rate-sensitive assets and liabilities with various terms and maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. Management actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities.

The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Bank’s spread by attracting lower-cost retail deposits.

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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 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, 2013 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, 2013, if any.

Issuer Purchases of Equity Securities (1)

Period		Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plan or Program		Maximum Number of Shares That May Yet be Purchased Under the Plan or Program
Beginning	Ending
January 1, 2013	January 31, 2013		-		-		-		187,559
February 1, 2013	February 29, 2013		-		-		-		187,559
March 1, 2013	March 31, 2013		-		-		-		187,559
Total			-		-		-		187,559

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

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Item 6. Exhibits.

31.1	*	Certification of Robert F. Mangano, principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)

31.2	*	Certification of Joseph M. Reardon, principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)

32	*	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, principal executive officer of the Company, and Joseph M. Reardon, principal financial officer of the Company

101.INS	*	XBRL Instance DocumentX

101.SCH	*	XBRL Taxonomy Extension Schema DocumentX

101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase DocumentX

101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document X

101.LAB	*	XBRL Taxonomy Extension Label Linkbase DocumentX

101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase DocumentX

_____________________

Filed herewith.

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

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SIGNATURES

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

	1ST CONSTITUTION BANCORP


Date: May 14, 2013	By:	/s/ ROBERT F. MANGANO
		Robert F. Mangano
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: May 14, 2013	By:	/s/ JOSEPH M. REARDON
		Joseph M. Reardon
		Senior Vice President and Treasurer
		(Principal Financial and Accounting Officer)