10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

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

For the transition period from ___________ to ___________

Commission file number 1-33377

Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
New Jersey	22-3351447
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
630 Godwin Avenue, Midland Park,  NJ	07432
(Address of principal executive offices)	(Zip Code)
(201)  444-7100
(Registrant’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 ý       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 ý       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.

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

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

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of August 7, 2013 was 5,939,451.

Stewardship Financial Corporation

INDEX

	PAGE
	NUMBER
PART I  -  FINANCIAL INFORMATION
ITEM 1  -   FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at June 30, 2013 (Unaudited) and December 31, 2012	1
Consolidated Statements of Income (Loss) for the Three and Six Months ended June 30, 2013 and 2012 (Unaudited)	2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2013 and 2012 (Unaudited)	3
Consolidated Statement of Changes in Shareholders’ Equity for the Six Months ended June 30, 2013 and 2012 (Unaudited)	4
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2013 and 2012 (Unaudited)	5 - 6
Notes to Consolidated Financial Statements (Unaudited)	7 - 27
ITEM 2  -   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28 - 37
ITEM 3 -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
ITEM 4 -    CONTROLS AND PROCEDURES	38
PART II  -  OTHER INFORMATION
ITEM 6 -     EXHIBITS	39
SIGNATURES	40
EXHIBIT INDEX	41

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition

	June 30,			December 31,
	2013			2012
	(Unaudited)
Assets
Cash and due from banks	$	14,038,000		$	19,962,000
Other interest-earning assets		284,000			1,054,000
Cash and cash equivalents		14,322,000			21,016,000
Securities available for sale		181,676,000			174,700,000
Securities held to maturity; estimated fair value of $29,575,000 (at June 30, 2013) and
$31,768,000 (at December 31, 2012)		28,119,000			29,718,000
FHLB-NY stock, at cost		2,133,000			2,213,000
Mortgage loans held for sale		2,054,000			784,000
Loans, net of allowance for loan losses of $10,787,000 (at June 30, 2013) and
$10,641,000 (at December 31, 2012)		431,353,000			429,832,000
Premises and equipment, net		5,538,000			5,645,000
Accrued interest receivable		2,301,000			2,372,000
Other real estate owned, net		1,072,000			1,058,000
Bank owned life insurance		10,105,000			10,470,000
Other assets		10,159,000			10,580,000
Total assets	$	688,832,000		$	688,388,000
Liabilities and shareholders' equity
Liabilities
Deposits:
Noninterest-bearing	$	145,388,000		$	124,286,000
Interest-bearing		447,311,000			465,968,000
Total deposits		592,699,000			590,254,000
Federal Home Loan Bank of New York advances		25,000,000			25,000,000
Securities sold under agreements to repurchase		7,344,000			7,343,000
Subordinated debentures		7,217,000			7,217,000
Accrued interest payable		445,000			560,000
Accrued expenses and other liabilities		1,835,000			1,668,000
Total liabilities		634,540,000			632,042,000
Commitments and contingencies		—			—
Shareholders' equity
Preferred stock, no par value; 2,500,000 shares authorized; 15,000 shares
issued and outstanding at June 30, 2013 and December 31, 2012
liquidation preference of $15,000,000		14,969,000			14,964,000
Common stock, no par value; 10,000,000 shares authorized;
5,936,054 and 5,924,865 shares issued and outstanding at June 30, 2013
and December 31, 2012, respectively		40,652,000			40,606,000
Retained earnings		1,182,000			316,000
Accumulated other comprehensive income (loss), net		(2,511,000	)		460,000
Total shareholders' equity		54,292,000			56,346,000
Total liabilities and shareholders' equity	$	688,832,000		$	688,388,000

See notes to unaudited consolidated financial statements.

1

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income (Loss)

(Unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013		2012			2013		2012
Interest income:
Loans	$	5,680,000	$	6,085,000		$	11,604,000	$	12,344,000
Securities held to maturity
Taxable		75,000		128,000			151,000		280,000
Non-taxable		195,000		204,000			391,000		413,000
Securities available for sale
Taxable		578,000		798,000			1,144,000		1,597,000
Non-taxable		77,000		64,000			154,000		125,000
FHLB dividends		23,000		28,000			48,000		57,000
Other interest-earning assets		8,000		10,000			14,000		17,000
Total interest income		6,636,000		7,317,000			13,506,000		14,833,000
Interest expense:
Deposits		592,000		894,000			1,233,000		1,877,000
Borrowed money		366,000		463,000			729,000		945,000
Total interest expense		958,000		1,357,000			1,962,000		2,822,000
Net interest income before provision for loan losses		5,678,000		5,960,000			11,544,000		12,011,000
Provision for loan losses		850,000		2,900,000			2,450,000		4,665,000
Net interest income after provision for loan losses		4,828,000		3,060,000			9,094,000		7,346,000
Noninterest income:
Fees and service charges		492,000		531,000			948,000		1,046,000
Bank owned life insurance		77,000		81,000			153,000		161,000
Gain on calls and sales of securities		—		12,000			2,000		445,000
Gain on sales of mortgage loans		298,000		154,000			460,000		565,000
Gain on sale of other real estate owned		—		370,000			126,000		469,000
Gain on life insurance proceeds		—		—			537,000		—
Other		128,000		133,000			243,000		244,000
Total noninterest income		995,000		1,281,000			2,469,000		2,930,000
Noninterest expenses:
Salaries and employee benefits		2,711,000		2,257,000			5,407,000		4,643,000
Occupancy, net		503,000		471,000			1,020,000		958,000
Equipment		199,000		243,000			383,000		491,000
Data processing		332,000		316,000			660,000		650,000
Advertising		140,000		139,000			251,000		278,000
FDIC insurance premium		276,000		155,000			426,000		303,000
Charitable contributions		60,000		25,000			120,000		175,000
Other		910,000		1,218,000			1,796,000		2,179,000
Total noninterest expenses		5,131,000		4,824,000			10,063,000		9,677,000
Income (loss) before income tax expense (benefit)		692,000		(483,000	)		1,500,000		599,000
Income tax expense (benefit)		231,000		(159,000	)		217,000		147,000
Net income (loss)		461,000		(324,000	)		1,283,000		452,000
Dividends on preferred stock		127,000		38,000			293,000		113,000
Net income (loss) available to common shareholders	$	334,000	$	(362,000	)	$	990,000	$	339,000
Basic earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06
Diluted earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06
Weighted average number of common shares outstanding		5,934,549		5,902,167			5,932,774		5,897,266
Weighted average number of diluted common
shares outstanding		5,934,549		5,902,167			5,932,774		5,897,266

See notes to unaudited consolidated financial statements.

2

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net income (loss)	$	461,000		$	(324,000	)	$	1,283,000		$	452,000
Other comprehensive (loss) income:
Change in unrealized holding gains (losses) on
securities available for sale arising during the period		(4,465,000	)		668,000			(5,013,000	)		728,000
Reclassification adjustment for gains in net income		—			(12,000	)		(2,000	)		(445,000	)
Net unrealized gains (losses)		(4,465,000	)		656,000			(5,015,000	)		283,000
Tax effect		1,736,000			(256,000	)		1,946,000			(111,000	)
Net unrealized gains (losses), net of tax amount		(2,729,000	)		400,000			(3,069,000	)		172,000
Change in fair value of interest rate swap		99,000			(13,000	)		164,000			17,000
Tax effect		(40,000	)		5,000			(66,000	)		(7,000	)
Change in fair value of interest rate swap,
net of tax amount		59,000			(8,000	)		98,000			10,000
Total other comprehensive income (loss)		(2,670,000	)		392,000			(2,971,000	)		182,000
Total comprehensive income (loss)	$	(2,209,000	)	$	68,000		$	(1,688,000	)	$	634,000

The following is a summary of the accumulated other comprehensive income balances, net of tax.

	6/30/2013			12/31/2012
Unrealized gain (loss) on securities available for sale	$	(2,122,000	)	$	947,000
Unrealized loss on fair value of interest rate swap		(389,000	)		(487,000	)
Accumulated other comprehensive income (loss), net	$	(2,511,000	)	$	460,000

See notes to unaudited consolidated financial statements.

3

Stewardship Financial Corporation and Subsidiary

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)

	Six Months Ended June 30, 2013
											Accumulated
											Other
											Comprehensive
	Preferred		Common Stock					Retained			Income (Loss),
	Stock		Shares		Amount			Earnings			Net			Total
Balance -- December 31, 2012	$	14,964,000		5,924,865	$	40,606,000		$	316,000		$	460,000		$	56,346,000
Cash dividends paid on common stock		—		—		—			(119,000	)		—			(119,000	)
Payment of discount on dividend
reinvestment plan		—		—		(1,000	)		—			—			(1,000	)
Cash dividends accrued on
preferred stock		—		—		—			(293,000	)		—			(293,000	)
Common stock issued under stock plans		—		11,189		47,000			—			—			47,000
Amortization of issuance costs		5,000		—		—			(5,000	)					—
Net income									1,283,000			—			1,283,000
Other comprehensive loss		—		—		—			—			(2,971,000	)		(2,971,000	)
Balance -- June 30, 2013	$	14,969,000		5,936,054	$	40,652,000		$	1,182,000		$	(2,511,000	)	$	54,292,000

	Six Months Ended June 30, 2012
											Accumulated
											Other
											Comprehensive
	Preferred		Common Stock					Retained			Income (Loss),
	Stock		Shares		Amount			Earnings			Net		Total
Balance -- December 31, 2011	$	14,955,000		5,882,504	$	40,420,000		$	1,043,000		$	1,374,000	$	57,792,000
Cash dividends paid on common stock		—		—		—			(531,000	)		—		(531,000	)
Payment of discount on dividend
reinvestment plan		—		—		(5,000	)		—			—		(5,000	)
Cash dividends accrued on
preferred stock		—		—		—			(113,000	)		—		(113,000	)
Common stock issued under stock plans		—		22,854		114,000			—			—		114,000
Amortization of issuance costs		5,000		—		—			(5,000	)				—
Net income									452,000			—		452,000
Other comprehensive income		—		—		—			—			182,000		182,000
Balance -- June 30, 2012	$	14,960,000		5,905,358	$	40,529,000		$	846,000		$	1,556,000	$	57,891,000

See notes to unaudited consolidated financial statements.

4

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	June 30,
	2013			2012
Cash flows from operating activities:
Net income	$	1,283,000		$	452,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment		217,000			276,000
Amortization of premiums and accretion of discounts, net		700,000			791,000
Accretion (amortization) of deferred loan fees		22,000			25,000
Provision for loan losses		2,450,000			4,665,000
Originations of mortgage loans held for sale		(27,614,000	)		(39,324,000	)
Proceeds from sale of mortgage loans		26,804,000			41,266,000
Gain on sales of mortgage loans		(460,000	)		(565,000	)
Gain on sales and calls of securities		(2,000	)		(445,000	)
Gain on sale of other real estate owned		(126,000	)		(469,000	)
Deferred income tax benefit		(63,000	)		(142,000	)
Decrease in accrued interest receivable		71,000			129,000
Decrease in accrued interest payable		(115,000	)		(131,000	)
Earnings on bank owned life insurance		(153,000	)		(161,000	)
Gain on life insurance proceeds		(537,000	)		—
Decrease in other assets		2,428,000			315,000
Increase (decrease) in other liabilities		266,000			(891,000	)
Net cash provided by operating activities		5,171,000			5,791,000
Cash flows from investing activities:
Purchase of securities available for sale		(35,436,000	)		(40,525,000	)
Proceeds from maturities and principal repayments on securities available for sale		16,297,000			12,783,000
Proceeds from sales and calls on securities available for sale		6,500,000			25,960,000
Proceeds from maturities and principal repayments on securities held to maturity		1,300,000			2,188,000
Proceeds from calls on securities held to maturity		250,000			3,105,000
Sale of FHLB-NY stock		80,000			265,000
Net (increase) decrease in loans		(4,342,000	)		5,853,000
Proceeds from sale of other real estate owned		461,000			4,562,000
Life insurance proceeds		1,055,000			—
Additions to premises and equipment		(110,000	)		(48,000	)
Net cash provided by (used in) investing activities		(13,945,000	)		14,143,000
Cash flows from financing activities:
Net increase in noninterest-bearing deposits		21,102,000			8,241,000
Net increase (decrease) in interest-bearing deposits		(18,657,000	)		(8,298,000	)
Net increase in securities sold under agreements to repurchase		1,000			—
Net decrease in short term borrowings		—			(4,700,000	)
Repayment of long term borrowings		—			(3,000,000	)
Cash dividends paid on common stock		(119,000	)		(531,000	)
Cash dividends paid on preferred stock		(293,000	)		(113,000	)
Payment of discount on dividend reinvestment plan		(1,000	)		(5,000	)
Issuance of common stock		47,000			114,000
Net cash provided by (used in) financing activities		2,080,000			(8,292,000	)
Net increase (decrease) in cash and cash equivalents		(6,694,000	)		11,642,000
Cash and cash equivalents - beginning		21,016,000			13,698,000
Cash and cash equivalents - ending	$	14,322,000		$	25,340,000

See notes to unaudited consolidated financial statements.

5

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited)

	Six Months Ended
	June 30,
	2013		2012
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	2,077,000	$	2,953,000
Cash paid during the period for income taxes	$	68,000	$	1,194,000
Transfers from loans to other real estate owned	$	349,000	$	882,000

See notes to unaudited consolidated financial statements.

6

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 28, 2013 (the “2012 Annual Report”).

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results which may be expected for the entire year.

Principles of consolidation

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current presentation.

The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.

Material estimates

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize probable incurred losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area.

Adoption of New Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income – Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statement where net income is presented or in the accompanying notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The standard is effective prospectively for reporting periods, including interim periods, beginning after December 15, 2012. The adoption of the standard did not have a material effect on the Corporation’s consolidated financial statements.

7

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): “Disclosures about Offsetting Assets and Liabilities,” This ASU requires an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject an enforceable master netting arrangement or similar agreement regardless of whether they are presented net in the financial statements.  The standard is effective for annual and interim periods beginning on January 1, 2013, and it is required to be applied retrospectively. The adoption of the standard did not have a material impact on the Corporation’s consolidated financial statements.

Note 2. Securities – Available-for-sale and Held to Maturity

The fair value of the available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	June 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	—	$	—	$	—	$	—
U.S. government-sponsored agencies		40,796,000		68,000		1,701,000		39,163,000
Obligations of state and political
subdivisions		13,655,000		241,000		181,000		13,715,000
Mortgage-backed securities - residential		114,333,000		523,000		2,151,000		112,705,000
Asset-backed securities (a)		9,874,000		—		80,000		9,794,000
Corporate debt		2,994,000		4,000		92,000		2,906,000
Total debt securities		181,652,000		836,000		4,205,000		178,283,000
Other equity investments		3,484,000		—		91,000		3,393,000
	$	185,136,000	$	836,000	$	4,296,000	$	181,676,000

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,003,000	$	3,000	$	—	$	4,006,000
U.S. government-sponsored agencies		37,287,000		35,000		67,000		37,255,000
Obligations of state and political
subdivisions		13,724,000		468,000		22,000		14,170,000
Mortgage-backed securities - residential		104,341,000		1,176,000		89,000		105,428,000
Asset-backed securities (a)		9,874,000		22,000		12,000		9,884,000
Corporate debt		492,000		3,000		—		495,000
Total debt securities		169,721,000		1,707,000		190,000		171,238,000
Other equity investments		3,425,000		37,000		—		3,462,000
	$	173,146,000	$	1,744,000	$	190,000	$	174,700,000

(a) Collateralized by student loans

Cash proceeds realized from calls and sales of securities available for sale for the three and six months ended June 30, 2013 were $4,000,000 and $6,500,000, respectively. Cash proceeds realized from calls and sales of securities available for sale for the three and six months ended June 30, 2012 were $14,000,000 and $25,960,000, respectively. There were no gross gains realized on calls and sales during the three months ended June 30, 2013. Gross gains realized on calls and sales during the six months ended June 30, 2013 totaled $2,000. There were no gross losses realized on calls and sales during the three and six months ended June 30, 2013. Gross gains realized on calls and sales during the three and six months ended June 30, 2012 totaled $5,000 and $438,000, respectively. There were no gross losses realized on calls and sales during the three and six months ended June 30, 2012.

8

The following is a summary of the held to maturity securities and related unrecognized gains and losses:

	June 30, 2013
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	259,000	$	34,000		—	$	293,000
Obligations of state and political
subdivisions		22,221,000		998,000		—		23,219,000
Mortgage-backed securities - residential		5,639,000		424,000		—		6,063,000
	$	28,119,000	$	1,456,000	$	—	$	29,575,000

	December 31, 2012
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	260,000	$	46,000	$	—	$	306,000
Obligations of state and political
subdivisions		22,787,000		1,407,000		—		24,194,000
Mortgage-backed securities - residential		6,671,000		597,000		—		7,268,000
	$	29,718,000	$	2,050,000	$	—	$	31,768,000

While there were no cash proceeds realized from calls of securities held to maturity for the three months ended June 30, 2013, cash proceeds realized from calls of securities held to maturity for the six months ended June 30, 2013 were $250,000. Cash proceeds realized from calls of securities held to maturity for the three and six months ended June 30, 2012 were $2,500,000 and $3,105,000, respectively. There were no gross gains and no gross losses realized on calls during the three and six months ended June 30, 2013. Gross gains of $7,000 were realized on calls for both the three and six months ended June 30, 2012. There were no gross losses realized on calls during the three and six months ended June 30, 2012.

The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.

	June 30, 2013
	Amortized		Fair
	Cost		Value
Available for sale
Within one year	$	—	$	—
After one year, but within five years		7,202,000		7,109,000
After five years, but within ten years		29,600,000		28,769,000
After ten years		20,643,000		19,906,000
Mortgage-backed securities - residential		114,333,000		112,705,000
Asset-backed securities		9,874,000		9,794,000
Total	$	181,652,000	$	178,283,000
Held to maturity
Within one year	$	1,888,000	$	1,907,000
After one year, but within five years		15,687,000		16,427,000
After five years, but within ten years		4,727,000		4,994,000
After ten years		178,000		184,000
Mortgage-backed securities - residential		5,639,000		6,063,000
Total	$	28,119,000	$	29,575,000

9

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2013 and December 31, 2012, and if the unrealized loss was continuous for the twelve months prior to June 30, 2013 and December 31, 2012. There were no unrealized losses on held to maturity securities at either June 30, 2013 or December 31, 2012.

Available for Sale
June 30, 2013	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury	$	—	$	—		$	—	$	—	$	—	$	—
U.S. government-
sponsored agencies		33,890,000		(1,701,000	)		—		—		33,890,000		(1,701,000	)
Obligations of state and
political subdivisions		6,344,000		(181,000	)		—		—		6,344,000		(181,000	)
Mortgage-backed
securities - residential		68,340,000		(2,151,000	)		—		—		68,340,000		(2,151,000	)
Asset-backed securities		9,795,000		(80,000	)		—		—		9,795,000		(80,000	)
Corporate debt		2,407,000		(92,000	)		—		—		2,407,000		(92,000	)
Other equity investments		3,333,000		(91,000	)		—		—		3,333,000		(91,000	)
Total temporarily
impaired securities	$	124,109,000	$	(4,296,000	)	$	—	$	—	$	124,109,000	$	(4,296,000	)

December 31, 2012	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury	$	—	$	—		$	—	$	—	$	—	$	—
U.S. government-
sponsored agencies		20,716,000		(67,000	)		—		—		20,716,000		(67,000	)
Obligations of state and
political subdivisions		3,257,000		(22,000	)		—		—		3,257,000		(22,000	)
Mortgage-backed
securities - residential		23,715,000		(89,000	)		—		—		23,715,000		(89,000	)
Asset-backed securities		3,047,000		(12,000	)						3,047,000		(12,000	)
Corporate debt		—		—			—		—		—		—
Other equity investments		—		—			—		—		—		—
Total temporarily
impaired securities	$	50,735,000	$	(190,000	)	$	—	$	—	$	50,735,000	$	(190,000	)

Other-Than-Temporary-Impairment

At June 30, 2013, there were no securities in a continuous loss position for 12 months or longer. The Corporation’s unrealized losses are primarily due to market interest rate conditions. These securities have not been considered other than temporarily impaired as scheduled principal and interest payments have been made and management anticipates collecting the entire principal balance as scheduled. Because the decline in fair value is attributable to changes in market conditions, and not credit quality, and because the Corporation does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

10

Note 3. Loans and Nonperforming Loans

At June 30, 2013 and December 31, 2012, respectively, the loan portfolio consisted of the following:

	June 30,			December 31,
	2013			2012
Commercial:
Secured by real estate	$	54,844,000		$	58,160,000
Other		28,132,000			31,254,000
Commercial real estate		252,219,000			242,763,000
Commercial construction		5,421,000			9,324,000
Residential real estate		73,004,000			67,200,000
Consumer:
Secured by real estate		27,827,000			30,982,000
Other		489,000			624,000
Other		70,000			116,000
Total gross loans		442,006,000			440,423,000
Less:  Deferred loan fees, net of costs		(134,000	)		(50,000	)
Allowance for loan losses		10,787,000			10,641,000
		10,653,000			10,591,000
Loans, net	$	431,353,000		$	429,832,000

At June 30, 2013 and December 31, 2012, loan participations sold by the Corporation to other lending institutions totaled approximately $15,506,000 and $20,559,000, respectively. These amounts are not included in the totals presented above.

Activity in the allowance for loan losses is summarized as follows:

	For the three months ended June 30, 2013
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	5,285,000	$	(1,082,000	)	$	261,000	$	43,000	$	3,985,000
Commercial real estate		5,549,000		1,452,000			1,403,000		—		5,598,000
Construction		20,000		261,000			—		23,000		304,000
Residential real estate		334,000		100,000			—		—		434,000
Consumer		290,000		99,000			—		21,000		410,000
Other loans		1,000		—			—		—		1,000
Unallocated		33,000		20,000			—		2,000		55,000
Total	$	11,512,000	$	850,000		$	1,664,000	$	89,000	$	10,787,000

11

	For the six months ended June 30, 2013
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	4,832,000	$	(277,000	)	$	648,000	$	78,000	$	3,985,000
Commercial real estate		4,936,000		2,421,000			1,759,000		—		5,598,000
Construction		169,000		133,000			24,000		26,000		304,000
Residential real estate		308,000		126,000			—		—		434,000
Consumer		352,000		41,000			3,000		20,000		410,000
Other loans		3,000		(4,000	)		—		2,000		1,000
Unallocated		41,000		10,000			—		4,000		55,000
Total	$	10,641,000	$	2,450,000		$	2,434,000	$	130,000	$	10,787,000

	For the three months ended June 30, 2012
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	6,068,000	$	1,994,000		$	2,068,000	$	29,000	$	6,023,000
Commercial real estate		5,448,000		918,000			1,839,000		—		4,527,000
Construction		777,000		(118,000	)		145,000		—		514,000
Residential real estate		338,000		54,000			—		—		392,000
Consumer		439,000		39,000			41,000		—		437,000
Other loans		2,000		1,000			—		1,000		4,000
Unallocated		25,000		12,000			—		—		37,000
Total	$	13,097,000	$	2,900,000		$	4,093,000	$	30,000	$	11,934,000

	For the six months ended June 30, 2012
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	5,368,000	$	2,960,000		$	2,356,000	$	51,000	$	6,023,000
Commercial real estate		4,943,000		1,423,000			1,839,000		—		4,527,000
Construction		480,000		179,000			145,000		—		514,000
Residential real estate		303,000		89,000			—		—		392,000
Consumer		498,000		(14,000	)		47,000		—		437,000
Other loans		2,000		1,000			—		1,000		4,000
Unallocated		10,000		27,000			—		—		37,000
Total	$	11,604,000	$	4,665,000		$	4,387,000	$	52,000	$	11,934,000

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and December 31, 2012.

12

	June 30, 2013
			Commercial		Commercial		Residential				Other
	Commercial		Real Estate		Construction		Real Estate		Consumer		Loans		Unallocated		Total
Allowance for loan
losses:
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment	$	181,000	$	29,000	$	99,000	$	67,000	$	149,000	$	—	$	—	$	525,000
Collectively
evaluated for
impairment		3,804,000		5,569,000		205,000		367,000		261,000		1,000		55,000		10,262,000
Total ending
allowance
balance	$	3,985,000	$	5,598,000	$	304,000	$	434,000	$	410,000	$	1,000	$	55,000	$	10,787,000
Loans:
Loans
individually
evaluated for
impairment	$	9,219,000	$	12,351,000	$	1,875,000	$	595,000	$	911,000	$	—	$	—	$	24,951,000
Loans
collectively
evaluated for
impairment		73,757,000		239,868,000		3,546,000		72,409,000		27,405,000		70,000		—		417,055,000
Total ending
loan balance	$	82,976,000	$	252,219,000	$	5,421,000	$	73,004,000	$	28,316,000	$	70,000	$	—	$	442,006,000

13

	December 31, 2012
			Commercial		Commercial		Residential				Other
	Commercial		Real Estate		Construction		Real Estate		Consumer		Loans		Unallocated		Total
Allowance for loan
losses:
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment	$	251,000	$	15,000	$	—	$	—	$	—	$	—	$	—	$	266,000
Collectively
evaluated for
impairment		4,581,000		4,921,000		169,000		308,000		352,000		3,000		41,000		10,375,000
Total ending
allowance
balance	$	4,832,000	$	4,936,000	$	169,000	$	308,000	$	352,000	$	3,000	$	41,000	$	10,641,000
Loans:
Loans
individually
evaluated for
impairment	$	8,641,000	$	12,803,000	$	6,029,000	$	413,000	$	800,000	$	—	$	—	$	28,686,000
Loans
collectively
evaluated for
impairment		80,773,000		229,960,000		3,295,000		66,787,000		30,806,000		116,000		—		411,737,000
Total ending
loan balance	$	89,414,000	$	242,763,000	$	9,324,000	$	67,200,000	$	31,606,000	$	116,000	$	—	$	440,423,000

The following table presents the recorded investment in nonaccrual loans in the periods indicated:

	June 30,		December 31,
	2013		2012
Commercial:
Secured by real estate	$	3,446,000	$	3,374,000
Other		109,000		261,000
Commercial real estate		9,655,000		10,083,000
Commercial construction		—		3,080,000
Residential real estate		595,000		413,000
Consumer:
Secured by real estate		911,000		800,000
Total nonperfoming loans	$	14,716,000	$	18,011,000

14

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

	At June 30, 2013
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	11,403,000	$	7,608,000			$	6,504,000	$	134,000
Other		31,000		27,000				103,000		1,000
Commercial real estate		16,513,000		11,418,000				9,885,000		60,000
Commercial construction		—		—				3,998,000		19,000
Residential real estate		451,000		413,000				413,000		—
Consumer:
Secured by real estate		578,000		569,000				739,000		—
With an allowance recorded:
Commercial:
Secured by real estate		625,000		562,000	$	146,000		916,000		15,000
Other		1,078,000		1,022,000		35,000		1,184,000		25,000
Commercial real estate		1,426,000		933,000		29,000		2,541,000		25,000
Commercial construction		2,289,000		1,875,000		99,000		625,000		36,000
Residential real estate		183,000		182,000		67,000		61,000		—
Consumer:
Secured by real estate		342,000		342,000		149,000		114,000		—
	$	34,919,000	$	24,951,000	$	525,000	$	27,083,000	$	315,000

15

	At December 31, 2012
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	9,689,000	$	6,557,000			$	4,221,000	$	92,000
Other		424,000		146,000				109,000		5,000
Commercial real estate		17,211,000		12,149,000				10,054,000		158,000
Construction:
Commercial		7,300,000		6,029,000				6,041,000		53,000
Residential		—		—				—		—
Residential real estate		451,000		413,000				393,000		—
Consumer:
Secured by real estate		834,000		800,000				922,000		—
With an allowance recorded:
Commercial:
Secured by real estate		965,000		781,000	$	176,000		2,589,000		25,000
Other		1,163,000		1,157,000		75,000		2,195,000		43,000
Commercial real estate		923,000		654,000		15,000		2,940,000		18,000
Construction:
Commercial		—		—		—		1,224,000		—
Residential		—		—		—		596,000		—
Residential real estate		—		—		—		239,000		—
	$	38,960,000	$	28,686,000	$	266,000	$	31,523,000	$	394,000

16

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2013 and December 31, 2012. Nonaccrual loans are included in the disclosure by payment status.

	June 30, 2013
					Greater than				Loans
	30-59 Days		60-89 Days		90 Days		Total		Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial:
Secured by real estate	$	—	$	—	$	352,000	$	352,000	$	54,492,000	$	54,844,000
Other		179,000		—		1,510,000		1,689,000		26,443,000		28,132,000
Commercial real estate		—		1,498,000		6,941,000		8,439,000		243,780,000		252,219,000
Commercial construction		—		—		—		—		5,421,000		5,421,000
Residential real estate		—		—		595,000		595,000		72,409,000		73,004,000
Consumer:
Secured by real estate		70,000		—		674,000		744,000		27,083,000		27,827,000
Other		—		—		—		—		489,000		489,000
Other		—		—		—		—		70,000		70,000
Total	$	249,000	$	1,498,000	$	10,072,000	$	11,819,000	$	430,187,000	$	442,006,000

	December 31, 2012
					Greater than				Loans
	30-59 Days		60-89 Days		90 Days		Total		Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial:
Secured by real estate	$	101,000	$	179,000	$	2,674,000	$	2,954,000	$	55,206,000	$	58,160,000
Other		25,000		98,000		52,000		175,000		31,079,000		31,254,000
Commercial real estate		2,582,000		—		9,023,000		11,605,000		231,158,000		242,763,000
Commercial construction		—		460,000		815,000		1,275,000		8,049,000		9,324,000
Residential real estate		161,000		—		413,000		574,000		66,626,000		67,200,000
Consumer:
Secured by real estate		67,000		—		647,000		714,000		30,268,000		30,982,000
Other		—		—		—		—		624,000		624,000
Other		—		—		—		—		116,000		116,000
Total	$	2,936,000	$	737,000	$	13,624,000	$	17,297,000	$	423,126,000	$	440,423,000

Troubled Debt Restructurings

At June 30, 2013 and December 31, 2012, the Corporation had $11.4 million and $11.7 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $10.2 million and $10.4 million were performing in accordance with their new terms at June 30, 2013 and December 31, 2012, respectively. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of $301,000 and $246,000 have been allocated for the troubled debt restructurings at June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, the Corporation has committed $120,000 and $241,000 respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

The following table presents loans, by class, that were modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2013:

17

	For the three months ended June 30,
	2013						2012
			Pre-		Post-				Pre-		Post-
	Number		Modification		Modification		Number		Modification		Modification
	of		Recorded		Recorded		of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Commercial:
Secured by real estate		—	$	—	$	—		2	$	226,000	$	226,000
Other		—		—		—		1		74,000		72,000
Total troubled debt restructurings		—	$	—	$	—		3	$	300,000	$	298,000

	For the six months ended June 30,
	2013						2012
			Pre-		Post-				Pre-		Post-
	Number		Modification		Modification		Number		Modification		Modification
	of		Recorded		Recorded		of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Commercial:
Secured by real estate		—	$	—	$	—		2	$	226,000	$	226,000
Other		1		17,000		17,000		1		74,000		72,000
Total troubled debt restructurings		1	$	17,000	$	17,000		3	$	300,000	$	298,000

There were no loans modified as a trouble debt restructuring during the three months ended June 30, 2013. During the six months ended June 30, 2013, the term of one loan was modified as a troubled debt restructuring. The modification of the terms of this loan represents a term out of a remaining balance on a matured loan.

For the six months ended June 30, 2013, the troubled debt restructuring described above resulted in no change to the allowance for loan losses. Charge-offs for the six months ended June 30, 2012 related to troubled debt restructurings totaled $250,000.

A loan is considered to be in payment default once it is contractually 90 days past due under the modified terms. In the six months ended June 30, 2013, there have been no troubled debt restructured loans that have defaulted since their modification.

Credit Quality Indicators

The Corporation categorizes certain loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate and commercial construction loans. This analysis is performed at the time the loan is originated and annually thereafter. The Corporation uses the following definitions for risk ratings.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. While potentially weak, the borrower is currently marginally acceptable and loss of principal or interest is not presently envisioned.

Substandard – Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – A Doubtful loan has all of the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable or improbable. The likelihood of loss is extremely high, but because of certain important and reasonably specific factors, an estimated loss is deferred until a more exact status can be determined.

18

Loss – A loan classified Loss is considered uncollectible and of such little value that its continuance as an asset is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be effected in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2013 and December 31, 2012, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:

	June 30, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	44,304,000	$	5,952,000	$	4,588,000	$	—	$	—	$	54,844,000
Other		25,729,000		1,259,000		1,117,000		27,000		—		28,132,000
Commercial real estate		223,674,000		14,333,000		12,091,000		2,121,000		—		252,219,000
Commercial construction		976,000		4,445,000		—		—		—		5,421,000
Total	$	294,683,000	$	25,989,000	$	17,796,000	$	2,148,000	$	—	$	340,616,000

	December 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	47,524,000	$	7,368,000	$	3,268,000	$	—	$	—	$	58,160,000
Other		29,484,000		1,508,000		185,000		77,000		—		31,254,000
Commercial real estate		215,158,000		16,003,000		9,007,000		2,595,000		—		242,763,000
Commercial construction		3,294,000		2,950,000		3,080,000		—		—		9,324,000
Total	$	295,460,000	$	27,829,000	$	15,540,000	$	2,672,000	$	—	$	341,501,000

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loans losses. For residential real estate and consumer loan segments, the Corporation also evaluates credit quality based on payment activity. The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of June 30, 2013 and December 31, 2012.

	June 30, 2013
			Past Due and
	Current		Nonaccrual		Total
Residential real estate	$	72,409,000	$	595,000	$	73,004,000
Consumer:
Secured by real estate		27,083,000		744,000		27,827,000
Other		489,000		—		489,000
Total	$	99,981,000	$	1,339,000	$	101,320,000

19

	December 31, 2012
			Past Due and
	Current		Nonaccrual		Total
Residential real estate	$	66,626,000	$	574,000	$	67,200,000
Consumer:
Secured by real estate		30,268,000		714,000		30,982,000
Other		624,000		—		624,000
Total	$	97,518,000	$	1,288,000	$	98,806,000

Note 4. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). As the Corporation is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Corporation compares the prices received from the pricing service to a secondary pricing source. The Corporation’s internal price verification procedures have not historically resulted in adjustment in the prices obtained from the pricing service.

The interest rate swaps are reported at fair values obtained from brokers who utilize internal models with observable market data inputs to estimate the values of these instruments (Level 2 inputs).

The Corporation measures impairment of collateralized loans and OREO based on the estimated fair value of the collateral less estimated costs to sell the collateral, incorporating assumptions that experienced parties might use in estimating the value of such collateral (Level 3 inputs). At the time a loan or OREO is considered impaired, it is valued at the lower of cost or fair value. Generally, impaired loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for loan losses. OREO is initially recorded at fair value less estimated selling costs. Subsequent adjustments to the OREO carrying value are recorded in a specific valuation allowance for OREO. For collateral dependent loans and OREO, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, the net book value recorded for the collateral on the borrower’s financial statements, or aging reports. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the borrower and borrower’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals are generally obtained to support the fair value of collateral. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by licensed appraisers whose qualifications and licenses have been reviewed and verified by the Corporation. The Corporation utilizes a third party to order appraisals and, once received, review the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

20

Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. In addition, appraisers may make adjustments to the sales price of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 12% discount to real estate appraised values to cover disposition / selling costs and to reflect the potential price reductions in the market necessary to complete an expedient transaction and to factor in the impact of the perception that a transaction being completed by a bank may result in further price reduction pressure.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements Using:
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Assets:
Available for sale securities
U.S. Treasuries	$	—	$	—	$	—	$	—
U.S. government -
sponsored agencies		39,163,000		—		39,163,000		—
Obligations of state and
political subdivisions		13,715,000		—		13,715,000		—
Mortgage-backed
securities - residential		112,705,000		—		112,705,000		—
Asset-backed securities		9,794,000				9,794,000
Corporate debt		2,906,000				2,906,000
Other equity investments		3,393,000		3,333,000		60,000		—
Total available for
sale securities	$	181,676,000	$	3,333,000	$	178,343,000	$	—
Liabilities:
Interest rate swap	$	648,000	$	—	$	648,000	$	—

	At December 31, 2012
Assets:
Available for sale securities
U.S. Treasuries	$	4,006,000	$	4,006,000	$	—	$	—
U.S. government -
sponsored agencies		37,255,000		—		37,255,000		—
Obligations of state and
political subdivisions		14,170,000		—		14,170,000		—
Mortgage-backed
securities - residential		105,428,000		—		105,428,000		—
Asset-backed securities		9,884,000				9,884,000
Corporate debt		495,000				495,000
Other equity investments		3,462,000		3,402,000		60,000		—
Total available for
sale securities	$	174,700,000	$	7,408,000	$	167,292,000	$	—
Liabilities:
Interest rate swap	$	812,000	$	—	$	812,000	$	—

21

There were no transfers of assets between Level 1 and Level 2 during the three and six months ended June 30, 2013 or the year ended December 31, 2012. There were no changes to the valuation techniques for fair value measurements as of June 30, 2013 and December 31, 2012.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,564,000	$	—	$	—	$	6,564,000
Other		—		—		—		—
Commercial real estate		9,980,000		—		—		9,980,000
Commercial construction		1,776,000		—		—		1,776,000
Residential real estate		529,000		—		—		529,000
Consumer
Secured by real estate		762,000		—		—		762,000
Other Real Estate Owned		1,072,000						1,072,000
	$	20,683,000	$	—	$	—	$	20,683,000

	At December 31, 2012
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,490,000	$	—	$	—	$	6,490,000
Other		—		—		—		—
Commercial real estate		10,445,000		—		—		10,445,000
Commercial construction		4,373,000		—		—		4,373,000
Residential real estate		413,000		—		—		413,000
Consumer
Secured by real estate		800,000		—		—		800,000
Other Real Estate Owned		1,058,000						1,058,000
	$	23,579,000	$	—	$	—	$	23,579,000

Collateral-dependent impaired loans measured for impairment using the fair value of the collateral had a recorded investment of $20,088,000, with a valuation allowance of $477,000, resulting in a increase of the provision for loan losses of $1,275,000 and $2,468,000 for the three and six months ended June 30, 2013.

Other real estate owned had a recorded investment value of $1,072,000 and $1,058,000 with no valuation allowances at June 30, 2013 and December 31, 2012, respectively. No additional valuation allowance was recorded for the six months ended June 30, 2013.

22

For the Level 3 assets measured at fair value on a non-recurring basis at June 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair
Assets	Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans	$	19,611,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.		5%
				Estimated selling costs.		7%
Other real estate owned	$	1,072,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.		5% - 10%
				Estimated selling costs.		7%

Fair value estimates for the Corporation’s financial instruments are summarized below:

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Financial assets:
Cash and cash equivalents	$	14,322,000	$	14,322,000	$	—	$	—
Securities available for sale		181,676,000		3,333,000		178,343,000		—
Securities held to maturity		28,119,000		—		29,575,000		—
Mortgage loans held for sale		2,054,000		—		2,053,000		—
Loans, net		431,353,000		—		—		436,861,000
Accrued interest receivable		2,301,000		1,000		895,000		1,405,000
Financial liabilities:
Deposits		592,699,000		447,479,000		146,077,000		—
FHLB-NY advances		25,000,000		—		25,384,000		—
Securities sold under
agreements to repurchase		7,344,000		—		7,704,000		—
Subordinated debenture		7,217,000		—		—		7,210,000
Accrued interest payable		445,000		1,000		426,000		18,000
Interest rate swap		648,000		—		648,000		—

23

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At December 31, 2012
Financial assets:
Cash and cash equivalents	$	21,016,000	$	21,016,000	$	—	$	—
Securities available for sale		174,700,000		7,408,000		167,292,000		—
Securities held to maturity		29,718,000		—		31,768,000		—
Mortgage loans held for sale		784,000		—		784,000		—
Loans, net		429,832,000		—		—		449,041,000
Accrued interest receivable		2,372,000		2,000		908,000		1,462,000
Financial liabilities:
Deposits		590,254,000		434,569,000		157,219,000		—
FHLB-NY advances		25,000,000		—		25,825,000		—
Securities sold under
agreements to repurchase		7,343,000		—		7,883,000		—
Subordinated debenture		7,217,000		—		—		7,112,000
Accrued interest payable		560,000		1,000		540,000		19,000
Interest rate swap		812,000		—		812,000		—

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents – The carrying amount approximates fair value and is classified as Level 1.

Securities available-for-sale and held to maturity – The methods for determining fair values were described previously.

Mortgage loans held for sale – Loans in this category have been committed for sale to third party investors at the current carrying amount resulting in a Level 2 classification.

Loans, net – Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential and commercial mortgages, commercial and other installment loans. The fair value of loans is estimated by discounting cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans resulting in a Level 3 classification. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Accrued interest receivable – The carrying amount approximates fair value.

Deposits – The fair value of deposits, with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand resulting in a Level 1 classification. The fair value of certificates of deposit is based on the discounted value of cash flows resulting in a Level 2 classification. The discount rate is estimated using market discount rates which reflect interest rate risk inherent in the certificates of deposit.

FHLB-NY advances – With respect to FHLB-NY borrowings, the carrying amount of the borrowings which mature in one day approximates fair value. For borrowings with a longer maturity, the fair value is based on the discounted value of cash flows. The discount rate is estimated using market discount rates which reflect the interest rate risk and credit risk inherent in the term borrowings resulting in a Level 2 classification.

Securities sold under agreements to repurchase – The carrying value approximates fair value due to the relatively short time before maturity resulting in a Level 2 classification.

Subordinated debenture – The fair value of the subordinated debenture is based on the discounted value of the cash flows. The discount rate is estimated using market rates which reflect the interest rate and credit risk inherent in the debenture resulting in a Level 3 classification.

24

Accrued interest payable – The carrying amount approximates fair value.

Interest rate swap – The fair value of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Commitments to extend credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. At June 30, 2013 and December 31, 2012, the fair value of such commitments were not material.

Limitations

The preceding fair value estimates were made at June 30, 2013 and December 31, 2012 based on pertinent market data and relevant information on the financial instruments. These estimates do not include any premiums or discounts that could result from an offer to sell at one time the Corporation's entire holdings of a particular financial instrument or category thereof. Since no market exists for a substantial portion of the Corporation's financial instruments, fair value estimates were necessarily based on judgments with respect to future expected loss experience, current economic conditions, risk assessments of various financial instruments, and other factors. Given the subjective nature of these estimates, the uncertainties surrounding them and the matters of significant judgment that must be applied, these fair value estimates cannot be calculated with precision. Modifications in such assumptions could meaningfully alter these estimates.

Since these fair value approximations were made solely for on- and off-balance sheet financial instruments at June 30, 2013 and December 31, 2012, no attempt was made to estimate the value of anticipated future business. Furthermore, certain tax implications related to the realization of unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into the estimates.

Note 5. Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Common stock equivalents are not included in the calculation. Diluted earnings (loss) per share is computed similar to that of basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potential dilutive common shares were issued.

The following reconciles the income (loss) available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings (loss) per share.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013		2012			2013		2012
Net income (loss)	$	461,000	$	(324,000	)	$	1,283,000	$	452,000
Dividends on preferred stock		127,000		38,000			293,000		113,000
Net income (loss) available to common stockholders	$	334,000	$	(362,000	)	$	990,000	$	339,000
Weighted average shares		5,934,549		5,902,167			5,932,774		5,897,266
Effect of dilutive stock options		N/A		N/A			N/A		N/A
Total weighted average dilutive shares		5,934,549		5,902,167			5,932,774		5,897,266
Basic earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06
Diluted earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06

Stock options to purchase 6,754 shares of common stock were not considered in computing diluted earnings per share the three and six months ended June 30, 2013 because they were antidilutive. For the three and six months ended June 30, 2012, stock options to purchase 62,937 and 63,714 shares of common stock, respectively, were not considered in computing diluted earnings per share of common stock because they were antidilutive.

25

Note 6. Preferred Stock

In connection with the Corporation’s participation in the U.S. Department of the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion, on September 1, 2011, the Corporation issued 15,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Shares”) to the Treasury for an aggregate purchase price of $15 million, in cash.

Using the proceeds of the issuance of the Series B Preferred Shares, the Corporation simultaneously repurchased all 10,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Shares”) previously issued under the Treasury’s Troubled Assets Relief Program (“TARP”) Capital Purchase Program (the “CPP”) for an aggregate purchase price of $10,022,222, in cash, including accrued but unpaid dividends through the date of repurchase.

The terms of the newly-established Series B Preferred Shares provide for a liquidation preference of $1,000 per share and impose restrictions on the Corporation’s ability to declare or pay dividends or purchase, redeem or otherwise acquire for consideration, shares of the Corporation’s Common Stock and any class or series of stock of the Corporation the terms of which do not expressly provide that such class or series will rank senior or junior to the Series B Preferred Shares as to dividend rights and/or rights on liquidation, dissolution or winding up of the Corporation. Specifically, the terms provide for the payment of a non-cumulative quarterly dividend, payable in arrears, which the Corporation accrues as earned over the period that the Series B Preferred Shares are outstanding. The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement) from 1% to 5% per annum and, thereafter, for the eleventh through the first half of the nineteenth dividend periods, from 1% to 7%. In general, the dividend rate decreases as the level of the Bank’s QSBL increases. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%. Such dividends are not cumulative but the Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level.

In addition, the Series B Preferred Shares are non-voting except in limited circumstances. In the event that the Corporation has not timely declared and paid dividends on the Series B Preferred Shares for six dividend periods or more, whether or not consecutive, and shares of Series B Preferred Stock with an aggregate liquidation preference of at least $25,000,000 are still outstanding, the Treasury may designate two additional directors to be elected to the Corporation’s Board of Directors. Subject to the approval of the Bank’s federal banking regulator, the Federal Reserve, the Corporation may redeem the Series B Preferred Shares at any time at the Corporation’s option, at a redemption price equal to the liquidation preference per share plus the per share amount of any unpaid dividends for the then-current period through the date of the redemption. The Series B Preferred Shares are includable in Tier I capital for regulatory capital.

26

Note 7. Accumulated Other Comprehensive Income

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive income for the three and six months ended June 30, 2013.

	For the Three Months Ended June 30, 2013
	Components of
	Accumulated Other Comprehensive Income						Total
	Unrealized Gains						Accumulated
	and Losses on			Unrealized Gains			Other
	Available for Sale			and Losses on			Comprehensive
	(AFS) Securities			Derivatives			Loss
Balance at March 31, 2012	$	607,000		$	(448,000	)	$	159,000
Other comprehensive income before
reclassifications		(2,729,000	)		59,000			(2,670,000	)
Amounts reclassified from
other comprehensive income		—			—			—
Other comprehensive income, net		(2,729,000	)		59,000			(2,670,000	)
Balance at June 30, 2013	$	(2,122,000	)	$	(389,000	)	$	(2,511,000	)

	For the Six Months Ended June 30, 2013
	Components of
	Accumulated Other Comprehensive Income						Total
	Unrealized Gains						Accumulated
	and Losses on			Unrealized Gains			Other
	Available for Sale			and Losses on			Comprehensive
	(AFS) Securities			Derivatives			Loss
Balance at December 31, 2012	$	947,000		$	(487,000	)	$	460,000
Other comprehensive income before
reclassifications		(3,068,000	)		98,000			(2,970,000	)
Amounts reclassified from
other comprehensive income		(1,000	)		—			(1,000	)
Other comprehensive income, net		(3,069,000	)		98,000			(2,971,000	)
Balance at June 30, 2013	$	(2,122,000	)	$	(389,000	)	$	(2,511,000	)

The following table presents amounts reclassified from each component of accumulated other comprehensive income on a gross and net of tax basis for the six months ended June 30, 2013.

	Accumulated
	Other			Income
Components of Accumulated Other	Comprehensive			Statement
Comprehensive Loss	Income			Line Item
Unrealized gains on AFS securities before tax	$	2,000		Gains on securities transactions, net
Tax effect		(1,000	)
Total net of tax		1,000
Total reclassifications, net of tax	$	1,000

27

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward looking statements” with respect to Stewardship Financial Corporation (the “Corporation”) within the meaning of the Private Securities Litigation Reform Act of 1995, which forward looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of the Corporation that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include: changes in general, economic and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects the Corporation’s interest rate spread or other income anticipated from operations and investments. As used in this Form 10-Q, “we”, “us” and “our” refer to the Corporation and its consolidated subsidiary, Atlantic Stewardship Bank, depending on the context.

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures found elsewhere in this Quarterly Report on Form 10-Q, are based upon the Corporation’s consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Corporation’s Audited Consolidated Financial Statements for the year ended December 31, 2012 included in the 2012 Annual Report contains a summary of the Corporation’s significant accounting policies. Management believes the Corporation’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical accounting policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

The allowance for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the loan portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Corporation’s loans are secured by real estate in the State of New Jersey. Accordingly, the collectability of a substantial portion of the carrying value of the Corporation’s loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the northern New Jersey area experience adverse economic changes. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation’s control.

Financial Condition

Total assets were relatively unchanged, increasing only $444,000 to $688.8 million at June 30, 2013 from $688.4 million at December 31, 2012. Cash and cash equivalents decreased $6.7 million to $14.3 million at June 30, 2013 from $21.0 million at December 31, 2012, reflecting growth in the securities portfolio. Securities available-for-sale increased $7.0 million to $181.7 million while securities held to maturity decreased $1.6 million to $28.1 million. Net loans increased $1.5 million to $431.4 million at June 30, 2013 compared to $429.8 million at December 31, 2012. Increases due to new loans originated were partially offset by regular principal payments and payoffs in the first six months of fiscal year 2013 as well as a $146,000 net increase in the allowance for loan losses. Loans held for sale totaled $2.1 million at June 30, 2013, an increase of $1.3 million from $784,000 at December 31, 2012.

Deposits totaled $592.7 million at June 30, 2013, an increase of $2.4 million from $590.3 million at December 31, 2012. The growth in deposits consisted of a $21.1 million increase in noninterest-bearing accounts partially offset by an $18.7 million decrease in interest-bearing accounts.

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Results of Operations

General

The Corporation reported net income of $461,000, or $0.06 diluted earnings per common share for the three months ended June 30, 2013, compared to a net loss of $324,000, or a $0.06 loss per diluted per common share for the three months ended June 30, 2012. For the six months ended June 30, 2013, the Corporation reported net income of $1.3 million, or $0.17 diluted earnings per common share compared to net income of $452,000 million, or $0.06 per diluted common share, for the comparable prior year periods.

Net Interest Income

Net interest income, on a tax equivalent basis, for the three and six months ended June 30, 2013 was $5.8 million and $11.8 million, respectively, compared to $6.1 million and $12.3 million recorded in prior year periods. The net interest rate spread and net yield on interest-earning assets for the three months ended June 30, 2013 were 3.36% and 3.55%, respectively, compared to 3.47% and 3.69% for the three months ended June 30, 2012. For the six months ended June 30, 2013, the net interest rate spread and net yield on interest-earning assets were 3.46% and 3.66%, respectively, compared to 3.47% and 3.70% for the six months ended June 30, 2012. The net interest rate spread and net yield on interest-earning assets for the current year periods reflect a decline in loan interest rates and yields on securities as well as a decline in the interest rates on deposits. The Corporation continues in its efforts to proactively manage deposit costs in an effort to mitigate the lower asset yields earned. The reduced yields on assets primarily reflect lower yields on loans as well as on investment securities, reflective of the historically low market rates in the current environment.

The following table reflects the components of the Corporation’s net interest income for the three and six months ended June 30, 2013 and 2012 including: (1) average assets, liabilities and stockholders’ equity based on average daily balances, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, and (4) net yield on interest-earning assets. Nontaxable income from investment securities and loans is presented on a tax-equivalent basis assuming a statutory tax rate of 34% for the periods presented. This was accomplished by adjusting non-taxable income upward to make it equivalent to the level of taxable income required to earn the same amount after taxes.

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Analysis of Net Interest Income (Unaudited)

For the Three Months Ended June 30,

	2013									2012
							Average									Average
				Interest			Rates						Interest			Rates
	Average			Income/			Earned/			Average			Income/			Earned/
	Balance			Expense			Paid			Balance			Expense			Paid
	(Dollars in thousands)									(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) (2)	$	448,182		$	5,691			5.09	%	$	452,280		$	6,096			5.41	%
Taxable investment securities (1)		172,296			676			1.57			176,487			954			2.17
Tax-exempt investment securities (1) (2)		36,666			406			4.44			33,211			399			4.82
Other interest-earning assets		391			8			8.21			829			10			4.35
Total interest-earning assets		657,535			6,781			4.14			662,807			7,459			4.51
Non-interest-earning assets:
Allowance for loan losses		(11,937	)								(13,251	)
Other assets		48,871									54,088
Total assets	$	694,469								$	703,644
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	234,231		$	189			0.32	%	$	247,257		$	298			0.48	%
Savings deposits		72,323			20			0.11			61,961			31			0.20
Time deposits		147,155			383			1.04			163,364			565			1.39
Repurchase agreements		7,344			91			4.97			14,342			182			5.09
FHLB-NY borrowing		25,140			150			2.39			27,074			155			2.30
Subordinated debenture		7,217			125			7.00			7,217			126			7.00
Total interest-bearing liabilities		493,410			958			0.78			521,215			1,357			1.04
Non-interest-bearing liabilities:
Demand deposits		140,978									120,768
Other liabilities		3,413									2,781
Stockholders' equity		56,668									58,880
Total liabilities and stockholders' equity	$	694,469								$	703,644
Net interest income (taxable equivalent basis)					5,823									6,102
Tax Equivalent adjustment					(145	)								(142	)
Net interest income				$	5,678								$	5,960
Net interest spread (taxable equivalent basis)								3.36	%								3.47	%
Net yield on interest-earning
assets (taxable equivalent basis) (3)								3.55	%								3.69	%

(1) For purpose of these calculations, nonaccruing loans are included in the average balance.  Loans and total interest-earning assets are net of unearned income.  Securities are included at amortized cost.

(2) The tax equivalent adjustments are based on a marginal tax rate of 34%.

(3) Net interest income (taxable equivalent basis) divided by average interest-earning assets.

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Analysis of Net Interest Income (Unaudited)

For the Six Months Ended June 30,

	2013									2012
							Average									Average
				Interest			Rates						Interest			Rates
	Average			Income/			Earned/			Average			Income/			Earned/
	Balance			Expense			Paid			Balance			Expense			Paid
	(Dollars in thousands)									(Dollars in thousands)
Assets
Interest-earning assets:
Loans (1) (2)	$	445,366		$	11,625			5.26	%	$	456,173		$	12,366			5.44	%
Taxable investment securities (1)		170,419			1,343			1.59			175,742			1,934			2.21
Tax-exempt investment securities (1) (2)		36,571			813			4.48			33,201			801			4.84
Other interest-earning assets		416			14			6.79			1,171			17			2.91
Total interest-earning assets		652,772			13,795			4.26			666,287			15,118			4.55
Non-interest-earning assets:
Allowance for loan losses		(11,508	)								(12,680	)
Other assets		48,137									53,455
Total assets	$	689,401								$	707,062
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	236,548		$	374			0.32	%	$	250,618		$	612			0.49	%
Savings deposits		70,654			38			0.11			60,230			61			0.20
Time deposits		148,138			821			1.12			165,168			1,204			1.46
Repurchase agreements		7,344			181			5.00			14,342			365			5.09
FHLB-NY borrowing		25,277			298			2.38			28,608			328			2.30
Subordinated debenture		7,217			250			6.99			7,217			252			7.00
Total interest-bearing liabilities		495,178			1,962			0.80			526,183			2,822			1.08
Non-interest-bearing liabilities:
Demand deposits		134,596									119,236
Other liabilities		2,977									2,986
Stockholders' equity		56,650									58,657
Total liabilities and stockholders' equity	$	689,401								$	707,062
Net interest income (taxable equivalent basis)					11,833									12,296
Tax Equivalent adjustment					(289	)								(285	)
Net interest income				$	11,544								$	12,011
Net interest spread (taxable equivalent basis)								3.46	%								3.47	%
Net yield on interest-earning
assets (taxable equivalent basis) (3)								3.66	%								3.70	%

(1) For purpose of these calculations, nonaccruing loans are included in the average balance.  Loans and total interest-earning assets are net of unearned income.  Securities are included at amortized cost.

(2) The tax equivalent adjustments are based on a marginal tax rate of 34%.

(3) Net interest income (taxable equivalent basis) divided by average interest-earning assets.

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For the three months ended June 30, 2013, total interest income, on a tax equivalent basis, decreased $678,000 to $6.8 million, or 9.1%, when compared to the same prior year period. The decrease was due to both a decrease in the average balance of interest-earning assets and a decrease in yields on interest-earning assets. Total interest income on a tax equivalent basis decreased $1.3 million to $13.8 million for the six months ended June 30, 2013, or 8.8%, compared to the same period for 2012. Consistent with the three month period, the decrease in the current six month period is due to a decrease in the overall yield on interest-earning assets and a decrease in the average interest-earning assets. The average rate earned on interest-earning assets was 4.14% and 4.26% for the three and six months ended June 30, 2013, respectively, compared to an average rate of 4.51% and 4.55% for the three and six months ended June 30, 2012. The decline in the asset yield reflects the effect of a prolonged low interest rate environment. Average interest-earning assets decreased $5.3 million and $13.5 million for the three and six months ended June 30, 2013 compared to the same prior year periods. The change in average interest-earning assets primarily reflects a decrease from the comparable prior year periods in average loans, which decreased $4.1 million and $10.8 million for the three and six months ended June 30, 2013, respectively.

Interest paid on deposits and borrowed money decreased $399,000 and $860,000 for the three and six months ended June 30, 2013, respectively, compared to the same periods for 2012. The decline is due to general decreases in rates paid on deposits and borrowings coupled with decreases in average interest-bearing liabilities. For the three months ended June 30, 2013, the total cost for interest-bearing liabilities declined to 0.78% representing a 26 basis point decline when compared to the same prior year period. The cost for deposits and borrowed money decreased 28 basis points from 1.08% for the six month period ended June 30, 2012 to 0.80% for the comparable period in 2013. The average balance of total interest-bearing deposits and borrowings decreased $27.8 million and $31.0 million for the three and six months ended June 30, 2013, respectively, from the comparable 2012 period. Average interest-bearing deposits decreased $18.9 million and average borrowings decreased $8.9 million for the three months ended June 30, 2013 when compared to the same prior year period. Likewise, for the six months ended June 30, 2013 the change in interest-bearing deposits and borrowings was comprised of a $20.7 million decrease in average interest-bearing deposits and a $10.3 million decrease in average borrowings.

Provision for Loan Losses

The Corporation maintains an allowance for loan losses at a level considered by management to be adequate to cover the probable incurred losses associated with its loan portfolio. On an ongoing basis, management analyzes the adequacy of this allowance by considering the nature and volume of the Corporation’s loan activity, financial condition of the borrower, fair market value of the underlying collateral, and changes in general market conditions. Additions to the allowance for loan losses are charged to operations in the appropriate period. Actual loan losses, net of recoveries, serve to reduce the allowance. The appropriate level of the allowance for loan losses is based on estimates, and ultimate losses may vary from current estimates.

The loan loss provision totaled $850,000 and $2.5 million for the three and six months ended June 30, 2013, respectively, compared to $2.9 million and $4.7 million for the three and six months ended June 30, 2012, respectively. Nonaccrual loans of $14.7 million at June 30, 2013 reflected a decrease from $18.0 million of nonaccrual loans at December 31, 2012. The allowance for loan losses related to the impaired loans increased from $266,000 at December 31, 2012 to $525,000 at June 30, 2013. During the six months ended June 30, 2013, the Corporation charged off $2.4 million of loan balances and recovered $130,000 in previously charged off loans compared to $4.4 million and $52,000, respectively, during the same period in 2012.

The current period loan loss provision primarily is indicative of continuing economic conditions that have contributed to an elevated level of loan delinquencies and the softness in the real estate market. The Corporation monitors its loan portfolio and intends to continue to provide for loan loss reserves based on its ongoing periodic review of the loan portfolio, charge-off activity and general market conditions.

See “Asset Quality” section below for a summary of the allowance for loan losses and nonperforming assets.

Noninterest Income

Noninterest income was $995,000 and $2.5 million for the three and six months ended June 30, 2013, respectively, compared to $1.3 million and $2.9 million for the prior year periods. For the three months ended June 30, 2013, there were no gains on sales of other real estate owned while noninterest income included $370,000 of such gain for the three months ended June 30, 2012. Gains on sales of other real estate owned were $126,000 for the six months ended June 30, 2013 compared to $469,000 for the comparable prior year period. Gains on sales of mortgage loans totaled $298,000 and $460,000 for the three and six months ended June 30, 2013, respectively, compared to $154,000 and $565,000 for the three and six months ended June 30, 2012, respectively. For the six months ended June 30, 2013, noninterest income included $2,000 from gains on calls and sales of securities compared to $445,000 for the same prior year period. Noninterest income of $537,000 was recorded as a result of a death benefit insurance payment received in early 2013.

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Noninterest Expense

Noninterest expenses for the three and six months ended June 30, 2013 increased to $5.1 million and $10.1 million compared to $4.8 million and $9.7 million in the comparable prior year periods. The majority of the increase in noninterest expenses has occurred in higher salary and employee benefits expense, reflective of increasing regulatory compliance and the attendant staffing necessary to oversee all compliance-related issues. In addition, the increase in salary and employee benefits expense is the result of an increased focus on commercial lending opportunities as well as costs associated with an enhanced credit review function.

Income Tax Expense

For the three months ended June 30, 2013, the Corporation recorded income tax expense of $231,000 compared to an income tax benefit of $159,000 for the three months ended June 30, 2012. For the six months ended June 30, 2013, income tax expense totaled $217,000 representing an effective tax rate of 14.5% compared to income tax expense of $147,000, or an effective tax rate of 24.5%, for the six months ended June 30, 2012. The current period tax expense reflects a decrease in our overall projected effective tax rate as a result of our tax exempt income, including the gain on life insurance proceeds, representing a larger percentage of pretax income.

Asset Quality

The Corporation’s principal earning asset is its loan portfolio. Inherent in the lending function is the risk of deterioration in the borrowers’ ability to repay loans under existing loan agreements. Management realizes that because of this risk, reserves are maintained to absorb probable incurred loan losses. In determining the adequacy of the allowance for loan losses, management of the Corporation considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with general economic and real estate market conditions. Although management attempts to establish a reserve sufficient to offset probable incurred losses in the portfolio, changes in economic conditions, regulatory policies and borrowers’ performance could require future changes to the allowance.

Risk elements include nonaccrual loans, past due and restructured loans, potential problem loans, loan concentrations and other real estate owned. The following table shows the composition of nonperforming assets at the end of each of the last four quarters:

	June 30,			March 31,			December 31,			September 30,
	2013			2013			2012			2012
	(Dollars in thousands)
Nonaccrual loans (1)	$	14,716		$	17,479		$	18,011		$	24,960
Loans past due 90 days or more and accruing (2)		—			50			237			75
Total nonperforming loans		14,716			17,529			18,248			25,035
Other real estate owned		1,072			876			1,058			2,985
Total nonperforming assets	$	15,788		$	18,405		$	19,306		$	28,020
Performing restructured loans (3)	$	10,235		$	10,134		$	10,373		$	7,176
Allowance for loan losses	$	10,787		$	11,512		$	10,641		$	12,598
Nonperforming loans to total gross loans		3.33	%		3.97	%		4.14	%		5.72	%
Nonperforming assets to total assets		2.29	%		2.65	%		2.80	%		4.10	%
Allowance for loan losses to total gross loans		2.44	%		2.61	%		2.42	%		2.88	%
Allowance for loan losses to
nonperforming loans		73.30	%		65.67	%		58.31	%		50.32	%

(1) Generally represents loans as to which the payment of principal or interest is in arrears for a period of more than 90 days. Interest previously accrued on these loans and not yet paid is reversed and charged against income during the current period. Interest earned thereafter is only included in income to the extent that it is received in cash.

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(2) Represents loans as to which payment of principal or interest is contractually past due 90 days or more but which are currently accruing income at the contractually stated rates. A determination is made to continue accruing income on those loans which are sufficiently collateralized and on which management believes all interest and principal owed will be collected.

(3) Any restructured loans that are on nonaccrual status are only reported in nonaccrual loans and not also in restructured loans.

A loan is generally placed on nonaccrual when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The identification of nonaccrual loans reflects careful monitoring of the loan portfolio. The Corporation is focused on resolving the nonperforming loans and mitigating future losses in the portfolio. All delinquent loans continue to be reviewed by management.

At June 30, 2013, the nonaccrual loans were comprised of 43 loans, primarily commercial real estate loans, commercial loans and construction loans. While the Corporation maintains strong underwriting requirements, the number and amount of nonaccrual loans is a reflection of the prolonged weakened economic conditions and the corresponding effects it has had on our commercial borrowers and the current real estate environment. Certain loans, including restructured loans, are current, but in accordance with applicable guidance and other weakness concerns, management has continued to keep these loans on nonaccrual status.

During the six months ended June 30, 2013, nonaccrual loans have decreased $3.3 million to $14.7 million, since December 31, 2012. The decrease reflects payments received, payoffs, charge-offs and loans returned to an accrual status partially offset by new nonaccrual loans. The ratio of allowance for loan losses to nonperforming loans increased to 73.30% at June 30, 2013 from 58.31% at December 31, 2012. The ratio of allowance for loan losses to nonperforming loans is reflective of a detailed analysis and the probable losses to be incurred that we have identified with these nonperforming loans. This metric reflects both the effect of an increase in the allowance for loan losses and the decrease in nonaccrual loans.

Evaluation of all nonperforming loans includes the updating of appraisals and specific evaluation of such loans to determine estimated cash flows from business and/or collateral. We have assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable losses to be incurred. The majority of our nonperforming loans are secured by real estate collateral. While we have continued to record appropriate charge-offs, the existing underlying collateral coverage for a considerable portion of the nonperforming loans currently supports collection of a significant portion of our remaining principal.

For loans not included in nonperforming loans, at June 30, 2013, the level of loans past due 30-89 days was only $249,000 compared to $3.1 million at December 31, 2012. We will continue to monitor delinquencies for early identification of new problem loans. While not comprising a significantly large portion of the loan portfolio, a number of problem loans are commercial construction loans which have been affected by the struggling construction industry. As such, the entire commercial construction portfolio is being actively monitored.

The Corporation maintains an allowance for loan losses at a level considered by management to be adequate to cover the probable losses to be incurred associated with its loan portfolio. The Corporation’s policy with respect to the methodology for the determination of the allowance for loan losses involves a high degree of complexity and requires management to make difficult and subjective judgments.

The adequacy of the allowance for loan losses is based upon management’s evaluation of the known and inherent risks in the portfolio, consideration to the size and composition of the loan portfolio, actual loan loss experience, the level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions.

In establishing the allowance for loan losses, the Corporation utilizes a two-tier approach by (1) identifying problem loans and allocating specific loss allowances on such loans and (2) establishing a general loan loss allowance on the remainder of its loan portfolio. The Corporation maintains a loan review system that allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such a system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers.

Allocations of specific loan loss allowances are established for identified loans based on a review of various information including appraisals of underlying collateral. Appraisals are performed by independent licensed appraisers to determine the value of impaired, collateral-dependent loans. Appraisals are periodically updated to ascertain any further decline in value. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loss experience, composition of the loan portfolio, current economic conditions and management’s judgment.

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For the three and six months ended June 30, 2013, the provision for loan losses was $850,000 and $2.5 million, respectively, compared to $2.9 million and $4.7 million for the three and six months ended June 30 2012, respectively. The total allowance for loan losses of 2.44% of total loans was comparable to a ratio of 2.42% at December 31, 2012.

When management expects that some portion or all of a loan balance will not be collected, that amount is charged-off as a loss against the allowance for loan losses. For the three and six months ended June 30, 2013, net charge-offs were $1.6 million and $2.3 million, respectively. For the prior year three and six months ended June 30, 2012, net charge-offs were $4.1 million and $4.3 million, respectively. These charge-offs primarily reflect partial writedowns on nonaccrual loans due to the initial and ongoing evaluations of market values of the underlying real estate collateral in accordance with Accounting Standards Codification (“ASC”) 310-40, and the prior year charge-offs are indicative of previously established reserves that were based on analysis of the discounted cash flows for non-real estate collateral dependent loans. Regardless of our actions of recording partial and full charge-offs on loans, we continue to aggressively pursue collection, including legal action.

While regular monthly payments continue to be made on many of the nonaccrual loans, certain charge-offs result, nevertheless, from the borrowers’ inability to provide adequate documentation evidencing their ability to continue to service their debt. Therefore, consideration has been given to any underlying collateral and appropriate charge-offs recorded based, in general, on the deficiency of such collateral. In general, the charge-offs reflect partial writedowns and full charge-offs on nonaccrual loans due to the initial evaluation of market values of the underlying real estate collateral in accordance with ASC 310-40. Management believes the charge-off of these reserves provides a clearer indication of the value of nonaccrual loans. In addition to our actions of recording partial and full charge-offs on loans, we continue to aggressively pursue collection, including legal action.

At June 30, 2013 and December 31, 2012, the Corporation had $11.4 million and $11.7 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $10.2 million and $10.4 million were performing in accordance with their new terms at June 30, 2013 and December 31, 2012, respectively. The remaining troubled debt restructures are reported as nonaccrual loans. Specific reserves of $301,000 and $246,000 were allocated for the troubled debt restructurings at June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012 the Corporation had committed $120,000 and $241,000 respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

As of June 30, 2013, there were $24.1 million of other loans not included in the preceding table where credit conditions of borrowers, including real estate tax delinquencies, caused management to have concerns about the possibility of the borrowers not complying with the present terms and conditions of repayment and which may result in disclosure of such loans as nonperforming loans at a future date. These loans have been considered by management in conjunction with the analysis of the adequacy of the allowance for loan losses.

The Corporation’s lending activities are concentrated in loans secured by real estate located in northern New Jersey. Accordingly, the collectability of a substantial portion of the Corporation’s loan portfolio is susceptible to changes in real estate market conditions in northern New Jersey.

Capital Adequacy

The Corporation is subject to capital adequacy guidelines promulgated by the Board of Governors of the Federal Reserve System (“FRB”). The Bank is subject to similar capital adequacy requirements imposed by the Federal Deposit Insurance Corporation. The FRB has issued regulations to define the adequacy of capital based upon the sensitivity of assets and off-balance sheet exposures to risk factors. Four categories of risk weights (0%, 20%, 50%, and 100%) were established to be applied to different types of balance sheet assets and off-balance sheet exposures. The aggregate of the risk-weighted items (risk-based assets) is the denominator of the ratio; the numerator of the ratio is risk-based capital. Under the regulations, risk-based capital has been classified into two categories. Tier 1 capital consists of common and qualifying perpetual preferred shareholders’ equity less goodwill and other intangibles. Tier 2 capital consists of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) the excess of qualifying preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory convertible securities and (f) qualifying subordinated debt. Total qualifying capital consists of Tier 1 capital and Tier 2 capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FRB (determined on a case-by-case basis or as a matter of policy after formal rule-making). However, the amount of Tier 2 capital may not exceed the amount of Tier 1 capital. At June 30, 2013, the minimum risk-based capital requirements to be considered adequately capitalized were 4% for Tier 1 capital and 8% for total capital.

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Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. The leverage ratio under which a bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of at least 3% (in the case of a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion) is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (non-risk-adjusted) for the preceding three months. At June 30, 2013 the minimum leverage ratio requirement to be considered well capitalized was 4%. The following table summarizes the capital ratios for the Corporation and the Bank at June 30, 2013.

							To Be Well
							Capitalized
				Required for			Under Prompt
				Capital			Corrective
				Adequacy			Action
	Actual			Purposes			Regulations
Leverage ratio
Corporation		8.99	%		4.00	%		N/A
Bank		8.83	%		4.00	%		5.00	%
Risk-based capital
Tier I
Corporation		13.43	%		4.00	%		N/A
Bank		13.19	%		4.00	%		6.00	%
Total
Corporation		14.70	%		8.00	%		N/A
Bank		14.45	%		8.00	%		10.00	%

Liquidity and Capital Resources

The Corporation’s primary sources of funds are deposits, amortization and prepayments of loans and mortgage-backed securities, maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturities of investment securities are a relatively predictable source of funds, deposit flow and prepayments on loans and mortgage-backed securities are greatly influenced by market interest rates, economic conditions and competition. The Corporation’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities.

The primary source of cash from operating activities is net income. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in interest-earning cash accounts or short-term investments, such as federal funds sold.

Cash and cash equivalents decreased $6.7 million during the first six months of 2013. Net operating and financing activities provided $5.2 million and $2.1 million, respectively, and investing activities used $13.9 million.

We anticipate that the Corporation will have sufficient funds available to meet its current contractual commitments. Should we need temporary funding, the Corporation has the ability to borrow overnight with the Federal Home Loan Bank-NY (“FHLB-NY”). The overall borrowing capacity is contingent on available collateral to secure borrowings and the ability to purchase additional activity-based capital stock of the FHLB-NY. The Corporation may also borrow from the Discount Window of the Federal Reserve Bank of New York based on the market value of collateral pledged. In addition, the Corporation has available overnight variable repricing lines of credit with other correspondent banks totaling $13.0 million on an unsecured basis.

36

With respect to the payment of dividends on common stock, the Corporation has historically paid a quarterly cash dividend; however, management recognizes that the payment of future dividends could be impacted by losses or reduced earnings and the Corporation cannot assure the payment of future dividends. In addition, due to its participation in the United States Treasury’s Small Business Lending Fund (the “SBLF”) program, pursuant to which the Corporation issued 15,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Shares”) to the Treasury for a purchase price of $15.0 million in cash, the Corporation may only declare and pay dividends on its common stock (or any other equity security junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Stock for the current dividend period and, if after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital at the date of entering into the SBLF program excluding any subsequent charge-offs and any redemption of the Series B Preferred shares. On July 17, 2013, the Corporation announced that its Board of Directors had declared a $0.01 per share cash dividend payable to shareholders of record as of August 1, 2013. The dividend is to be paid on August 15, 2013.

37

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

ITEM 4. Controls and Procedures

Evaluation of internal controls and procedures

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our internal disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Controls over Financial Reporting

Pursuant to Rule 13a-15(d) under the Exchange Act, our management, with the participation of our principal executive officer and principal financial officer, has evaluated our internal controls over financial reporting and based upon such evaluation concluded that there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

38

Part II -- Other Information

Item 6. Exhibits

See Exhibit Index following this report.

39

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.

	Stewardship Financial Corporation
Date: August 12, 2013	By:	/s/ Paul Van Ostenbridge
		Paul Van Ostenbridge
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: August 12, 2013	By:	/s/ Claire M. Chadwick
		Claire M. Chadwick
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

40

EXHIBIT INDEX

Exhibit Number	Description of Exhibits
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following material from Stewardship Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text1

¹ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference.

41

EX-31.1

Exhibit 31.1

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,

as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Paul Van Ostenbridge, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Stewardship Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 12, 2013

/s/ Paul Van Ostenbridge
Paul Van Ostenbridge
President and Chief Executive Officer

42

EX-31.2

Exhibit 31.2

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,

as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Claire M. Chadwick, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Stewardship Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 12, 2013

/s/ Claire M. Chadwick
Claire M. Chadwick
Executive Vice President and Chief Financial Officer

43

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. § 1350 as adopted pursuant

to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Stewardship Financial Corporation (the “Company”), certifies that:

(1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 12, 2013	/s/ Paul Van Ostenbridge
	Paul Van Ostenbridge
	President and Chief Executive Officer
Dated: August 12, 2013	/s/ Claire M. Chadwick
	Claire M. Chadwick
	Executive Vice President and
	Chief Financial Officer

This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

44

XML

Loans and Nonperforming Loans (Tables)

6 Months Ended

Jun. 30, 2013

Loans And Nonperforming Loans Tables

Loan Portfolio Schedule

At June 30, 2013 and December 31, 2012, respectively, the loan portfolio consisted of the following:

	June 30,			December 31,
	2013			2012
Commercial:
Secured by real estate	$	54,844,000		$	58,160,000
Other		28,132,000			31,254,000
Commercial real estate		252,219,000			242,763,000
Commercial construction		5,421,000			9,324,000
Residential real estate		73,004,000			67,200,000
Consumer:
Secured by real estate		27,827,000			30,982,000
Other		489,000			624,000
Other		70,000			116,000
Total gross loans		442,006,000			440,423,000
Less:  Deferred loan fees, net of costs		(134,000	)		(50,000	)
Allowance for loan losses		10,787,000			10,641,000
		10,653,000			10,591,000
Loans, net	$	431,353,000		$	429,832,000

Schedule of Allowance for Loan Losses

Activity in the allowance for loan losses is summarized as follows:

	For the three months ended June 30, 2013
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	5,285,000	$	(1,082,000	)	$	261,000	$	43,000	$	3,985,000
Commercial real estate		5,549,000		1,452,000			1,403,000		—		5,598,000
Construction		20,000		261,000			—		23,000		304,000
Residential real estate		334,000		100,000			—		—		434,000
Consumer		290,000		99,000			—		21,000		410,000
Other loans		1,000		—			—		—		1,000
Unallocated		33,000		20,000			—		2,000		55,000
Total	$	11,512,000	$	850,000		$	1,664,000	$	89,000	$	10,787,000

	For the six months ended June 30, 2013
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	4,832,000	$	(277,000	)	$	648,000	$	78,000	$	3,985,000
Commercial real estate		4,936,000		2,421,000			1,759,000		—		5,598,000
Construction		169,000		133,000			24,000		26,000		304,000
Residential real estate		308,000		126,000			—		—		434,000
Consumer		352,000		41,000			3,000		20,000		410,000
Other loans		3,000		(4,000	)		—		2,000		1,000
Unallocated		41,000		10,000			—		4,000		55,000
Total	$	10,641,000	$	2,450,000		$	2,434,000	$	130,000	$	10,787,000

	For the three months ended June 30, 2012
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	6,068,000	$	1,994,000		$	2,068,000	$	29,000	$	6,023,000
Commercial real estate		5,448,000		918,000			1,839,000		—		4,527,000
Construction		777,000		(118,000	)		145,000		—		514,000
Residential real estate		338,000		54,000			—		—		392,000
Consumer		439,000		39,000			41,000		—		437,000
Other loans		2,000		1,000			—		1,000		4,000
Unallocated		25,000		12,000			—		—		37,000
Total	$	13,097,000	$	2,900,000		$	4,093,000	$	30,000	$	11,934,000

	For the six months ended June 30, 2012
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	5,368,000	$	2,960,000		$	2,356,000	$	51,000	$	6,023,000
Commercial real estate		4,943,000		1,423,000			1,839,000		—		4,527,000
Construction		480,000		179,000			145,000		—		514,000
Residential real estate		303,000		89,000			—		—		392,000
Consumer		498,000		(14,000	)		47,000		—		437,000
Other loans		2,000		1,000			—		1,000		4,000
Unallocated		10,000		27,000			—		—		37,000
Total	$	11,604,000	$	4,665,000		$	4,387,000	$	52,000	$	11,934,000

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and December 31, 2012.

	June 30, 2013
			Commercial		Commercial		Residential				Other
	Commercial		Real Estate		Construction		Real Estate		Consumer		Loans		Unallocated		Total
Allowance for loan
losses:
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment	$	181,000	$	29,000	$	99,000	$	67,000	$	149,000	$	—	$	—	$	525,000
Collectively
evaluated for
impairment		3,804,000		5,569,000		205,000		367,000		261,000		1,000		55,000		10,262,000
Total ending
allowance
balance	$	3,985,000	$	5,598,000	$	304,000	$	434,000	$	410,000	$	1,000	$	55,000	$	10,787,000
Loans:
Loans
individually
evaluated for
impairment	$	9,219,000	$	12,351,000	$	1,875,000	$	595,000	$	911,000	$	—	$	—	$	24,951,000
Loans
collectively
evaluated for
impairment		73,757,000		239,868,000		3,546,000		72,409,000		27,405,000		70,000		—		417,055,000
Total ending
loan balance	$	82,976,000	$	252,219,000	$	5,421,000	$	73,004,000	$	28,316,000	$	70,000	$	—	$	442,006,000

	December 31, 2012
			Commercial		Commercial		Residential				Other
	Commercial		Real Estate		Construction		Real Estate		Consumer		Loans		Unallocated		Total
Allowance for loan
losses:
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment	$	251,000	$	15,000	$	—	$	—	$	—	$	—	$	—	$	266,000
Collectively
evaluated for
impairment		4,581,000		4,921,000		169,000		308,000		352,000		3,000		41,000		10,375,000
Total ending
allowance
balance	$	4,832,000	$	4,936,000	$	169,000	$	308,000	$	352,000	$	3,000	$	41,000	$	10,641,000
Loans:
Loans
individually
evaluated for
impairment	$	8,641,000	$	12,803,000	$	6,029,000	$	413,000	$	800,000	$	—	$	—	$	28,686,000
Loans
collectively
evaluated for
impairment		80,773,000		229,960,000		3,295,000		66,787,000		30,806,000		116,000		—		411,737,000
Total ending
loan balance	$	89,414,000	$	242,763,000	$	9,324,000	$	67,200,000	$	31,606,000	$	116,000	$	—	$	440,423,000

Schedule of recorded investment in nonaccrual loans

The following table presents the recorded investment in nonaccrual loans in the periods indicated:

	June 30,		December 31,
	2013		2012
Commercial:
Secured by real estate	$	3,446,000	$	3,374,000
Other		109,000		261,000
Commercial real estate		9,655,000		10,083,000
Commercial construction		—		3,080,000
Residential real estate		595,000		413,000
Consumer:
Secured by real estate		911,000		800,000
Total nonperfoming loans	$	14,716,000	$	18,011,000

Schedule of recorded investments in impaired loans

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

	At June 30, 2013
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	11,403,000	$	7,608,000			$	6,504,000	$	134,000
Other		31,000		27,000				103,000		1,000
Commercial real estate		16,513,000		11,418,000				9,885,000		60,000
Commercial construction		—		—				3,998,000		19,000
Residential real estate		451,000		413,000				413,000		—
Consumer:
Secured by real estate		578,000		569,000				739,000		—
With an allowance recorded:
Commercial:
Secured by real estate		625,000		562,000	$	146,000		916,000		15,000
Other		1,078,000		1,022,000		35,000		1,184,000		25,000
Commercial real estate		1,426,000		933,000		29,000		2,541,000		25,000
Commercial construction		2,289,000		1,875,000		99,000		625,000		36,000
Residential real estate		183,000		182,000		67,000		61,000		—
Consumer:
Secured by real estate		342,000		342,000		149,000		114,000		—
	$	34,919,000	$	24,951,000	$	525,000	$	27,083,000	$	315,000

	At December 31, 2012
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	9,689,000	$	6,557,000			$	4,221,000	$	92,000
Other		424,000		146,000				109,000		5,000
Commercial real estate		17,211,000		12,149,000				10,054,000		158,000
Construction:
Commercial		7,300,000		6,029,000				6,041,000		53,000
Residential		—		—				—		—
Residential real estate		451,000		413,000				393,000		—
Consumer:
Secured by real estate		834,000		800,000				922,000		—
With an allowance recorded:
Commercial:
Secured by real estate		965,000		781,000	$	176,000		2,589,000		25,000
Other		1,163,000		1,157,000		75,000		2,195,000		43,000
Commercial real estate		923,000		654,000		15,000		2,940,000		18,000
Construction:
Commercial		—		—		—		1,224,000		—
Residential		—		—		—		596,000		—
Residential real estate		—		—		—		239,000		—
	$	38,960,000	$	28,686,000	$	266,000	$	31,523,000	$	394,000

Schedule of aging of the recorded investment in past due loans by class of loans

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2013 and December 31, 2012. Nonaccrual loans are included in the disclosure by payment status.

	June 30, 2013
					Greater than				Loans
	30-59 Days		60-89 Days		90 Days		Total		Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial:
Secured by real estate	$	—	$	—	$	352,000	$	352,000	$	54,492,000	$	54,844,000
Other		179,000		—		1,510,000		1,689,000		26,443,000		28,132,000
Commercial real estate		—		1,498,000		6,941,000		8,439,000		243,780,000		252,219,000
Commercial construction		—		—		—		—		5,421,000		5,421,000
Residential real estate		—		—		595,000		595,000		72,409,000		73,004,000
Consumer:
Secured by real estate		70,000		—		674,000		744,000		27,083,000		27,827,000
Other		—		—		—		—		489,000		489,000
Other		—		—		—		—		70,000		70,000
Total	$	249,000	$	1,498,000	$	10,072,000	$	11,819,000	$	430,187,000	$	442,006,000

	December 31, 2012
					Greater than				Loans
	30-59 Days		60-89 Days		90 Days		Total		Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial:
Secured by real estate	$	101,000	$	179,000	$	2,674,000	$	2,954,000	$	55,206,000	$	58,160,000
Other		25,000		98,000		52,000		175,000		31,079,000		31,254,000
Commercial real estate		2,582,000		—		9,023,000		11,605,000		231,158,000		242,763,000
Commercial construction		—		460,000		815,000		1,275,000		8,049,000		9,324,000
Residential real estate		161,000		—		413,000		574,000		66,626,000		67,200,000
Consumer:
Secured by real estate		67,000		—		647,000		714,000		30,268,000		30,982,000
Other		—		—		—		—		624,000		624,000
Other		—		—		—		—		116,000		116,000
Total	$	2,936,000	$	737,000	$	13,624,000	$	17,297,000	$	423,126,000	$	440,423,000

Schedule of Troubled Debt Restructurings

The following table presents loans, by class, that were modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2013:

	For the three months ended June 30,
	2013						2012
			Pre-		Post-				Pre-		Post-
	Number		Modification		Modification		Number		Modification		Modification
	of		Recorded		Recorded		of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Commercial:
Secured by real estate		—	$	—	$	—		2	$	226,000	$	226,000
Other		—		—		—		1		74,000		72,000
Total troubled debt restructurings		—	$	—	$	—		3	$	300,000	$	298,000

	For the six months ended June 30,
	2013						2012
			Pre-		Post-				Pre-		Post-
	Number		Modification		Modification		Number		Modification		Modification
	of		Recorded		Recorded		of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Commercial:
Secured by real estate		—	$	—	$	—		2	$	226,000	$	226,000
Other		1		17,000		17,000		1		74,000		72,000
Total troubled debt restructurings		1	$	17,000	$	17,000		3	$	300,000	$	298,000

Schedule of loans by credit quality indicators

As of June 30, 2013 and December 31, 2012, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:

	June 30, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	44,304,000	$	5,952,000	$	4,588,000	$	—	$	—	$	54,844,000
Other		25,729,000		1,259,000		1,117,000		27,000		—		28,132,000
Commercial real estate		223,674,000		14,333,000		12,091,000		2,121,000		—		252,219,000
Commercial construction		976,000		4,445,000		—		—		—		5,421,000
Total	$	294,683,000	$	25,989,000	$	17,796,000	$	2,148,000	$	—	$	340,616,000

	December 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	47,524,000	$	7,368,000	$	3,268,000	$	—	$	—	$	58,160,000
Other		29,484,000		1,508,000		185,000		77,000		—		31,254,000
Commercial real estate		215,158,000		16,003,000		9,007,000		2,595,000		—		242,763,000
Commercial construction		3,294,000		2,950,000		3,080,000		—		—		9,324,000
Total	$	295,460,000	$	27,829,000	$	15,540,000	$	2,672,000	$	—	$	341,501,000

Schedule of recorded investment in residential real estate and consumer loans based on payment activity

The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of June 30, 2013 and December 31, 2012.

	June 30, 2013
			Past Due and
	Current		Nonaccrual		Total
Residential real estate	$	72,409,000	$	595,000	$	73,004,000
Consumer:
Secured by real estate		27,083,000		744,000		27,827,000
Other		489,000		—		489,000
Total	$	99,981,000	$	1,339,000	$	101,320,000

	December 31, 2012
			Past Due and
	Current		Nonaccrual		Total
Residential real estate	$	66,626,000	$	574,000	$	67,200,000
Consumer:
Secured by real estate		30,268,000		714,000		30,982,000
Other		624,000		—		624,000
Total	$	97,518,000	$	1,288,000	$	98,806,000

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Consolidated Statements of Income (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Interest income:
Loans	$ 5,680,000	$ 6,085,000	$ 11,604,000	$ 12,344,000
Securities held to maturity
Taxable	75,000	128,000	151,000	280,000
Non-taxable	195,000	204,000	391,000	413,000
Securities available for sale
Taxable	578,000	798,000	1,144,000	1,597,000
Non-taxable	77,000	64,000	154,000	125,000
FHLB dividends	23,000	28,000	48,000	57,000
Other interest-earning assets	8,000	10,000	14,000	17,000
Total interest income	6,636,000	7,317,000	13,506,000	14,833,000
Interest expense:
Deposits	592,000	894,000	1,233,000	1,877,000
Borrowed money	366,000	463,000	729,000	945,000
Total interest expense	958,000	1,357,000	1,962,000	2,822,000
Net interest income before provision for loan losses	5,678,000	5,960,000	11,544,000	12,011,000
Provision for loan losses	850,000	2,900,000	2,450,000	4,665,000
Net interest income after provision for loan losses	4,828,000	3,060,000	9,094,000	7,346,000
Noninterest income:
Fees and service charges	492,000	531,000	948,000	1,046,000
Bank owned life insurance	77,000	81,000	153,000	161,000
Gain on calls and sales of securities		12,000	2,000	445,000
Gain on sales of mortgage loans	298,000	154,000	460,000	565,000
Gain on sales of other real estate owned		370,000	126,000	469,000
Gain on life insurance proceeds			537,000
Other	128,000	133,000	243,000	244,000
Total noninterest income	995,000	1,281,000	2,469,000	2,930,000
Noninterest expenses:
Salaries and employee benefits	2,711,000	2,257,000	5,407,000	4,643,000
Occupancy, net	503,000	471,000	1,020,000	958,000
Equipment	199,000	243,000	383,000	491,000
Data processing	332,000	316,000	660,000	650,000
Advertising	140,000	139,000	251,000	278,000
FDIC insurance premium	276,000	155,000	426,000	303,000
Charitable contributions	60,000	25,000	120,000	175,000
Other	910,000	1,218,000	1,796,000	2,179,000
Total noninterest expenses	5,131,000	4,824,000	10,063,000	9,677,000
Income (loss) before income tax expense (benefit)	692,000	(483,000)	1,500,000	599,000
Income tax expense (benefit)	231,000	(159,000)	217,000	147,000
Net income (loss)	461,000	(324,000)	1,283,000	452,000
Dividends on preferred stock and accretion	127,000	38,000	293,000	113,000
Net income (loss) available to common stockholders	$ 334,000	$ (362,000)	$ 990,000	$ 339,000
Basic earnings (loss) per common share	$ 0.06	$ (0.06)	$ 0.17	$ 0.06
Diluted earnings (loss) per common share	$ 0.06	$ (0.06)	$ 0.17	$ 0.06
Weighted average number of common shares outstanding	5,934,549	5,902,167	5,932,774	5,897,266
Weighted average number of diluted common shares outstanding	5,934,549	5,902,167	5,932,774	5,897,266

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Loans and Nonperforming Loans

6 Months Ended

Jun. 30, 2013

Loans And Nonperforming Loans

Loans and Nonperforming Loans

Note 3. Loans and Nonperforming Loans

At June 30, 2013 and December 31, 2012, respectively, the loan portfolio consisted of the following:

	June 30,			December 31,
	2013			2012
Commercial:
Secured by real estate	$	54,844,000		$	58,160,000
Other		28,132,000			31,254,000
Commercial real estate		252,219,000			242,763,000
Commercial construction		5,421,000			9,324,000
Residential real estate		73,004,000			67,200,000
Consumer:
Secured by real estate		27,827,000			30,982,000
Other		489,000			624,000
Other		70,000			116,000
Total gross loans		442,006,000			440,423,000
Less:  Deferred loan fees, net of costs		(134,000	)		(50,000	)
Allowance for loan losses		10,787,000			10,641,000
		10,653,000			10,591,000
Loans, net	$	431,353,000		$	429,832,000

At June 30, 2013 and December 31, 2012, loan participations sold by the Corporation to other lending institutions totaled approximately $15,506,000 and $20,559,000, respectively. These amounts are not included in the totals presented above.

Activity in the allowance for loan losses is summarized as follows:

	For the three months ended June 30, 2013
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	5,285,000	$	(1,082,000	)	$	261,000	$	43,000	$	3,985,000
Commercial real estate		5,549,000		1,452,000			1,403,000		—		5,598,000
Construction		20,000		261,000			—		23,000		304,000
Residential real estate		334,000		100,000			—		—		434,000
Consumer		290,000		99,000			—		21,000		410,000
Other loans		1,000		—			—		—		1,000
Unallocated		33,000		20,000			—		2,000		55,000
Total	$	11,512,000	$	850,000		$	1,664,000	$	89,000	$	10,787,000

	For the six months ended June 30, 2013
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	4,832,000	$	(277,000	)	$	648,000	$	78,000	$	3,985,000
Commercial real estate		4,936,000		2,421,000			1,759,000		—		5,598,000
Construction		169,000		133,000			24,000		26,000		304,000
Residential real estate		308,000		126,000			—		—		434,000
Consumer		352,000		41,000			3,000		20,000		410,000
Other loans		3,000		(4,000	)		—		2,000		1,000
Unallocated		41,000		10,000			—		4,000		55,000
Total	$	10,641,000	$	2,450,000		$	2,434,000	$	130,000	$	10,787,000

	For the three months ended June 30, 2012
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	6,068,000	$	1,994,000		$	2,068,000	$	29,000	$	6,023,000
Commercial real estate		5,448,000		918,000			1,839,000		—		4,527,000
Construction		777,000		(118,000	)		145,000		—		514,000
Residential real estate		338,000		54,000			—		—		392,000
Consumer		439,000		39,000			41,000		—		437,000
Other loans		2,000		1,000			—		1,000		4,000
Unallocated		25,000		12,000			—		—		37,000
Total	$	13,097,000	$	2,900,000		$	4,093,000	$	30,000	$	11,934,000

	For the six months ended June 30, 2012
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period
Commercial	$	5,368,000	$	2,960,000		$	2,356,000	$	51,000	$	6,023,000
Commercial real estate		4,943,000		1,423,000			1,839,000		—		4,527,000
Construction		480,000		179,000			145,000		—		514,000
Residential real estate		303,000		89,000			—		—		392,000
Consumer		498,000		(14,000	)		47,000		—		437,000
Other loans		2,000		1,000			—		1,000		4,000
Unallocated		10,000		27,000			—		—		37,000
Total	$	11,604,000	$	4,665,000		$	4,387,000	$	52,000	$	11,934,000

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and December 31, 2012.

	June 30, 2013
			Commercial		Commercial		Residential				Other
	Commercial		Real Estate		Construction		Real Estate		Consumer		Loans		Unallocated		Total
Allowance for loan
losses:
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment	$	181,000	$	29,000	$	99,000	$	67,000	$	149,000	$	—	$	—	$	525,000
Collectively
evaluated for
impairment		3,804,000		5,569,000		205,000		367,000		261,000		1,000		55,000		10,262,000
Total ending
allowance
balance	$	3,985,000	$	5,598,000	$	304,000	$	434,000	$	410,000	$	1,000	$	55,000	$	10,787,000
Loans:
Loans
individually
evaluated for
impairment	$	9,219,000	$	12,351,000	$	1,875,000	$	595,000	$	911,000	$	—	$	—	$	24,951,000
Loans
collectively
evaluated for
impairment		73,757,000		239,868,000		3,546,000		72,409,000		27,405,000		70,000		—		417,055,000
Total ending
loan balance	$	82,976,000	$	252,219,000	$	5,421,000	$	73,004,000	$	28,316,000	$	70,000	$	—	$	442,006,000

	December 31, 2012
			Commercial		Commercial		Residential				Other
	Commercial		Real Estate		Construction		Real Estate		Consumer		Loans		Unallocated		Total
Allowance for loan
losses:
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment	$	251,000	$	15,000	$	—	$	—	$	—	$	—	$	—	$	266,000
Collectively
evaluated for
impairment		4,581,000		4,921,000		169,000		308,000		352,000		3,000		41,000		10,375,000
Total ending
allowance
balance	$	4,832,000	$	4,936,000	$	169,000	$	308,000	$	352,000	$	3,000	$	41,000	$	10,641,000
Loans:
Loans
individually
evaluated for
impairment	$	8,641,000	$	12,803,000	$	6,029,000	$	413,000	$	800,000	$	—	$	—	$	28,686,000
Loans
collectively
evaluated for
impairment		80,773,000		229,960,000		3,295,000		66,787,000		30,806,000		116,000		—		411,737,000
Total ending
loan balance	$	89,414,000	$	242,763,000	$	9,324,000	$	67,200,000	$	31,606,000	$	116,000	$	—	$	440,423,000

The following table presents the recorded investment in nonaccrual loans in the periods indicated:

	June 30,		December 31,
	2013		2012
Commercial:
Secured by real estate	$	3,446,000	$	3,374,000
Other		109,000		261,000
Commercial real estate		9,655,000		10,083,000
Commercial construction		—		3,080,000
Residential real estate		595,000		413,000
Consumer:
Secured by real estate		911,000		800,000
Total nonperfoming loans	$	14,716,000	$	18,011,000

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

	At June 30, 2013
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	11,403,000	$	7,608,000			$	6,504,000	$	134,000
Other		31,000		27,000				103,000		1,000
Commercial real estate		16,513,000		11,418,000				9,885,000		60,000
Commercial construction		—		—				3,998,000		19,000
Residential real estate		451,000		413,000				413,000		—
Consumer:
Secured by real estate		578,000		569,000				739,000		—
With an allowance recorded:
Commercial:
Secured by real estate		625,000		562,000	$	146,000		916,000		15,000
Other		1,078,000		1,022,000		35,000		1,184,000		25,000
Commercial real estate		1,426,000		933,000		29,000		2,541,000		25,000
Commercial construction		2,289,000		1,875,000		99,000		625,000		36,000
Residential real estate		183,000		182,000		67,000		61,000		—
Consumer:
Secured by real estate		342,000		342,000		149,000		114,000		—
	$	34,919,000	$	24,951,000	$	525,000	$	27,083,000	$	315,000

	At December 31, 2012
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment		Recognized
With no related allowance recorded:
Commercial:
Secured by real estate	$	9,689,000	$	6,557,000			$	4,221,000	$	92,000
Other		424,000		146,000				109,000		5,000
Commercial real estate		17,211,000		12,149,000				10,054,000		158,000
Construction:
Commercial		7,300,000		6,029,000				6,041,000		53,000
Residential		—		—				—		—
Residential real estate		451,000		413,000				393,000		—
Consumer:
Secured by real estate		834,000		800,000				922,000		—
With an allowance recorded:
Commercial:
Secured by real estate		965,000		781,000	$	176,000		2,589,000		25,000
Other		1,163,000		1,157,000		75,000		2,195,000		43,000
Commercial real estate		923,000		654,000		15,000		2,940,000		18,000
Construction:
Commercial		—		—		—		1,224,000		—
Residential		—		—		—		596,000		—
Residential real estate		—		—		—		239,000		—
	$	38,960,000	$	28,686,000	$	266,000	$	31,523,000	$	394,000

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2013 and December 31, 2012. Nonaccrual loans are included in the disclosure by payment status.

	June 30, 2013
					Greater than				Loans
	30-59 Days		60-89 Days		90 Days		Total		Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial:
Secured by real estate	$	—	$	—	$	352,000	$	352,000	$	54,492,000	$	54,844,000
Other		179,000		—		1,510,000		1,689,000		26,443,000		28,132,000
Commercial real estate		—		1,498,000		6,941,000		8,439,000		243,780,000		252,219,000
Commercial construction		—		—		—		—		5,421,000		5,421,000
Residential real estate		—		—		595,000		595,000		72,409,000		73,004,000
Consumer:
Secured by real estate		70,000		—		674,000		744,000		27,083,000		27,827,000
Other		—		—		—		—		489,000		489,000
Other		—		—		—		—		70,000		70,000
Total	$	249,000	$	1,498,000	$	10,072,000	$	11,819,000	$	430,187,000	$	442,006,000

	December 31, 2012
					Greater than				Loans
	30-59 Days		60-89 Days		90 Days		Total		Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial:
Secured by real estate	$	101,000	$	179,000	$	2,674,000	$	2,954,000	$	55,206,000	$	58,160,000
Other		25,000		98,000		52,000		175,000		31,079,000		31,254,000
Commercial real estate		2,582,000		—		9,023,000		11,605,000		231,158,000		242,763,000
Commercial construction		—		460,000		815,000		1,275,000		8,049,000		9,324,000
Residential real estate		161,000		—		413,000		574,000		66,626,000		67,200,000
Consumer:
Secured by real estate		67,000		—		647,000		714,000		30,268,000		30,982,000
Other		—		—		—		—		624,000		624,000
Other		—		—		—		—		116,000		116,000
Total	$	2,936,000	$	737,000	$	13,624,000	$	17,297,000	$	423,126,000	$	440,423,000

Troubled Debt Restructurings

At June 30, 2013 and December 31, 2012, the Corporation had $11.4 million and $11.7 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $10.2 million and $10.4 million were performing in accordance with their new terms at June 30, 2013 and December 31, 2012, respectively. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of $301,000 and $246,000 have been allocated for the troubled debt restructurings at June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, the Corporation has committed $120,000 and $241,000 respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

The following table presents loans, by class, that were modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2013:

	For the three months ended June 30,
	2013						2012
			Pre-		Post-				Pre-		Post-
	Number		Modification		Modification		Number		Modification		Modification
	of		Recorded		Recorded		of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Commercial:
Secured by real estate		—	$	—	$	—		2	$	226,000	$	226,000
Other		—		—		—		1		74,000		72,000
Total troubled debt restructurings		—	$	—	$	—		3	$	300,000	$	298,000

	For the six months ended June 30,
	2013						2012
			Pre-		Post-				Pre-		Post-
	Number		Modification		Modification		Number		Modification		Modification
	of		Recorded		Recorded		of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Commercial:
Secured by real estate		—	$	—	$	—		2	$	226,000	$	226,000
Other		1		17,000		17,000		1		74,000		72,000
Total troubled debt restructurings		1	$	17,000	$	17,000		3	$	300,000	$	298,000

There were no loans modified as a trouble debt restructuring during the three months ended June 30, 2013. During the six months ended June 30, 2013, the term of one loan was modified as a troubled debt restructuring. The modification of the terms of this loan represents a term out of a remaining balance on a matured loan.

For the six months ended June 30, 2013, the troubled debt restructuring described above resulted in no change to the allowance for loan losses. Charge-offs for the six months ended June 30, 2012 related to troubled debt restructurings totaled $250,000.

A loan is considered to be in payment default once it is contractually 90 days past due under the modified terms. In the six months ended June 30, 2013, there have been no troubled debt restructured loans that have defaulted since their modification.

Credit Quality Indicators

The Corporation categorizes certain loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate and commercial construction loans. This analysis is performed at the time the loan is originated and annually thereafter. The Corporation uses the following definitions for risk ratings.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. While potentially weak, the borrower is currently marginally acceptable and loss of principal or interest is not presently envisioned.

Substandard – Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – A Doubtful loan has all of the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable or improbable. The likelihood of loss is extremely high, but because of certain important and reasonably specific factors, an estimated loss is deferred until a more exact status can be determined.

Loss – A loan classified Loss is considered uncollectible and of such little value that its continuance as an asset is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be effected in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2013 and December 31, 2012, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:

	June 30, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	44,304,000	$	5,952,000	$	4,588,000	$	—	$	—	$	54,844,000
Other		25,729,000		1,259,000		1,117,000		27,000		—		28,132,000
Commercial real estate		223,674,000		14,333,000		12,091,000		2,121,000		—		252,219,000
Commercial construction		976,000		4,445,000		—		—		—		5,421,000
Total	$	294,683,000	$	25,989,000	$	17,796,000	$	2,148,000	$	—	$	340,616,000

	December 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
Commercial:
Secured by real estate	$	47,524,000	$	7,368,000	$	3,268,000	$	—	$	—	$	58,160,000
Other		29,484,000		1,508,000		185,000		77,000		—		31,254,000
Commercial real estate		215,158,000		16,003,000		9,007,000		2,595,000		—		242,763,000
Commercial construction		3,294,000		2,950,000		3,080,000		—		—		9,324,000
Total	$	295,460,000	$	27,829,000	$	15,540,000	$	2,672,000	$	—	$	341,501,000

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loans losses. For residential real estate and consumer loan segments, the Corporation also evaluates credit quality based on payment activity. The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of June 30, 2013 and December 31, 2012.

	June 30, 2013
			Past Due and
	Current		Nonaccrual		Total
Residential real estate	$	72,409,000	$	595,000	$	73,004,000
Consumer:
Secured by real estate		27,083,000		744,000		27,827,000
Other		489,000		—		489,000
Total	$	99,981,000	$	1,339,000	$	101,320,000

	December 31, 2012
			Past Due and
	Current		Nonaccrual		Total
Residential real estate	$	66,626,000	$	574,000	$	67,200,000
Consumer:
Secured by real estate		30,268,000		714,000		30,982,000
Other		624,000		—		624,000
Total	$	97,518,000	$	1,288,000	$	98,806,000

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Securities - Available-for-sale and Held to Maturity (Details 2) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Amortized Cost
Within one year
After one year, but within five years	7,202,000
After five years, but within ten years	29,600,000
After ten years	20,643,000
Total	181,652,000
Fair value
Within one year
After one year, but within five years	7,109,000
After five years, but within ten years	28,769,000
After ten years	19,906,000
Total	178,283,000
Amortized Cost
Within one year	1,888,000
After one year, but within five years	15,687,000
After five years, but within ten years	4,727,000
After ten years	178,000
Total	28,119,000	29,718,000
Fair Value
Within one year	1,907,000
After one year, but within five years	16,427,000
After five years, but within ten years	4,994,000
After ten years	184,000
Total	29,575,000	31,768,000
Mortgage-backed securities - residential
Amortized Cost
Total	114,333,000
Fair value
Total	112,705,000
Amortized Cost
Total	5,639,000
Fair Value
Total	6,063,000	7,268,000
Asset-backed Securities
Amortized Cost
Total	9,874,000
Fair value
Total	$ 9,794,000

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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Of Financial Instruments Tables

Schedule of assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements Using:
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Assets:
Available for sale securities
U.S. Treasuries	$	—	$	—	$	—	$	—
U.S. government -
sponsored agencies		39,163,000		—		39,163,000		—
Obligations of state and
political subdivisions		13,715,000		—		13,715,000		—
Mortgage-backed
securities - residential		112,705,000		—		112,705,000		—
Asset-backed securities		9,794,000				9,794,000
Corporate debt		2,906,000				2,906,000
Other equity investments		3,393,000		3,333,000		60,000		—
Total available for
sale securities	$	181,676,000	$	3,333,000	$	178,343,000	$	—
Liabilities:
Interest rate swap	$	648,000	$	—	$	648,000	$	—

	At December 31, 2012
Assets:
Available for sale securities
U.S. Treasuries	$	4,006,000	$	4,006,000	$	—	$	—
U.S. government -
sponsored agencies		37,255,000		—		37,255,000		—
Obligations of state and
political subdivisions		14,170,000		—		14,170,000		—
Mortgage-backed
securities - residential		105,428,000		—		105,428,000		—
Asset-backed securities		9,884,000				9,884,000
Corporate debt		495,000				495,000
Other equity investments		3,462,000		3,402,000		60,000		—
Total available for
sale securities	$	174,700,000	$	7,408,000	$	167,292,000	$	—
Liabilities:
Interest rate swap	$	812,000	$	—	$	812,000	$	—

Schedule of assets and liabilities measured at fair value on a non-recurring basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,564,000	$	—	$	—	$	6,564,000
Other		—		—		—		—
Commercial real estate		9,980,000		—		—		9,980,000
Commercial construction		1,776,000		—		—		1,776,000
Residential real estate		529,000		—		—		529,000
Consumer
Secured by real estate		762,000		—		—		762,000
Other Real Estate Owned		1,072,000						1,072,000
	$	20,683,000	$	—	$	—	$	20,683,000

	At December 31, 2012
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,490,000	$	—	$	—	$	6,490,000
Other		—		—		—		—
Commercial real estate		10,445,000		—		—		10,445,000
Commercial construction		4,373,000		—		—		4,373,000
Residential real estate		413,000		—		—		413,000
Consumer
Secured by real estate		800,000		—		—		800,000
Other Real Estate Owned		1,058,000						1,058,000
	$	23,579,000	$	—	$	—	$	23,579,000

Schedule of fair value assumptions for Level 3 asset measurements

For the Level 3 assets measured at fair value on a non-recurring basis at June 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair
Assets	Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans	$	19,611,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.		5%
				Estimated selling costs.		7%
Other real estate owned	$	1,072,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.		5% - 10%
				Estimated selling costs.		7%

Schedule of fair value estimates for the financial instruments

Fair value estimates for the Corporation’s financial instruments are summarized below:

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Financial assets:
Cash and cash equivalents	$	14,322,000	$	14,322,000	$	—	$	—
Securities available for sale		181,676,000		3,333,000		178,343,000		—
Securities held to maturity		28,119,000		—		29,575,000		—
Mortgage loans held for sale		2,054,000		—		2,053,000		—
Loans, net		431,353,000		—		—		436,861,000
Accrued interest receivable		2,301,000		1,000		895,000		1,405,000
Financial liabilities:
Deposits		592,699,000		447,479,000		146,077,000		—
FHLB-NY advances		25,000,000		—		25,384,000		—
Securities sold under
agreements to repurchase		7,344,000		—		7,704,000		—
Subordinated debenture		7,217,000		—		—		7,210,000
Accrued interest payable		445,000		1,000		426,000		18,000
Interest rate swap		648,000		—		648,000		—

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At December 31, 2012
Financial assets:
Cash and cash equivalents	$	21,016,000	$	21,016,000	$	—	$	—
Securities available for sale		174,700,000		7,408,000		167,292,000		—
Securities held to maturity		29,718,000		—		31,768,000		—
Mortgage loans held for sale		784,000		—		784,000		—
Loans, net		429,832,000		—		—		449,041,000
Accrued interest receivable		2,372,000		2,000		908,000		1,462,000
Financial liabilities:
Deposits		590,254,000		434,569,000		157,219,000		—
FHLB-NY advances		25,000,000		—		25,825,000		—
Securities sold under
agreements to repurchase		7,343,000		—		7,883,000		—
Subordinated debenture		7,217,000		—		—		7,112,000
Accrued interest payable		560,000		1,000		540,000		19,000
Interest rate swap		812,000		—		812,000		—

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Fair Value of Financial Instruments (Details 1) (Fair Value, Measurements, Nonrecurring, USD $)	Jun. 30, 2013	Dec. 31, 2012
Carrying Value
Assets, Fair Value
Commercial loan secured by real estate	$ 6,564,000	$ 6,490,000
Commercial loan - Other
Commercial real estate	9,980,000	10,445,000
Commerical construction	1,776,000	4,373,000
Residential real estate	529,000	413,000
Consumer loan secured by real estate	762,000	800,000
Other real estate owned	1,072,000	1,058,000
Impaired loans, Fair Value	20,683,000	23,579,000
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets, Fair Value
Commercial loan secured by real estate
Commercial loan - Other
Commercial real estate
Commerical construction
Residential real estate
Consumer loan secured by real estate
Other real estate owned
Impaired loans, Fair Value
Significant Other Observable Inputs (Level 2)
Assets, Fair Value
Commercial loan secured by real estate
Commercial loan - Other
Commercial real estate
Commerical construction
Residential real estate
Consumer loan secured by real estate
Other real estate owned
Impaired loans, Fair Value
Significant Unobservable Inputs (Level 3)
Assets, Fair Value
Commercial loan secured by real estate	6,564,000	6,490,000
Commercial loan - Other
Commercial real estate	9,980,000	10,445,000
Commerical construction	1,776,000	4,373,000
Residential real estate	529,000	413,000
Consumer loan secured by real estate	762,000	800,000
Other real estate owned	1,072,000	1,058,000
Impaired loans, Fair Value	$ 20,683,000	$ 23,579,000

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Loans and Nonperforming Loans (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Gross loans	$ 442,006,000	$ 440,423,000
Deferred loan fees, net of costs	(134,000)	(50,000)
Allowance for loan losses	10,787,000	10,641,000
Allowance net of deferred loan fees	10,653,000	10,591,000
Loans, net	431,353,000	429,832,000
Commercial loan secured by real estate
Gross loans	54,844,000	58,160,000
Commercial loan - Other
Gross loans	28,132,000	31,254,000
Commercial real estate
Gross loans	252,219,000	242,763,000
Allowance for loan losses	5,598,000	4,936,000
Commercial Construction
Gross loans	5,421,000	9,324,000
Residential real estate
Gross loans	73,004,000	67,200,000
Allowance for loan losses	434,000	308,000
Consumer loan secured by real estate
Gross loans	27,827,000	30,982,000
Consumer loan - Other
Gross loans	489,000	624,000
Other Loans
Gross loans	70,000	116,000
Allowance for loan losses	$ 1,000	$ 3,000

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Loans and Nonperforming Loans (Details Narrative) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Loans And Nonperforming Loans Details Narrative
Loans participated by the Corporation to other organizations, recorded off-balance sheet	$ 15,506,000	$ 15,506,000
Total value of modified loans in troubled debt restructurings	11,400	11,400
Trouble debt restructuring classified as performing	10,200,000	10,200,000
Specific reserve related to TDR	301,000	301,000
Committed funds for construction loan, classified as troubled debt restructuring	$ 120,000	$ 120,000

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Loans and Nonperforming Loans (Details 7) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Total Loans	$ 442,006,000	$ 440,423,000
Pass
Total Loans	294,683,000	295,460,000
Special Mention
Total Loans	25,989,000	27,829,000
Substandard
Total Loans	17,796,000	15,540,000
Doubtful
Total Loans	2,148,000	2,672,000
Loss
Total Loans
Commercial loan secured by real estate
Total Loans	54,844,000	58,160,000
Commercial loan secured by real estate | Pass
Total Loans	44,304,000	47,524,000
Commercial loan secured by real estate | Special Mention
Total Loans	5,952,000	7,368,000
Commercial loan secured by real estate | Substandard
Total Loans	4,588,000	3,268,000
Commercial loan secured by real estate | Doubtful
Total Loans
Commercial loan secured by real estate | Loss
Total Loans
Commercial loan - Other
Total Loans	28,132,000	31,254,000
Commercial loan - Other | Pass
Total Loans	25,729,000	29,484,000
Commercial loan - Other | Special Mention
Total Loans	1,259,000	1,508,000
Commercial loan - Other | Substandard
Total Loans	1,117,000	185,000
Commercial loan - Other | Doubtful
Total Loans	27,000	77,000
Commercial loan - Other | Loss
Total Loans
Commercial real estate
Total Loans	252,219,000	242,763,000
Commercial real estate | Pass
Total Loans	223,674,000	215,158,000
Commercial real estate | Special Mention
Total Loans	14,333,000	16,003,000
Commercial real estate | Substandard
Total Loans	12,091,000	9,007,000
Commercial real estate | Doubtful
Total Loans	2,121,000	2,595,000
Commercial real estate | Loss
Total Loans
Commercial Construction
Total Loans	5,421,000	9,324,000
Commercial Construction | Pass
Total Loans	976,000	3,294,000
Commercial Construction | Special Mention
Total Loans	4,445,000	2,950,000
Commercial Construction | Substandard
Total Loans		3,080,000
Commercial Construction | Doubtful
Total Loans
Commercial Construction | Loss
Total Loans
Total
Total Loans	$ 342,656,000	$ 341,501,000

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Fair Value of Financial Instruments (Details 3) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Financial assets:
Securities available for sale	$ 181,676,000	$ 174,700,000
Securities held to maturity	29,575,000	31,768,000
Financial liabilities:
Subordinated debenture	7,217,000	7,217,000
Carrying Value
Financial assets:
Cash and cash equivalents	14,322,000	21,016,000
Securities available for sale	181,676,000	174,700,000
Securities held to maturity	28,119,000	29,718,000
Mortgage loans held for sale	2,054,000	784,000
Loans, net	431,353,000	429,832,000
Accrued interest receivable	2,301,000	2,372,000
Financial liabilities:
Deposits	592,699,000	590,254,000
FHLB-NY Advances	25,000,000	25,000,000
Securities sold under agreements to repurchase	7,344,000	7,343,000
Subordinated debenture	7,217,000	7,217,000
Accrued interest payable	445,000	560,000
Interest rate swap	648,000	812,000
Quoted Prices in Active Markets for Identical Assets (Level 1)
Financial assets:
Cash and cash equivalents	14,322,000	21,016,000
Securities available for sale	3,333,000	7,408,000
Securities held to maturity
Mortgage loans held for sale
Loans, net
Accrued interest receivable	1,000	2,000
Financial liabilities:
Deposits	447,479,000	434,569,000
FHLB-NY Advances
Securities sold under agreements to repurchase
Subordinated debenture
Accrued interest payable	1,000	1,000
Interest rate swap
Significant Other Observable Inputs (Level 2)
Financial assets:
Cash and cash equivalents
Securities available for sale	178,343,000	167,292,000
Securities held to maturity	29,575,000	31,768,000
Mortgage loans held for sale	2,053,000	784,000
Loans, net
Accrued interest receivable	895,000	908,000
Financial liabilities:
Deposits	146,077,000	157,219,000
FHLB-NY Advances	25,384,000	25,825,000
Securities sold under agreements to repurchase	7,704,000	7,883,000
Subordinated debenture
Accrued interest payable	426,000	540,000
Interest rate swap	648,000	812,000
Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Mortgage loans held for sale
Loans, net	436,861,000	449,041,000
Accrued interest receivable	1,405,000	1,462,000
Financial liabilities:
Deposits
FHLB-NY Advances
Securities sold under agreements to repurchase
Subordinated debenture	7,210,000	7,112,000
Accrued interest payable	18,000	19,000
Interest rate swap

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Loans and Nonperforming Loans (Details 4) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Related Allowance	$ 525,000	$ 525,000
Unpaid Principal Balance	34,919,000	34,919,000
Recorded Investment	24,951,000	24,951,000
Average Recorded Investment	27,083,000	31,523,000
Interest Income Recognized	315,000	394,000
Commercial loan secured by real estate
Unpaid Principal Balance With no related allowance recorded	11,403,000	9,689,000
Recorded Investment With no related allowance recorded	7,608,000	6,557,000
Average Recorded Investment	6,504,000	4,221,000
Interest income recognized for the year	134,000	92,000
Unpaid Principal Balance With an allowance recorded	625,000	965,000
Recorded Investment With an allowance recorded	562,000	781,000
Related Allowance	146,000	176,000
Average Recorded Investment	916,000	2,589,000
Interest income recognized for the year	15,000	25,000
Commercial loan - Other
Unpaid Principal Balance With no related allowance recorded	31,000	424,000
Recorded Investment With no related allowance recorded	27,000	146,000
Average Recorded Investment	103,000	109,000
Interest income recognized for the year	1,000	5,000
Unpaid Principal Balance With an allowance recorded	1,078,000	1,163,000
Recorded Investment With an allowance recorded	1,022,000	1,157,000
Related Allowance	35,000	75,000
Average Recorded Investment	1,184,000	2,195,000
Interest income recognized for the year	25,000	43,000
Commercial real estate
Unpaid Principal Balance With no related allowance recorded	16,513,000	17,211,000
Recorded Investment With no related allowance recorded	11,418,000	12,149,000
Average Recorded Investment	9,885,000	10,054,000
Interest income recognized for the year	60,000	158,000
Unpaid Principal Balance With an allowance recorded	1,426,000	923,000
Recorded Investment With an allowance recorded	933,000	654,000
Related Allowance	29,000	15,000
Average Recorded Investment	2,541,000	2,940,000
Interest income recognized for the year	25,000	18,000
Commercial Construction
Unpaid Principal Balance With no related allowance recorded		7,300,000
Recorded Investment With no related allowance recorded		6,029,000
Average Recorded Investment	3,998,000	6,041,000
Interest income recognized for the year	19,000	53,000
Unpaid Principal Balance With an allowance recorded	2,289,000
Recorded Investment With an allowance recorded	1,875,000
Related Allowance	99,000
Average Recorded Investment	625,000	1,224,000
Interest income recognized for the year	36,000
Residential real estate
Unpaid Principal Balance With no related allowance recorded	451,000	451,000
Recorded Investment With no related allowance recorded	413,000	413,000
Average Recorded Investment	413,000	393,000
Interest income recognized for the year
Unpaid Principal Balance With an allowance recorded	183,000
Recorded Investment With an allowance recorded	182,000
Related Allowance	67,000
Average Recorded Investment	61,000	239,000
Interest income recognized for the year
Consumer loan secured by real estate
Unpaid Principal Balance With no related allowance recorded	578,000	834,000
Recorded Investment With no related allowance recorded	569,000	800,000
Average Recorded Investment	739,000	922,000
Interest income recognized for the year
Unpaid Principal Balance With an allowance recorded	342,000
Recorded Investment With an allowance recorded	342,000
Related Allowance	149,000
Average Recorded Investment	114,000
Interest income recognized for the year
Residential Construction
Unpaid Principal Balance With no related allowance recorded
Recorded Investment With no related allowance recorded
Average Recorded Investment
Interest income recognized for the year
Average Recorded Investment		596,000
Interest income recognized for the year

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Preferred Stock (Details Narrative) (USD $)					0 Months Ended	6 Months Ended	0 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2013 Minimum	Jun. 30, 2013 Maximum	Sep. 01, 2011 Senior Non-Cumulative Perpetual Preferred Stock, Series B	Jun. 30, 2013 Senior Non-Cumulative Perpetual Preferred Stock, Series B N	Sep. 01, 2011 Series A Preferred Shares
Amount of fund established to encourage lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion		$ 30,000,000,000
Stock issued during period (in shares)					15,000
Stock issued during period, value					15,000,000
Stock repurchased during period (in shares)							10,000
Liquidation preference (in dollars per share)					$ 1,000		$ 1,000
Payment for repurchase of preferred stock including accrued but unpaid dividends							10,022,222
Preferred stock dividend rate, Terms						The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement) from 1% to 5% per annum and, thereafter, for the eleventh through the first half of the nineteenth dividend periods, from 1% to 7%. In general, the dividend rate decreases as the level of the Bank’s QSBL increases. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%
Dividend payment restrictions, Description						Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level
Number of dividend defaults required for having voting rights on preferred stock						6
Aggregate liquidation preference						$ 25,000,000
Number of additional directors which may be elected in BOD						2
Dividend rate, first ten quarters			1.00%	5.00%
Dividend rate, eleventh through first hald of ninteenth period			1.00%	7.00%
Dividend rate, fixed after four and one half years	9.00%

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Securities - Available-for-sale and Held to Maturity (Details 3) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	$ 124,109,000	$ 50,735,000
Less than 12 Months, Unrealized Losses	(4,296,000)	(190,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	124,109,000	50,735,000
Unrealized Losses	(4,296,000)	(190,000)
U.S. Treasury
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value
Less than 12 Months, Unrealized Losses
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value
Unrealized Losses
U.S. government-sponsored agencies
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	33,890,000	20,716,000
Less than 12 Months, Unrealized Losses	(1,701,000)	(67,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	33,890,000	20,716,000
Unrealized Losses	(1,701,000)	(67,000)
Obligations of state and political and subdivisions
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	6,344,000	3,257,000
Less than 12 Months, Unrealized Losses	(181,000)	(22,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	6,344,000	3,257,000
Unrealized Losses	(181,000)	(22,000)
Mortgage-backed securities - residential
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	68,340,000	23,715,000
Less than 12 Months, Unrealized Losses	(2,151,000)	(89,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	68,340,000	23,715,000
Unrealized Losses	(2,151,000)	(89,000)
Asset-backed Securities
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	9,795,000	3,047,000
Less than 12 Months, Unrealized Losses	(80,000)	(12,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	9,795,000	3,047,000
Unrealized Losses	(80,000)	(12,000)
Corporate Debt Securities
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	2,407,000
Less than 12 Months, Unrealized Losses	(92,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	2,407,000
Unrealized Losses	(92,000)
Other equity investments
Available for sale securities, Continuous unrealized loss position
Less than 12 Months, Fair Value	3,333,000
Less than 12 Months, Unrealized Losses	(91,000)
12 Months or Longer, Fair Value
12 Months or Longer, Unrealized Losses
Fair Value	3,333,000
Unrealized Losses	$ (91,000)

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Consolidated Statement of Changes in Stockholders' Equity (Unaudited) (USD $)	Preferred Stock	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income (Loss), Net	Total
Balance beginning at Dec. 31, 2011	$ 14,955,000	$ 40,420,000	$ 1,043,000	$ 1,374,000	$ 57,792,000
Balance beginning, shares at Dec. 31, 2011		5,882,504
Cash dividends paid on common stock			(531,000)		(531,000)
Payment of discount on dividend reinvestment plan		(5,000)			(5,000)
Cash dividends accrued on preferred stock			(113,000)		(113,000)
Common stock issued under stock plans		114,000			114,000
Common stock issued under stock plans, shares		22,854
Amortization of issuance costs	5,000		(5,000)
Net Income			452,000		452,000
Other comprehensive income				182,000	182,000
Balance ending at Jun. 30, 2012	14,960,000	40,529,000	846,000	1,556,000	57,891
Balance ending, shares at Jun. 30, 2012		5,905,358
Balance beginning at Dec. 31, 2012	14,964,000	40,606,000	316,000	460,000	56,346,000
Balance beginning, shares at Dec. 31, 2012		5,924,865			5,924,865
Cash dividends paid on common stock			(119,000)		(119,000)
Payment of discount on dividend reinvestment plan		(1,000)			(1,000)
Cash dividends accrued on preferred stock			(293,000)		(293,000)
Common stock issued under stock plans		47,000			47,000
Common stock issued under stock plans, shares		11,189
Amortization of issuance costs	5,000		(5,000)
Net Income			1,283,000		1,283,000
Other comprehensive income				(2,971,000)	(2,971,000)
Balance ending at Jun. 30, 2013	$ 14,969,000	$ 40,652,000	$ 1,182,000	$ (2,511,000)	$ 54,292,000
Balance ending, shares at Jun. 30, 2013		5,936,054			5,936,054

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Summary Of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1. Summary of Significant Accounting Policies

Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 28, 2013 (the “2012 Annual Report”).

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results which may be expected for the entire year.

Principles of consolidation

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current presentation.

The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.

Material estimates

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize probable incurred losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area.

Adoption of New Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income – Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statement where net income is presented or in the accompanying notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The standard is effective prospectively for reporting periods, including interim periods, beginning after December 15, 2012. The adoption of the standard did not have a material effect on the Corporation’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): “Disclosures about Offsetting Assets and Liabilities,” This ASU requires an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject an enforceable master netting arrangement or similar agreement regardless of whether they are presented net in the financial statements.  The standard is effective for annual and interim periods beginning on January 1, 2013, and it is required to be applied retrospectively. The adoption of the standard did not have a material impact on the Corporation’s consolidated financial statements.

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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2013

Fair Value Of Financial Instruments

Fair Value of Financial Instruments

Note 4. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). As the Corporation is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Corporation compares the prices received from the pricing service to a secondary pricing source. The Corporation’s internal price verification procedures have not historically resulted in adjustment in the prices obtained from the pricing service.

The interest rate swaps are reported at fair values obtained from brokers who utilize internal models with observable market data inputs to estimate the values of these instruments (Level 2 inputs).

The Corporation measures impairment of collateralized loans and OREO based on the estimated fair value of the collateral less estimated costs to sell the collateral, incorporating assumptions that experienced parties might use in estimating the value of such collateral (Level 3 inputs). At the time a loan or OREO is considered impaired, it is valued at the lower of cost or fair value. Generally, impaired loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for loan losses. OREO is initially recorded at fair value less estimated selling costs. Subsequent adjustments to the OREO carrying value are recorded in a specific valuation allowance for OREO. For collateral dependent loans and OREO, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, the net book value recorded for the collateral on the borrower’s financial statements, or aging reports. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the borrower and borrower’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals are generally obtained to support the fair value of collateral. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by licensed appraisers whose qualifications and licenses have been reviewed and verified by the Corporation. The Corporation utilizes a third party to order appraisals and, once received, review the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. In addition, appraisers may make adjustments to the sales price of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 12% discount to real estate appraised values to cover disposition / selling costs and to reflect the potential price reductions in the market necessary to complete an expedient transaction and to factor in the impact of the perception that a transaction being completed by a bank may result in further price reduction pressure.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements Using:
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Assets:
Available for sale securities
U.S. Treasuries	$	—	$	—	$	—	$	—
U.S. government -
sponsored agencies		39,163,000		—		39,163,000		—
Obligations of state and
political subdivisions		13,715,000		—		13,715,000		—
Mortgage-backed
securities - residential		112,705,000		—		112,705,000		—
Asset-backed securities		9,794,000				9,794,000
Corporate debt		2,906,000				2,906,000
Other equity investments		3,393,000		3,333,000		60,000		—
Total available for
sale securities	$	181,676,000	$	3,333,000	$	178,343,000	$	—
Liabilities:
Interest rate swap	$	648,000	$	—	$	648,000	$	—

	At December 31, 2012
Assets:
Available for sale securities
U.S. Treasuries	$	4,006,000	$	4,006,000	$	—	$	—
U.S. government -
sponsored agencies		37,255,000		—		37,255,000		—
Obligations of state and
political subdivisions		14,170,000		—		14,170,000		—
Mortgage-backed
securities - residential		105,428,000		—		105,428,000		—
Asset-backed securities		9,884,000				9,884,000
Corporate debt		495,000				495,000
Other equity investments		3,462,000		3,402,000		60,000		—
Total available for
sale securities	$	174,700,000	$	7,408,000	$	167,292,000	$	—
Liabilities:
Interest rate swap	$	812,000	$	—	$	812,000	$	—

There were no transfers of assets between Level 1 and Level 2 during the three and six months ended June 30, 2013 or the year ended December 31, 2012. There were no changes to the valuation techniques for fair value measurements as of June 30, 2013 and December 31, 2012.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,564,000	$	—	$	—	$	6,564,000
Other		—		—		—		—
Commercial real estate		9,980,000		—		—		9,980,000
Commercial construction		1,776,000		—		—		1,776,000
Residential real estate		529,000		—		—		529,000
Consumer
Secured by real estate		762,000		—		—		762,000
Other Real Estate Owned		1,072,000						1,072,000
	$	20,683,000	$	—	$	—	$	20,683,000

	At December 31, 2012
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,490,000	$	—	$	—	$	6,490,000
Other		—		—		—		—
Commercial real estate		10,445,000		—		—		10,445,000
Commercial construction		4,373,000		—		—		4,373,000
Residential real estate		413,000		—		—		413,000
Consumer
Secured by real estate		800,000		—		—		800,000
Other Real Estate Owned		1,058,000						1,058,000
	$	23,579,000	$	—	$	—	$	23,579,000

Collateral-dependent impaired loans measured for impairment using the fair value of the collateral had a recorded investment of $20,088,000, with a valuation allowance of $477,000, resulting in a increase of the provision for loan losses of $1,275,000 and $2,468,000 for the three and six months ended June 30, 2013.

Other real estate owned had a recorded investment value of $1,072,000 and $1,058,000 with no valuation allowances at June 30, 2013 and December 31, 2012, respectively. No additional valuation allowance was recorded for the six months ended June 30, 2013.

For the Level 3 assets measured at fair value on a non-recurring basis at June 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair
Assets	Value		Valuation Technique	Unobservable Inputs	Range
Impaired loans	$	19,611,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.		5%
				Estimated selling costs.		7%
Other real estate owned	$	1,072,000	Comparable real estate sales and / or the income approach.	Adjustments for differences between comparable sales and income data available.		5% - 10%
				Estimated selling costs.		7%

Fair value estimates for the Corporation’s financial instruments are summarized below:

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At June 30, 2013
Financial assets:
Cash and cash equivalents	$	14,322,000	$	14,322,000	$	—	$	—
Securities available for sale		181,676,000		3,333,000		178,343,000		—
Securities held to maturity		28,119,000		—		29,575,000		—
Mortgage loans held for sale		2,054,000		—		2,053,000		—
Loans, net		431,353,000		—		—		436,861,000
Accrued interest receivable		2,301,000		1,000		895,000		1,405,000
Financial liabilities:
Deposits		592,699,000		447,479,000		146,077,000		—
FHLB-NY advances		25,000,000		—		25,384,000		—
Securities sold under
agreements to repurchase		7,344,000		—		7,704,000		—
Subordinated debenture		7,217,000		—		—		7,210,000
Accrued interest payable		445,000		1,000		426,000		18,000
Interest rate swap		648,000		—		648,000		—

			Fair Value Measurements Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
	At December 31, 2012
Financial assets:
Cash and cash equivalents	$	21,016,000	$	21,016,000	$	—	$	—
Securities available for sale		174,700,000		7,408,000		167,292,000		—
Securities held to maturity		29,718,000		—		31,768,000		—
Mortgage loans held for sale		784,000		—		784,000		—
Loans, net		429,832,000		—		—		449,041,000
Accrued interest receivable		2,372,000		2,000		908,000		1,462,000
Financial liabilities:
Deposits		590,254,000		434,569,000		157,219,000		—
FHLB-NY advances		25,000,000		—		25,825,000		—
Securities sold under
agreements to repurchase		7,343,000		—		7,883,000		—
Subordinated debenture		7,217,000		—		—		7,112,000
Accrued interest payable		560,000		1,000		540,000		19,000
Interest rate swap		812,000		—		812,000		—

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents – The carrying amount approximates fair value and is classified as Level 1.

Securities available-for-sale and held to maturity – The methods for determining fair values were described previously.

Mortgage loans held for sale – Loans in this category have been committed for sale to third party investors at the current carrying amount resulting in a Level 2 classification.

Loans, net – Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential and commercial mortgages, commercial and other installment loans. The fair value of loans is estimated by discounting cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans resulting in a Level 3 classification. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Accrued interest receivable – The carrying amount approximates fair value.

Deposits – The fair value of deposits, with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand resulting in a Level 1 classification. The fair value of certificates of deposit is based on the discounted value of cash flows resulting in a Level 2 classification. The discount rate is estimated using market discount rates which reflect interest rate risk inherent in the certificates of deposit.

FHLB-NY advances – With respect to FHLB-NY borrowings, the carrying amount of the borrowings which mature in one day approximates fair value. For borrowings with a longer maturity, the fair value is based on the discounted value of cash flows. The discount rate is estimated using market discount rates which reflect the interest rate risk and credit risk inherent in the term borrowings resulting in a Level 2 classification.

Securities sold under agreements to repurchase – The carrying value approximates fair value due to the relatively short time before maturity resulting in a Level 2 classification.

Subordinated debenture – The fair value of the subordinated debenture is based on the discounted value of the cash flows. The discount rate is estimated using market rates which reflect the interest rate and credit risk inherent in the debenture resulting in a Level 3 classification.

Accrued interest payable – The carrying amount approximates fair value.

Interest rate swap – The fair value of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Commitments to extend credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. At June 30, 2013 and December 31, 2012, the fair value of such commitments were not material.

Limitations

The preceding fair value estimates were made at June 30, 2013 and December 31, 2012 based on pertinent market data and relevant information on the financial instruments. These estimates do not include any premiums or discounts that could result from an offer to sell at one time the Corporation's entire holdings of a particular financial instrument or category thereof. Since no market exists for a substantial portion of the Corporation's financial instruments, fair value estimates were necessarily based on judgments with respect to future expected loss experience, current economic conditions, risk assessments of various financial instruments, and other factors. Given the subjective nature of these estimates, the uncertainties surrounding them and the matters of significant judgment that must be applied, these fair value estimates cannot be calculated with precision. Modifications in such assumptions could meaningfully alter these estimates.

Since these fair value approximations were made solely for on- and off-balance sheet financial instruments at June 30, 2013 and December 31, 2012, no attempt was made to estimate the value of anticipated future business. Furthermore, certain tax implications related to the realization of unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into the estimates.

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Securities - Available-for-sale and Held to Maturity

6 Months Ended

Jun. 30, 2013

Securities - Available-For-Sale And Held To Maturity

Securities - Available-for-sale and Held to Maturity

Note 2. Securities – Available-for-sale and Held to Maturity

The fair value of the available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	June 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	—	$	—	$	—	$	—
U.S. government-sponsored agencies		40,796,000		68,000		1,701,000		39,163,000
Obligations of state and political
subdivisions		13,655,000		241,000		181,000		13,715,000
Mortgage-backed securities - residential		114,333,000		523,000		2,151,000		112,705,000
Asset-backed securities (a)		9,874,000		—		80,000		9,794,000
Corporate debt		2,994,000		4,000		92,000		2,906,000
Total debt securities		181,652,000		836,000		4,205,000		178,283,000
Other equity investments		3,484,000		—		91,000		3,393,000
	$	185,136,000	$	836,000	$	4,296,000	$	181,676,000

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,003,000	$	3,000	$	—	$	4,006,000
U.S. government-sponsored agencies		37,287,000		35,000		67,000		37,255,000
Obligations of state and political
subdivisions		13,724,000		468,000		22,000		14,170,000
Mortgage-backed securities - residential		104,341,000		1,176,000		89,000		105,428,000
Asset-backed securities (a)		9,874,000		22,000		12,000		9,884,000
Corporate debt		492,000		3,000		—		495,000
Total debt securities		169,721,000		1,707,000		190,000		171,238,000
Other equity investments		3,425,000		37,000		—		3,462,000
	$	173,146,000	$	1,744,000	$	190,000	$	174,700,000

(a) Collateralized by student loans

Cash proceeds realized from calls and sales of securities available for sale for the three and six months ended June 30, 2013 were $4,000,000 and $6,500,000, respectively. Cash proceeds realized from calls and sales of securities available for sale for the three and six months ended June 30, 2012 were $14,000,000 and $25,960,000, respectively. There were no gross gains realized on calls and sales during the three months ended June 30, 2013. Gross gains realized on calls and sales during the six months ended June 30, 2013 totaled $2,000. There were no gross losses realized on calls and sales during the three and six months ended June 30, 2013. Gross gains realized on calls and sales during the three and six months ended June 30, 2012 totaled $5,000 and $438,000, respectively. There were no gross losses realized on calls and sales during the three and six months ended June 30, 2012.

The following is a summary of the held to maturity securities and related unrecognized gains and losses:

	June 30, 2013
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	259,000	$	34,000		—	$	293,000
Obligations of state and political
subdivisions		22,221,000		998,000		—		23,219,000
Mortgage-backed securities - residential		5,639,000		424,000		—		6,063,000
	$	28,119,000	$	1,456,000	$	—	$	29,575,000

	December 31, 2012
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	260,000	$	46,000	$	—	$	306,000
Obligations of state and political
subdivisions		22,787,000		1,407,000		—		24,194,000
Mortgage-backed securities - residential		6,671,000		597,000		—		7,268,000
	$	29,718,000	$	2,050,000	$	—	$	31,768,000

While there were no cash proceeds realized from calls of securities held to maturity for the three months ended June 30, 2013, cash proceeds realized from calls of securities held to maturity for the six months ended June 30, 2013 were $250,000. Cash proceeds realized from calls of securities held to maturity for the three and six months ended June 30, 2012 were $2,500,000 and $3,105,000, respectively. There were no gross gains and no gross losses realized on calls during the three and six months ended June 30, 2013. Gross gains of $7,000 were realized on calls for both the three and six months ended June 30, 2012. There were no gross losses realized on calls during the three and six months ended June 30, 2012.

The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.

	June 30, 2013
	Amortized		Fair
	Cost		Value
Available for sale
Within one year	$	—	$	—
After one year, but within five years		7,202,000		7,109,000
After five years, but within ten years		29,600,000		28,769,000
After ten years		20,643,000		19,906,000
Mortgage-backed securities - residential		114,333,000		112,705,000
Asset-backed securities		9,874,000		9,794,000
Total	$	181,652,000	$	178,283,000
Held to maturity
Within one year	$	1,888,000	$	1,907,000
After one year, but within five years		15,687,000		16,427,000
After five years, but within ten years		4,727,000		4,994,000
After ten years		178,000		184,000
Mortgage-backed securities - residential		5,639,000		6,063,000
Total	$	28,119,000	$	29,575,000

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2013 and December 31, 2012, and if the unrealized loss was continuous for the twelve months prior to June 30, 2013 and December 31, 2012. There were no unrealized losses on held to maturity securities at either June 30, 2013 or December 31, 2012.

Available for Sale
June 30, 2013	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury	$	—	$	—		$	—	$	—	$	—	$	—
U.S. government-
sponsored agencies		33,890,000		(1,701,000	)		—		—		33,890,000		(1,701,000	)
Obligations of state and
political subdivisions		6,344,000		(181,000	)		—		—		6,344,000		(181,000	)
Mortgage-backed
securities - residential		68,340,000		(2,151,000	)		—		—		68,340,000		(2,151,000	)
Asset-backed securities		9,795,000		(80,000	)		—		—		9,795,000		(80,000	)
Corporate debt		2,407,000		(92,000	)		—		—		2,407,000		(92,000	)
Other equity investments		3,333,000		(91,000	)		—		—		3,333,000		(91,000	)
Total temporarily
impaired securities	$	124,109,000	$	(4,296,000	)	$	—	$	—	$	124,109,000	$	(4,296,000	)

December 31, 2012	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury	$	—	$	—		$	—	$	—	$	—	$	—
U.S. government-
sponsored agencies		20,716,000		(67,000	)		—		—		20,716,000		(67,000	)
Obligations of state and
political subdivisions		3,257,000		(22,000	)		—		—		3,257,000		(22,000	)
Mortgage-backed
securities - residential		23,715,000		(89,000	)		—		—		23,715,000		(89,000	)
Asset-backed securities		3,047,000		(12,000	)						3,047,000		(12,000	)
Corporate debt		—		—			—		—		—		—
Other equity investments		—		—			—		—		—		—
Total temporarily
impaired securities	$	50,735,000	$	(190,000	)	$	—	$	—	$	50,735,000	$	(190,000	)

Other-Than-Temporary-Impairment

At June 30, 2013, there were no securities in a continuous loss position for 12 months or longer. The Corporation’s unrealized losses are primarily due to market interest rate conditions. These securities have not been considered other than temporarily impaired as scheduled principal and interest payments have been made and management anticipates collecting the entire principal balance as scheduled. Because the decline in fair value is attributable to changes in market conditions, and not credit quality, and because the Corporation does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

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Earnings Per Share (Details Narrative) (Stock options)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Stock options
Antidilutive securities excluded from computation of diluted EPS (in shares)	6,754	62,937	6,754	63,714

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Loans and Nonperforming Loans (Details 1) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Activity in the allowance for loan losses
Balance at the beginning of period	$ 11,512,000	$ 13,097,000	$ 10,787,000	$ 11,604,000
Provision	850,000	2,900,000	2,450,000	4,665,000
Charge Offs	1,664,000	4,093,000	2,434,000	4,387,000
Recoveries	89,000	30,000	130,000	52,000
Balance at the end of period	10,787,000	11,934,000	10,787,000	11,934,000
Commercial
Activity in the allowance for loan losses
Balance at the beginning of period	5,285,000	6,068,000	4,832,000	5,368,000
Provision	(1,082,000)	1,994,000	(277,000)	2,960,000
Charge Offs	261,000	2,068,000	648,000	2,356,000
Recoveries	43,000	29,000	78,000	51,000
Balance at the end of period	3,985,000	6,023,000	3,985,000	6,023,000
Commercial real estate
Activity in the allowance for loan losses
Balance at the beginning of period	5,549,000	5,448,000	4,936,000	4,943,000
Provision	1,452,000	918,000	2,421,000	1,423,000
Charge Offs	1,403,000	1,839,000	1,759,000	1,839,000
Recoveries
Balance at the end of period	5,598,000	4,527,000	5,598,000	4,527,000
Construction
Activity in the allowance for loan losses
Balance at the beginning of period	20,000	777,000	169,000	480,000
Provision	261,000	(118,000)	133,000	179,000
Charge Offs		145,000	24,000	145,000
Recoveries	23,000		26,000
Balance at the end of period	304,000	514,000	304,000	514,000
Residential real estate
Activity in the allowance for loan losses
Balance at the beginning of period	334,000	338,000	308,000	303,000
Provision	100,000	54,000	126,000	89,000
Charge Offs
Recoveries
Balance at the end of period	434,000	392,000	434,000	392,000
Consumer
Activity in the allowance for loan losses
Balance at the beginning of period	290,000	439,000	410,000	498,000
Provision	99,000	39,000	41,000	(14,000)
Charge Offs		41,000	3,000	470,000
Recoveries	21,000		20,000
Balance at the end of period	410,000	437,000	410,000	437,000
Other Loans
Activity in the allowance for loan losses
Balance at the beginning of period	1,000	2,000	3,000	2,000
Provision		1,000	(4,000)	1,000
Charge Offs
Recoveries		1,000	2,000	1,000
Balance at the end of period	1,000	4,000	1,000	4,000
Unallocated Loans
Activity in the allowance for loan losses
Balance at the beginning of period	33,000	25,000	41,000	10,000
Provision	20,000	12,000	10,000	27,000
Charge Offs
Recoveries	2,000		4,000
Balance at the end of period	$ 55,000	$ 37,000	$ 55,000	$ 37,000

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Loans and Nonperforming Loans (Details 5) (USD $)	Jun. 30, 2013	Dec. 31, 2012
30 to 59 Days	$ 249,000	$ 2,936,000
60 to 89 Days	1,498,000	737,000
Greater Than 90 Days	10,072,000	13,624,000
Total	11,819,000	17,297,000
Not past due	430,187,000	423,126,000
Total Loans	442,006,000	440,423,000
Commercial loan secured by real estate
30 to 59 Days		101,000
60 to 89 Days		179,000
Greater Than 90 Days	352,000	2,674,000
Total	352,000	2,954,000
Not past due	54,492,000	55,206,000
Total Loans	54,844,000	58,160,000
Commercial loan - Other
30 to 59 Days	179,000	25,000
60 to 89 Days		98,000
Greater Than 90 Days	1,510,000	52,000
Total	1,689,000	175,000
Not past due	26,443,000	31,079,000
Total Loans	28,132,000	31,254,000
Commercial real estate
30 to 59 Days		2,582,000
60 to 89 Days	1,498,000
Greater Than 90 Days	6,941,000	9,023,000
Total	8,439,000	11,605,000
Not past due	243,780,000	231,158,000
Total Loans	252,219,000	242,763,000
Commercial Construction
30 to 59 Days
60 to 89 Days		460,000
Greater Than 90 Days		815,000
Total		1,275,000
Not past due	5,421,000	8,049,000
Total Loans	5,421,000	9,324,000
Residential real estate
30 to 59 Days		161,000
60 to 89 Days
Greater Than 90 Days	595,000	413,000
Total	595,000	574,000
Not past due	72,409,000	66,626,000
Total Loans	73,004,000	67,200,000
Consumer loan secured by real estate
30 to 59 Days	70,000	67,000
60 to 89 Days
Greater Than 90 Days	674,000	647,000
Total	744,000	714,000
Not past due	27,083,000	30,268,000
Total Loans	27,827,000	30,982,000
Consumer loan - Other
30 to 59 Days
60 to 89 Days
Greater Than 90 Days
Total
Not past due	489,000	624,000
Total Loans	489,000	624,000
Other Loans
30 to 59 Days
60 to 89 Days
Greater Than 90 Days
Total
Not past due	70,000	116,000
Total Loans	$ 70,000	$ 116,000

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Fair Value of Financial Instruments (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Assets, Fair Value
Total available for sale securities	$ 181,676,000	$ 174,700,000
Fair Value Measured on a Recurring Basis | Carrying Value
Assets, Fair Value
U.S. Treasuries		4,006,000
U.S. government-sponsored agencies	39,163,000	37,255,000
Obligations of state and political subdivisions	13,715,000	14,170,000
Mortgage-backed securities - residential	112,705,000	105,428,000
Asset backed securities	9,794,000	9,884,000
Corporate debt	2,906,000	495,000
Other equity investments	3,393,000	3,462,000
Total available for sale securities	181,676,000	174,700,000
Liabilities, Fair Value
Interest rate swap	648,000	812,000
Fair Value Measured on a Recurring Basis | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets, Fair Value
U.S. Treasuries		4,006,000
U.S. government-sponsored agencies
Obligations of state and political subdivisions
Mortgage-backed securities - residential
Asset backed securities
Corporate debt
Other equity investments	3,333,000	3,402,000
Total available for sale securities	3,333,000	7,408,000
Liabilities, Fair Value
Interest rate swap
Fair Value Measured on a Recurring Basis | Significant Other Observable Inputs (Level 2)
Assets, Fair Value
U.S. Treasuries
U.S. government-sponsored agencies	39,163,000	37,255,000
Obligations of state and political subdivisions	13,715,000	14,170,000
Mortgage-backed securities - residential	112,705,000	105,428,000
Asset backed securities	9,794,000	9,884,000
Corporate debt	2,906,000	495,000
Other equity investments	60,000	60,000
Total available for sale securities	178,343,000	167,292,000
Liabilities, Fair Value
Interest rate swap	648,000	812,000
Fair Value Measured on a Recurring Basis | Significant Unobservable Inputs (Level 3)
Assets, Fair Value
U.S. Treasuries
U.S. government-sponsored agencies
Obligations of state and political subdivisions
Mortgage-backed securities - residential
Asset backed securities
Corporate debt
Other equity investments
Total available for sale securities
Liabilities, Fair Value
Interest rate swap

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Accumulated Other Comprehensive Income (Details 1) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Accumulated Other Comprehensive Income Details 1
Unrealized gains on AFS securities before tax		$ 12,000	$ 2,000	$ 445,000
Tax effect			(1,000)
Total net of tax			1,000
Amounts reclassified from other comprehensive income			$ 1,000

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Consolidated Statements of Financial Condition (Unaudited) (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Assets
Securities held to maturity	$ 29,575,000	$ 31,768,000
Allowance for loan losses	10,787,000	10,641,000
Stockholders' equity
Preferred stock, par value	$ 0.00	$ 0.00
Preferred stock, shares authorized	2,500,000
Preferred stock, shares issued	15,000
Preferred stock, shares outstanding	15,000
Preferred stock, liquidation preference	$ 15,000,000
Common stock, par value	$ 0.00
Common stock, shares authorized	10,000,000
Common stock, shares issued	5,936,054	5,924,865
Common stock, shares outstanding	5,936,054	5,924,865

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Accumulated Other Comprehensive Income

6 Months Ended

Jun. 30, 2013

Accumulated Other Comprehensive Income

Accumulated Other Comprehensive Income

Note 7. Accumulated Other Comprehensive Income

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive income for the three and six months ended June 30, 2013.

	For the Three Months Ended June 30, 2013
	Components of
	Accumulated Other Comprehensive Income						Total
	Unrealized Gains						Accumulated
	and Losses on			Unrealized Gains			Other
	Available for Sale			and Losses on			Comprehensive
	(AFS) Securities			Derivatives			Loss
Balance at March 31, 2012	$	607,000		$	(448,000	)	$	159,000
Other comprehensive income before
reclassifications		(2,729,000	)		59,000			(2,670,000	)
Amounts reclassified from
other comprehensive income		—			—			—
Other comprehensive income, net		(2,729,000	)		59,000			(2,670,000	)
Balance at June 30, 2013	$	(2,122,000	)	$	(389,000	)	$	(2,511,000	)

	For the Six Months Ended June 30, 2013
	Components of
	Accumulated Other Comprehensive Income						Total
	Unrealized Gains						Accumulated
	and Losses on			Unrealized Gains			Other
	Available for Sale			and Losses on			Comprehensive
	(AFS) Securities			Derivatives			Loss
Balance at December 31, 2012	$	947,000		$	(487,000	)	$	460,000
Other comprehensive income before
reclassifications		(3,068,000	)		98,000			(2,970,000	)
Amounts reclassified from
other comprehensive income		(1,000	)		—			(1,000	)
Other comprehensive income, net		(3,069,000	)		98,000			(2,971,000	)
Balance at June 30, 2013	$	(2,122,000	)	$	(389,000	)	$	(2,511,000	)

The following table presents amounts reclassified from each component of accumulated other comprehensive income on a gross and net of tax basis for the six months ended June 30, 2013.

	Accumulated
	Other			Income
Components of Accumulated Other	Comprehensive			Statement
Comprehensive Loss	Income			Line Item
Unrealized gains on AFS securities before tax	$	2,000		Gains on securities transactions, net
Tax effect		(1,000	)
Total net of tax		1,000
Total reclassifications, net of tax	$	1,000

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Income Statement [Abstract]
Net income (loss)	$ 461,000	$ (324,000)	$ 1,283,000	$ 452,000
Other comprehensive (loss) income:
Change in unrealized holding gains on securities available for sale arising during the period	(4,465,000)	668,000	(5,013,000)	728,000
Reclassification adjustment for gains in net income		(12,000)	(2,000)	(445,000)
Net unrealized gains (losses)	(4,465,000)	656,000	(5,015,000)	283,000
Tax effect	1,736,000	(256,000)	1,946,000	(111,000)
Net unrealized gain (losses), net of tax amount	(2,729,000)	400,000	(3,069,000)	172,000
Change in fair value of interest rate swap	99,000	(13,000)	164,000	17,000
Tax effect	(40,000)	5,000	(66,000)	(7,000)
Change in fair value of interest rate swap, net of tax amount	59,000	(8,000)	98,000	10,000
Total other comprehensive income (loss)	(2,670,000)	392,000	(2,971,000)	182,000
Total comprehensive income (loss)	(2,209,000)	68,000	(1,688,000)	634,000
The following is a summary of the accumulated other comprehensive income balances, net of tax
Unrealized gain (loss) on securities available-for-sale	(2,122,000)		(2,122,000)
Unrealized loss on fair value of interest rate swap	(389,000)		(389,000)
Accumulated other comprehensive income (loss), net	$ (2,511,000)		$ (2,511,000)

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Consolidated Statements of Financial Condition (Unaudited) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 14,038,000	$ 19,962,000
Other interest-earning assets	284,000	1,054,000
Cash and cash equivalents	14,322,000	21,016,000
Securities available for sale	181,676,000	174,700,000
Securities held to maturity; estimated fair value of $29,575,000 (at June 30, 2013) and $31,768,000 (December 31, 2012)	28,119,000	29,718,000
FHLB-NY stock, at cost	2,133,000	2,213,000
Mortgage loans held for sale	2,054,000	784,000
Loans, net of allowance for loan losses of $10,787,000 (June 30, 2013) and $10,641,000 (December 31, 2012)	431,353,000	429,832,000
Premises and equipment, net	5,538,000	5,645,000
Accrued interest receivable	2,301,000	2,372,000
Other real estate owned, net	1,072,000	1,058,000
Bank owned life insurance	10,105,000	10,470,000
Other assets	10,159,000	10,580,000
Total assets	688,832,000	688,388,000
Deposits:
Noninterest-bearing	145,388,000	124,286,000
Interest-bearing	447,311,000	465,968,000
Total deposits	592,699,000	590,254,000
Federal Home Loan Bank of New York advances	25,000,000	25,000,000
Securities sold under agreements to repurchase	7,344,000	7,343,000
Subordinated debentures	7,217,000	7,217,000
Accrued interest payable	445,000	560,000
Accrued expenses and other liabilities	1,835,000	1,668,000
Total liabilities	634,540,000	632,042,000
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value; 2,500,000 shares authorized; 15,000 shares issued and outstanding at June 30, 2013 and December 31, 2012 liquidation preference of $15,000,000	14,969,000	14,964,000
Common stock, no par value; 10,000,000 shares authorized; 5,936,054 and 5,924,865 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively	40,652,000	40,606,000
Retained earnings	1,182,000	316,000
Accumulated other comprehensive income, net	(2,511,000)	460,000
Total stockholders' equity	54,292,000	56,346,000
Total liabilities and stockholders' equity	$ 688,832,000	$ 688,388,000

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Loans and Nonperforming Loans (Details 2) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Allowance for loan losses Ending balance, Individually evaluated for impairment	$ 525,000	$ 266,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	10,262,000	10,375,000
Total Ending allowance balance	10,787,000	10,641,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	24,951,000	28,686,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	417,055,000	411,737,000
Total Loans	442,006,000	440,423,000
Commercial
Allowance for loan losses Ending balance, Individually evaluated for impairment	181,000	251,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	3,804,000	4,581,000
Total Ending allowance balance	3,985,000	4,832,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	9,219,000	8,641,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	73,757,000	80,773,000
Total Loans	82,976,000	89,414,000
Commercial real estate
Allowance for loan losses Ending balance, Individually evaluated for impairment	29,000	15,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	5,569,000	4,921,000
Total Ending allowance balance	5,598,000	4,936,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	12,351,000	12,803,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	239,868,000	229,960,000
Total Loans	252,219,000	242,763,000
Construction
Allowance for loan losses Ending balance, Individually evaluated for impairment	99,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	205,000	169,000
Total Ending allowance balance	304,000	169,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	1,875,000	6,029,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	3,546,000	3,295,000
Total Loans	5,421,000	9,324,000
Residential real estate
Allowance for loan losses Ending balance, Individually evaluated for impairment	67,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	367,000	308,000
Total Ending allowance balance	434,000	308,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	595,000	413,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	72,409,000	66,787,000
Total Loans	73,004,000	67,200,000
Consumer
Allowance for loan losses Ending balance, Individually evaluated for impairment	149,000
Allowance for loan losses Ending balance, Collectively evaluated for impairment	261,000	352,000
Total Ending allowance balance	410,000	352,000
Loans Recorded investment Ending balance, Individually evaluated for impairment	911,000	800,000
Loans Recorded investment Ending balance, Collectively evaluated for impairment	27,405,000	30,806,000
Total Loans	28,316,000	31,606,000
Other Loans
Allowance for loan losses Ending balance, Individually evaluated for impairment
Allowance for loan losses Ending balance, Collectively evaluated for impairment	1,000	3,000
Total Ending allowance balance	1,000	3,000
Loans Recorded investment Ending balance, Individually evaluated for impairment
Loans Recorded investment Ending balance, Collectively evaluated for impairment	70,000	116,000
Total Loans	70,000	116,000
Unallocated Loans
Allowance for loan losses Ending balance, Individually evaluated for impairment
Allowance for loan losses Ending balance, Collectively evaluated for impairment	55,000	41,000
Total Ending allowance balance	55,000	41,000
Loans Recorded investment Ending balance, Individually evaluated for impairment
Loans Recorded investment Ending balance, Collectively evaluated for impairment
Total Loans

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Securities - Available-for-sale and Held to Maturity (Details 1) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Held to maturity securities
Amortized Cost	$ 28,119,000	$ 29,718,000
Gross Unrealized Gains	1,456,000	2,050,000
Gross Unrealized Losses
Fair Value	29,575,000	31,768,000
U.S. government-sponsored agencies
Held to maturity securities
Amortized Cost	259,000	260,000
Gross Unrealized Gains	34,000	46,000
Gross Unrealized Losses
Fair Value	293,000	306,000
Obligations of state and political and subdivisions
Held to maturity securities
Amortized Cost	22,221,000	22,787,000
Gross Unrealized Gains	998,000	1,407,000
Gross Unrealized Losses
Fair Value	23,219,000	24,194,000
Mortgage-backed securities - residential
Held to maturity securities
Amortized Cost	5,639,000	6,671,000
Gross Unrealized Gains	424,000	597,000
Gross Unrealized Losses
Fair Value	$ 6,063,000	$ 7,268,000

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Accumulated Other Comprehensive Income (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Unrealized gains and losses on available for sale (AFS) securities
Unrealized gains on securities available-for-sale	$ 607,000		$ 947,000
Other comprehensive income before reclassifications	(2,729,000)		(3,068,000)
Amounts reclassified from other comprehensive income			(1,000)
Net unrealized gain (losses), net of tax amount	(2,729,000)	400,000	(3,069,000)	172,000
Unrealized gains on securities available-for-sale	(2,122,000)		(2,122,000)
Unrealized gains and losses on derivatives
Unrealized loss on fair value of derivatives	(448,000)		(487,000)
Other comprehensive income before reclassifications	59,000	(8,000)	98,000	10,000
Change in fair value of derivatives, net of tax amount	59,000	(8,000)	98,000	10,000
Unrealized loss on fair value of derivatives	(389,000)		(389,000)
Total
Accumulated other comprehensive income, net	159,000		460,000
Other comprehensive income before reclassifications	(2,670,000)		(2,970,000)
Amounts reclassified from other comprehensive income			(1,000)
Total other comprehensive income (loss)	(2,670,000)	392,000	(2,971,000)	182,000
Accumulated other comprehensive income, net	$ (2,511,000)		$ (2,511,000)

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Fair Value of Financial Instruments (Details 2) (Significant Unobservable Inputs (Level 3), Fair Value, Measurements, Nonrecurring, USD $)	6 Months Ended
	Jun. 30, 2013
Impaired Loans
Fair value of financial assets	$ 19,611,000
Valuation Technique1	Comparable real estate sales and/or the income approach
Unobservable Input	Adjustments for differences between comparable sales and income data available
Unobservable Input2	Estimated Selling Costs
Range of Unobservable inputs used in fair value & weighting factor	5.00%
Range of Unobservable inputs used in fair value & weighting factor2	7.00%
Other Real Estate Owned
Fair value of financial assets	$ 1,072,000
Valuation Technique1	Comparable real estate sales and/or the income approach
Unobservable Input	Adjustments for differences between comparable sales and income data available
Unobservable Input2	Estimated Selling Costs
Range of Unobservable inputs used in fair value & weighting factor2	7.00%
Other Real Estate Owned | Minimum
Range of Unobservable inputs used in fair value & weighting factor	5.00%
Other Real Estate Owned | Maximum
Range of Unobservable inputs used in fair value & weighting factor	10.00%

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Loans and Nonperforming Loans (Details 8) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Current	$ 430,187,000	$ 423,126,000
Past Due and non accrual	11,819,000	17,297,000
Total Loans	442,006,000	440,423,000
Residential real estate
Current	72,409,000	66,626,000
Past Due and non accrual	595,000	574,000
Total Loans	73,004,000	67,200,000
Consumer loan secured by real estate
Current	27,083,000	30,268,000
Past Due and non accrual	744,000	714,000
Total Loans	27,827,000	30,982,000
Consumer loan - Other
Current	489,000	624,000
Past Due and non accrual
Total Loans	489,000	624,000
Residential real estate and consumer loan
Current	99,981,000	97,518,000
Past Due and non accrual	1,339,000	1,288,000
Total Loans	$ 101,320,000	$ 98,806,000

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Fair Value of Financial Instruments (Details Narrative) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Related Allowance	$ 525,000		$ 525,000		$ 525,000
Additional provision for loan losses	850,000	2,900,000	2,450,000	4,665,000
Fair Value, Measurements, Nonrecurring | Impaired Loans
Recorded Investment With an allowance recorded	20,088,000		20,088,000
Related Allowance	477,000		477,000
Additional provision for loan losses	1,275,000		2,468,000
Fair Value, Measurements, Nonrecurring | Other Real Estate Owned
Recorded Investment With an allowance recorded	1,072,000		1,072,000		1,058,000
Related Allowance	0		0		0
Additional provision for loan losses			$ 0

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Preferred Stock

6 Months Ended

Jun. 30, 2013

PreferredStockAbstract

Preferred Stock

Note 6. Preferred Stock

In connection with the Corporation’s participation in the U.S. Department of the Treasury’s Small Business Lending Fund program (“SBLF”), a $30 billion fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion, on September 1, 2011, the Corporation issued 15,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Shares”) to the Treasury for an aggregate purchase price of $15 million, in cash.

Using the proceeds of the issuance of the Series B Preferred Shares, the Corporation simultaneously repurchased all 10,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Shares”) previously issued under the Treasury’s Troubled Assets Relief Program (“TARP”) Capital Purchase Program (the “CPP”) for an aggregate purchase price of $10,022,222, in cash, including accrued but unpaid dividends through the date of repurchase.

The terms of the newly-established Series B Preferred Shares provide for a liquidation preference of $1,000 per share and impose restrictions on the Corporation’s ability to declare or pay dividends or purchase, redeem or otherwise acquire for consideration, shares of the Corporation’s Common Stock and any class or series of stock of the Corporation the terms of which do not expressly provide that such class or series will rank senior or junior to the Series B Preferred Shares as to dividend rights and/or rights on liquidation, dissolution or winding up of the Corporation. Specifically, the terms provide for the payment of a non-cumulative quarterly dividend, payable in arrears, which the Corporation accrues as earned over the period that the Series B Preferred Shares are outstanding. The dividend rate can fluctuate on a quarterly basis during the first ten quarters during which the Series B Preferred Shares are outstanding, based upon changes in the level of Qualified Small Business Lending (“QSBL” as defined in the Securities Purchase Agreement) from 1% to 5% per annum and, thereafter, for the eleventh through the first half of the nineteenth dividend periods, from 1% to 7%. In general, the dividend rate decreases as the level of the Bank’s QSBL increases. In the event that the Series B Preferred Shares remain outstanding for more than four and one half years, the dividend rate will be fixed at 9%. Based upon the Bank’s level of QSBL over a baseline level, the dividend rate for the initial dividend period was 1%. Such dividends are not cumulative but the Corporation may only declare and pay dividends on its Common Stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends on the Series B Preferred Shares for the current dividend period and, if, after payment of such dividend, the dollar amount of the Corporation’s Tier 1 Capital would be at least 90% of the Tier 1 Capital on the date of entering into the SBLF program, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Shares (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of the issuance and ending on the tenth anniversary, by 10% for each 1% increase in QSBL over the baseline level.

In addition, the Series B Preferred Shares are non-voting except in limited circumstances. In the event that the Corporation has not timely declared and paid dividends on the Series B Preferred Shares for six dividend periods or more, whether or not consecutive, and shares of Series B Preferred Stock with an aggregate liquidation preference of at least $25,000,000 are still outstanding, the Treasury may designate two additional directors to be elected to the Corporation’s Board of Directors. Subject to the approval of the Bank’s federal banking regulator, the Federal Reserve, the Corporation may redeem the Series B Preferred Shares at any time at the Corporation’s option, at a redemption price equal to the liquidation preference per share plus the per share amount of any unpaid dividends for the then-current period through the date of the redemption. The Series B Preferred Shares are includable in Tier I capital for regulatory capital.

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Loans and Nonperforming Loans (Details 3) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Total nonperfoming loans	$ 14,716,000	$ 18,011,000
Commercial loan secured by real estate
Total nonperfoming loans	3,446,000	3,374,000
Commercial loan - Other
Total nonperfoming loans	109,000	261,000
Commercial real estate
Total nonperfoming loans	9,655,000	10,083,000
Commercial Construction
Total nonperfoming loans		3,080,000
Residential real estate
Total nonperfoming loans	595,000	413,000
Consumer loan secured by real estate
Total nonperfoming loans	$ 911,000	$ 800,000

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Earnings Per Share (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Earnings Per Share Details
Net income	$ 461,000	$ (324,000)	$ 1,283,000	$ 452,000
Dividends on preferred stock and accretion	127,000	38,000	293,000	113,000
Net income available to common stockholders	$ 334,000	$ (362,000)	$ 990,000	$ 339,000
Weighted average shares (in shares)	5,934,549	5,902,167	5,932,774	5,897,266
Effect of dilutive stock options (in shares)
Total weighted average dilutive shares (in shares)	5,934,549	5,902,167	5,932,774	5,897,266
Basic earnings per common share (in dollars per share)	$ 0.06	$ (0.06)	$ 0.17	$ 0.06
Diluted earnings per common share (in dollars per share)	$ 0.06	$ (0.06)	$ 0.17	$ 0.06

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Securities - Available-for-sale and Held to Maturity (Tables)

6 Months Ended

Jun. 30, 2013

Securities - Available-For-Sale And Held To Maturity Tables

Schedule of fair value of securities available for sale and related gross unrealized gains and losses

The fair value of the available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	June 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	—	$	—	$	—	$	—
U.S. government-sponsored agencies		40,796,000		68,000		1,701,000		39,163,000
Obligations of state and political
subdivisions		13,655,000		241,000		181,000		13,715,000
Mortgage-backed securities - residential		114,333,000		523,000		2,151,000		112,705,000
Asset-backed securities (a)		9,874,000		—		80,000		9,794,000
Corporate debt		2,994,000		4,000		92,000		2,906,000
Total debt securities		181,652,000		836,000		4,205,000		178,283,000
Other equity investments		3,484,000		—		91,000		3,393,000
	$	185,136,000	$	836,000	$	4,296,000	$	181,676,000

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
U.S. Treasury	$	4,003,000	$	3,000	$	—	$	4,006,000
U.S. government-sponsored agencies		37,287,000		35,000		67,000		37,255,000
Obligations of state and political
subdivisions		13,724,000		468,000		22,000		14,170,000
Mortgage-backed securities - residential		104,341,000		1,176,000		89,000		105,428,000
Asset-backed securities (a)		9,874,000		22,000		12,000		9,884,000
Corporate debt		492,000		3,000		—		495,000
Total debt securities		169,721,000		1,707,000		190,000		171,238,000
Other equity investments		3,425,000		37,000		—		3,462,000
	$	173,146,000	$	1,744,000	$	190,000	$	174,700,000

(a) Collateralized by student loans

Schedule of held to maturity securities and related unrecognized gains and losses

The following is a summary of the held to maturity securities and related unrecognized gains and losses:

	June 30, 2013
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	259,000	$	34,000		—	$	293,000
Obligations of state and political
subdivisions		22,221,000		998,000		—		23,219,000
Mortgage-backed securities - residential		5,639,000		424,000		—		6,063,000
	$	28,119,000	$	1,456,000	$	—	$	29,575,000

	December 31, 2012
	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
U.S. government-sponsored agencies	$	260,000	$	46,000	$	—	$	306,000
Obligations of state and political
subdivisions		22,787,000		1,407,000		—		24,194,000
Mortgage-backed securities - residential		6,671,000		597,000		—		7,268,000
	$	29,718,000	$	2,050,000	$	—	$	31,768,000

Amortized cost and fair value of the investment securities portfolio by contractual maturity.

The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.

	June 30, 2013
	Amortized		Fair
	Cost		Value
Available for sale
Within one year	$	—	$	—
After one year, but within five years		7,202,000		7,109,000
After five years, but within ten years		29,600,000		28,769,000
After ten years		20,643,000		19,906,000
Mortgage-backed securities - residential		114,333,000		112,705,000
Asset-backed securities		9,874,000		9,794,000
Total	$	181,652,000	$	178,283,000
Held to maturity
Within one year	$	1,888,000	$	1,907,000
After one year, but within five years		15,687,000		16,427,000
After five years, but within ten years		4,727,000		4,994,000
After ten years		178,000		184,000
Mortgage-backed securities - residential		5,639,000		6,063,000
Total	$	28,119,000	$	29,575,000

Schedule of Continuous unrealized loss position for investment securities available for sale

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2013 and December 31, 2012, and if the unrealized loss was continuous for the twelve months prior to June 30, 2013 and December 31, 2012. There were no unrealized losses on held to maturity securities at either June 30, 2013 or December 31, 2012.

Available for Sale
June 30, 2013	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury	$	—	$	—		$	—	$	—	$	—	$	—
U.S. government-
sponsored agencies		33,890,000		(1,701,000	)		—		—		33,890,000		(1,701,000	)
Obligations of state and
political subdivisions		6,344,000		(181,000	)		—		—		6,344,000		(181,000	)
Mortgage-backed
securities - residential		68,340,000		(2,151,000	)		—		—		68,340,000		(2,151,000	)
Asset-backed securities		9,795,000		(80,000	)		—		—		9,795,000		(80,000	)
Corporate debt		2,407,000		(92,000	)		—		—		2,407,000		(92,000	)
Other equity investments		3,333,000		(91,000	)		—		—		3,333,000		(91,000	)
Total temporarily
impaired securities	$	124,109,000	$	(4,296,000	)	$	—	$	—	$	124,109,000	$	(4,296,000	)

December 31, 2012	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury	$	—	$	—		$	—	$	—	$	—	$	—
U.S. government-
sponsored agencies		20,716,000		(67,000	)		—		—		20,716,000		(67,000	)
Obligations of state and
political subdivisions		3,257,000		(22,000	)		—		—		3,257,000		(22,000	)
Mortgage-backed
securities - residential		23,715,000		(89,000	)		—		—		23,715,000		(89,000	)
Asset-backed securities		3,047,000		(12,000	)						3,047,000		(12,000	)
Corporate debt		—		—			—		—		—		—
Other equity investments		—		—			—		—		—		—
Total temporarily
impaired securities	$	50,735,000	$	(190,000	)	$	—	$	—	$	50,735,000	$	(190,000	)

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Earnings Per Share

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share

Note 5. Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Common stock equivalents are not included in the calculation. Diluted earnings (loss) per share is computed similar to that of basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potential dilutive common shares were issued.

The following reconciles the income (loss) available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings (loss) per share.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013		2012			2013		2012
Net income (loss)	$	461,000	$	(324,000	)	$	1,283,000	$	452,000
Dividends on preferred stock		127,000		38,000			293,000		113,000
Net income (loss) available to common stockholders	$	334,000	$	(362,000	)	$	990,000	$	339,000
Weighted average shares		5,934,549		5,902,167			5,932,774		5,897,266
Effect of dilutive stock options		N/A		N/A			N/A		N/A
Total weighted average dilutive shares		5,934,549		5,902,167			5,932,774		5,897,266
Basic earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06
Diluted earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06

Stock options to purchase 6,754 shares of common stock were not considered in computing diluted earnings per share the three and six months ended June 30, 2013 because they were antidilutive. For the three and six months ended June 30, 2012, stock options to purchase 62,937 and 63,714 shares of common stock, respectively, were not considered in computing diluted earnings per share of common stock because they were antidilutive.

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities:
Net income	$ 1,283,000	$ 452,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment	217,000	276,000
Amortization of premiums and accretion of discounts, net	700,000	791,000
Accretion (amortization) of deferred loan fees	22,000	25,000
Provision for loan losses	2,450,000	4,665,000
Originations of mortgage loans held for sale	(27,614,000)	(39,324,000)
Proceeds from sale of mortgage loans	26,804,000	41,266,000
Gain on sales of mortgage loans	(460,000)	(565,000)
Gain on sales and calls of securities	(2,000)	(445,000)
Gain on sale of other real estate owned	(126,000)	(469,000)
Deferred income tax benefit	(63,000)	(142,000)
Decrease in accrued interest receivable	71,000	129,000
Decrease in accrued interest payable	(115,000)	(131,000)
Earnings on bank owned life insurance	(153,000)	(161,000)
Gain on life insurance proceeds	(537,000)
Decrease in other assets	2,428,000	315,000
Increase (decrease) in other liabilities	266,000	(891,000)
Net cash provided by operating activities	5,171,000	5,791,000
Cash flows from investing activities:
Purchase of securities available for sale	(35,436,000)	(40,525,000)
Proceeds from maturities and principal repayments on securities available for sale	16,297,000	12,783,000
Proceeds from sales and calls on securities available for sale	6,500,000	25,960,000
Proceeds from maturities and principal repayments on securities held to maturity	1,300,000	2,188,000
Proceeds from calls on securities held to maturity	250,000	3,105,000
Sale of FHLB-NY stock	80,000	265,000
Net (increase) decrease in loans	(4,342,000)	5,853,000
Proceeds from sale of other real estate owned	461,000	4,562,000
Life insurance proceeds	1,055,000
Additions to premises and equipment	(110,000)	(48,000)
Net cash provided by (used in) investing activities	(13,945,000)	14,143,000
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	21,102,000	8,241,000
Net increase (decrease) in interest-bearing deposits	(18,657,000)	(8,298,000)
Net increase in securities sold under agreements to repurchase	1,000
Net decrease in short term borrowings		(4,700,000)
Repayment of long term borrowings		(3,000,000)
Cash dividends paid on common stock	(119,000)	(531,000)
Cash dividends paid on preferred stock	(293,000)	(113,000)
Payment of discount on dividend reinvestment plan	(1,000)	(5,000)
Issuance of common stock	47,000	114,000
Net cash provided by (used in) financing activities	2,080,000	(8,292,000)
Net increase (decrease) in cash and cash equivalents	(6,694,000)	11,642,000
Cash and cash equivalents - beginning	21,016,000	13,698,000
Cash and cash equivalents - ending	14,322,000	25,340,000
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	2,077,000	2,953,000
Cash paid during the period for income taxes	68,000	1,194,000
Transfers from loans to other real estate owned	$ 349,000	$ 882,000

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Loans and Nonperforming Loans (Details 6) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013 N	Jun. 30, 2012 N	Jun. 30, 2013 N	Jun. 30, 2012 N
Number of loans restructured		3	1	3
TDRs arising during period Pre-Modification Recorded Investment		$ 300,000	$ 17,000	$ 300,000
TDRs arising during period Post-Modification Recorded Investment		298,000	17,000	298,000
Commercial loan secured by real estate
Number of loans restructured		2		2
TDRs arising during period Pre-Modification Recorded Investment		226,000		226,000
TDRs arising during period Post-Modification Recorded Investment		226,000		226,000
Commercial loan - Other
Number of loans restructured		1	1	1
TDRs arising during period Pre-Modification Recorded Investment		74,000	17,000	74,000
TDRs arising during period Post-Modification Recorded Investment		$ 72,000	$ 17,000	$ 72,000

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share Tables

Schedule of Earnings Per Common Share

The following reconciles the income (loss) available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings (loss) per share.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013		2012			2013		2012
Net income (loss)	$	461,000	$	(324,000	)	$	1,283,000	$	452,000
Dividends on preferred stock		127,000		38,000			293,000		113,000
Net income (loss) available to common stockholders	$	334,000	$	(362,000	)	$	990,000	$	339,000
Weighted average shares		5,934,549		5,902,167			5,932,774		5,897,266
Effect of dilutive stock options		N/A		N/A			N/A		N/A
Total weighted average dilutive shares		5,934,549		5,902,167			5,932,774		5,897,266
Basic earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06
Diluted earnings (loss) per common share	$	0.06	$	(0.06	)	$	0.17	$	0.06

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Summary Of Significant Accounting Policies Policies

Principles of consolidation

Principles of consolidation

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current presentation.

The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.

Material estimates

Material estimates

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize probable incurred losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area.

Adoption of New Accounting Standards

Adoption of New Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income – Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statement where net income is presented or in the accompanying notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The standard is effective prospectively for reporting periods, including interim periods, beginning after December 15, 2012. The adoption of the standard did not have a material effect on the Corporation’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): “Disclosures about Offsetting Assets and Liabilities,” This ASU requires an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject an enforceable master netting arrangement or similar agreement regardless of whether they are presented net in the financial statements.  The standard is effective for annual and interim periods beginning on January 1, 2013, and it is required to be applied retrospectively. The adoption of the standard did not have a material impact on the Corporation’s consolidated financial statements.

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Securities - Available-for-sale and Held to Maturity (Details) (USD $)	6 Months Ended		12 Months Ended
	Jun. 30, 2013		Dec. 31, 2012
Available for sale securities
Amortized Cost	$ 185,136,000		$ 173,146,000
Gross Unrealized Gains	836,000		1,744,000
Gross Unrealized Losses	4,296,000		190,000
Fair Value	181,676,000		174,700,000
U.S. Treasury
Available for sale securities
Amortized Cost			4,003,000
Gross Unrealized Gains			3,000
Gross Unrealized Losses
Fair Value			4,006,000
U.S. government-sponsored agencies
Available for sale securities
Amortized Cost	40,796,000		37,287,000
Gross Unrealized Gains	68,000		35,000
Gross Unrealized Losses	1,701,000		67,000
Fair Value	39,163,000		37,255,000
Obligations of state and political and subdivisions
Available for sale securities
Amortized Cost	13,655,000		13,724,000
Gross Unrealized Gains	241,000		468,000
Gross Unrealized Losses	181,000		22,000
Fair Value	13,715,000		14,170,000
Mortgage-backed securities - residential
Available for sale securities
Amortized Cost	114,333,000		104,341,000
Gross Unrealized Gains	523,000		1,176,000
Gross Unrealized Losses	2,151,000		89,000
Fair Value	112,705,000		105,428,000
Asset-backed Securities
Available for sale securities
Amortized Cost	9,874,000	[1]	9,874,000
Gross Unrealized Gains			22,000
Gross Unrealized Losses	80,000		12,000
Fair Value	9,794,000		9,884,000
Corporate Debt Securities
Available for sale securities
Amortized Cost	2,994,000		492,000
Gross Unrealized Gains	4,000		3,000
Gross Unrealized Losses	92,000
Fair Value	2,906,000		495,000
Total debt securities
Available for sale securities
Amortized Cost	181,652,000		169,721,000
Gross Unrealized Gains	836,000		1,707,000
Gross Unrealized Losses	4,205,000		190,000
Fair Value	178,000		171,238,000
Other equity investments
Available for sale securities
Amortized Cost	3,484,000		3,425,000
Gross Unrealized Gains			37,000
Gross Unrealized Losses	91,000
Fair Value	$ 3,393,000		$ 3,462,000

[1] (a) Collateralized by student loans

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Accumulated Other Comprehensive Income (Tables)

6 Months Ended

Jun. 30, 2013

Accumulated Other Comprehensive Income Tables

Schedule of components of accumulated other comprehensive income

The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive income for the three and six months ended June 30, 2013.

	For the Three Months Ended June 30, 2013
	Components of
	Accumulated Other Comprehensive Income						Total
	Unrealized Gains						Accumulated
	and Losses on			Unrealized Gains			Other
	Available for Sale			and Losses on			Comprehensive
	(AFS) Securities			Derivatives			Loss
Balance at March 31, 2012	$	607,000		$	(448,000	)	$	159,000
Other comprehensive income before
reclassifications		(2,729,000	)		59,000			(2,670,000	)
Amounts reclassified from
other comprehensive income		—			—			—
Other comprehensive income, net		(2,729,000	)		59,000			(2,670,000	)
Balance at June 30, 2013	$	(2,122,000	)	$	(389,000	)	$	(2,511,000	)

	For the Six Months Ended June 30, 2013
	Components of
	Accumulated Other Comprehensive Income						Total
	Unrealized Gains						Accumulated
	and Losses on			Unrealized Gains			Other
	Available for Sale			and Losses on			Comprehensive
	(AFS) Securities			Derivatives			Loss
Balance at December 31, 2012	$	947,000		$	(487,000	)	$	460,000
Other comprehensive income before
reclassifications		(3,068,000	)		98,000			(2,970,000	)
Amounts reclassified from
other comprehensive income		(1,000	)		—			(1,000	)
Other comprehensive income, net		(3,069,000	)		98,000			(2,971,000	)
Balance at June 30, 2013	$	(2,122,000	)	$	(389,000	)	$	(2,511,000	)

Schedule of amount reclassified from each component of accumulated other comprehensive income

The following table presents amounts reclassified from each component of accumulated other comprehensive income on a gross and net of tax basis for the six months ended June 30, 2013.

	Accumulated
	Other			Income
Components of Accumulated Other	Comprehensive			Statement
Comprehensive Loss	Income			Line Item
Unrealized gains on AFS securities before tax	$	2,000		Gains on securities transactions, net
Tax effect		(1,000	)
Total net of tax		1,000
Total reclassifications, net of tax	$	1,000

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 09, 2013
Document And Entity Information
Entity Registrant Name	STEWARDSHIP FINANCIAL CORP
Entity Central Index Key	0001023860
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		5,985,869
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2013

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Securities - Available-for-sale and Held to Maturity (Details Narrative) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Securities - Available-For-Sale And Held To Maturity Details Narrative
Cash proceeds realized from sales and calls of securities available for sale	$ 4,000,000	$ 14,000,000	$ 6,500,000	$ 25,960,000
Gross gealized gain from sales and calls of securities available for sale	2,000	5,000	2,000	438,000
Gross gealized losses from sales and calls of securities available for sale
Proceeds from calls on securities held to maturity	250,000	2,500,000	250,000	3,105,000
Gross realized gain from sales and calls of held to maturity securities	$ 7,000		$ 7,000