STEWARDSHIP FINANCIAL CORP (Form: 10-Q, Received: 11/13/2013 10:54:03)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

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 ¨

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 ¨

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 ¨	Accelerated filer ¨
Non-accelerated filer ¨ (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 ¨ No ý

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of November 4, 2013 was 5,941,658.

Stewardship Financial Corporation

INDEX

	PAGE
	NUMBER
PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition at September 30, 2013 (Unaudited) and December 31, 2012	1

Consolidated Statements of Income for the Three and Nine Months ended September 30, 2013 and 2012 (Unaudited)	2

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2013 and 2012 (Unaudited)	3

Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2013 and 2012 (Unaudited)	4

Consolidated Statements of Cash Flows for the Nine Months ended September 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

Index

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition

	September 30,			December 31,
	2013			2012
		(Unaudited)
Assets

Cash and due from banks	$	14,955,000		$	19,962,000
Other interest-earning assets		445,000			1,054,000
Cash and cash equivalents		15,400,000			21,016,000

Securities available for sale		183,411,000			174,700,000
Securities held to maturity; estimated fair value of $27,512,000 (at September 30, 2013)
and $31,768,000 (at December 31, 2012)		26,161,000			29,718,000
FHLB-NY stock, at cost		2,813,000			2,213,000
Mortgage loans held for sale		910,000			784,000
Loans, net of allowance for loan losses of $10,704,000 (at September 30, 2013)
and $10,641,000 (at December 31, 2012)		428,799,000			429,832,000
Premises and equipment, net		5,566,000			5,645,000
Accrued interest receivable		2,058,000			2,372,000
Other real estate owned, net		470,000			1,058,000
Bank owned life insurance		13,203,000			10,470,000
Other assets		10,437,000			10,580,000
Total assets	$	689,228,000		$	688,388,000

Liabilities and shareholders' equity

Liabilities
Deposits:
Noninterest-bearing	$	139,918,000		$	124,286,000
Interest-bearing		437,238,000			465,968,000
Total deposits		577,156,000			590,254,000

Federal Home Loan Bank of New York advances		40,100,000			25,000,000
Securities sold under agreements to repurchase		8,044,000			7,343,000
Subordinated debentures		7,217,000			7,217,000
Accrued interest payable		373,000			560,000
Accrued expenses and other liabilities		2,060,000			1,668,000
Total liabilities		634,950,000			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 September 30, 2013 and December 31, 2012
liquidation preference of $15,000,000		14,972,000			14,964,000
Common stock, no par value; 10,000,000 shares authorized;
5,941,398 and 5,924,865 shares issued and outstanding at September 30, 2013
and December 31, 2012, respectively		40,679,000			40,606,000
Retained earnings		1,472,000			316,000
Accumulated other comprehensive income (loss), net		(2,845,000	)		460,000
Total shareholders' equity		54,278,000			56,346,000

Total liabilities and shareholders' equity	$	689,228,000		$	688,388,000

See notes to unaudited consolidated financial statements.

Index

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013		2012			2013		2012
Interest income:
Loans	$	5,534,000	$	5,951,000		$	17,138,000	$	18,295,000
Securities held to maturity
Taxable		69,000		109,000			220,000		389,000
Non-taxable		185,000		203,000			576,000		616,000
Securities available for sale
Taxable		642,000		747,000			1,786,000		2,344,000
Non-taxable		76,000		73,000			230,000		198,000
FHLB dividends		22,000		26,000			70,000		83,000
Other interest-earning assets		8,000		11,000			22,000		28,000
Total interest income		6,536,000		7,120,000			20,042,000		21,953,000

Interest expense:
Deposits		567,000		802,000			1,800,000		2,679,000
Borrowed money		373,000		457,000			1,102,000		1,402,000
Total interest expense		940,000		1,259,000			2,902,000		4,081,000

Net interest income before provision for loan losses		5,596,000		5,861,000			17,140,000		17,872,000
Provision for loan losses		900,000		2,000,000			3,350,000		6,665,000
Net interest income after provision for loan losses		4,696,000		3,861,000			13,790,000		11,207,000

Noninterest income:
Fees and service charges		459,000		496,000			1,407,000		1,542,000
Bank owned life insurance		98,000		83,000			251,000		244,000
Gain on calls and sales of securities		—		891,000			2,000		1,336,000
Gain on sales of mortgage loans		150,000		162,000			610,000		727,000
Gain (loss) on sale of other real estate owned		156,000		(37,000	)		282,000		432,000
Gain on life insurance proceeds		—		—			537,000		—
Miscellaneous		108,000		87,000			351,000		331,000
Total noninterest income		971,000		1,682,000			3,440,000		4,612,000

Noninterest expenses:
Salaries and employee benefits		2,570,000		2,394,000			7,977,000		7,037,000
Occupancy, net		518,000		494,000			1,538,000		1,452,000
Equipment		197,000		240,000			580,000		731,000
Data processing		327,000		324,000			987,000		974,000
Advertising		117,000		145,000			368,000		423,000
FDIC insurance premium		220,000		154,000			646,000		457,000
Charitable contributions		60,000		—			180,000		—
Other		865,000		1,418,000			2,661,000		3,772,000
Total noninterest expenses		4,874,000		5,169,000			14,937,000		14,846,000
Income before income tax expense		793,000		374,000			2,293,000		973,000
Income tax expense		271,000		46,000			488,000		193,000
Net income		522,000		328,000			1,805,000		780,000
Dividends on preferred stock		170,000		112,000			463,000		225,000
Net income available to common shareholders	$	352,000	$	216,000		$	1,342,000	$	555,000

Basic earnings per common share	$	0.06	$	0.04		$	0.23	$	0.09
Diluted earnings per common share	$	0.06	$	0.04		$	0.23	$	0.09

Weighted average number of common shares outstanding		5,939,958		5,916,123			5,935,195		5,903,598
Weighted average number of diluted common
shares outstanding		5,939,958		5,916,123			5,935,195		5,903,598

See notes to unaudited consolidated financial statements.

Index

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012

Net income	$	522,000		$	328,000		$	1,805,000		$	780,000

Other comprehensive (loss) income:
Change in unrealized holding gains (losses) on
securities available for sale arising during the period		(578,000	)		794,000			(5,591,000	)		1,522,000
Reclassification adjustment for gains in net income		—			(891,000	)		(2,000	)		(1,336,000	)
Net unrealized gains (losses)		(578,000	)		(97,000	)		(5,593,000	)		186,000
Tax effect		224,000			44,000			2,170,000			(67,000	)
Net unrealized gains (losses), net of tax amount		(354,000	)		(53,000	)		(3,423,000	)		119,000

Change in fair value of interest rate swap		33,000			(2,000	)		197,000			15,000
Tax effect		(13,000	)		1,000			(79,000	)		(6,000	)
Change in fair value of interest rate swap,
net of tax amount		20,000			(1,000	)		118,000			9,000

Total other comprehensive income (loss)		(334,000	)		(54,000	)		(3,305,000	)		128,000

Total comprehensive income (loss)	$	188,000		$	274,000		$	(1,500,000	)	$	908,000

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

	9/30/2013			12/31/2012

Unrealized gain (loss) on securities available for sale	$	(2,476,000	)	$	947,000
Unrealized loss on fair value of interest rate swap		(369,000	)		(487,000	)

Accumulated other comprehensive income (loss), net	$	(2,845,000	)	$	460,000

See notes to unaudited consolidated financial statements.

Index

Stewardship Financial Corporation and Subsidiary

Consolidated Statement of Changes in Shareholders' Equity

(Unaudited)

	Nine Months Ended September 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		—		—		—			(178,000	)		—			(178,000	)
Payment of discount on dividend
reinvestment plan		—		—		(1,000	)		—			—			(1,000	)
Cash dividends accrued on
preferred stock		—		—		—			(463,000	)		—			(463,000	)
Common stock issued under stock plans		—		16,533		74,000			—			—			74,000
Amortization of issuance costs		8,000		—		—			(8,000	)					—
Net income									1,805,000			—			1,805,000
Other comprehensive loss		—		—		—			—			(3,305,000	)		(3,305,000	)

Balance -- September 30, 2013	$	14,972,000		5,941,398	$	40,679,000		$	1,472,000		$	(2,845,000	)	$	54,278,000

	Nine Months Ended September 30, 2012
											Accumulated
											Other
	Preferred		Common Stock					Retained			Comprehensive
	Stock		Shares		Amount			Earnings			Income, 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		—		—		—			(766,000	)		—		(766,000	)
Payment of discount on dividend
reinvestment plan		—		—		(7,000	)		—			—		(7,000	)
Cash dividends accrued on
preferred stock		—		—		—			(225,000	)		—		(225,000	)
Common stock issued under stock plans		—		37,074		172,000			—			—		172,000
Amortization of issuance costs		8,000		—		—			(8,000	)				—
Net income									780,000			—		780,000
Other comprehensive income		—		—		—			—			128,000		128,000

Balance -- September 30, 2012	$	14,963,000		5,919,578	$	40,585,000		$	824,000		$	1,502,000	$	57,874,000

See notes to unaudited consolidated financial statements.

Index

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	1,805,000		$	780,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of premises and equipment		325,000			408,000
Amortization of premiums and accretion of discounts, net		1,031,000			1,203,000
Accretion (amortization) of deferred loan fees		56,000			31,000
Provision for loan losses		3,350,000			6,665,000
Originations of mortgage loans held for sale		(37,172,000	)		(49,899,000	)
Proceeds from sale of mortgage loans		37,656,000			54,399,000
Gain on sales of mortgage loans		(610,000	)		(727,000	)
Gain on sales and calls of securities		(2,000	)		(1,336,000	)
Gain on sale of other real estate owned		(282,000	)		(432,000	)
Loss on early distinguishment of debt		—			691,000
Deferred income tax benefit		(99,000	)		(427,000	)
Decrease in accrued interest receivable		314,000			414,000
Decrease in accrued interest payable		(187,000	)		(228,000	)
Earnings on bank owned life insurance		(251,000	)		(244,000	)
Gain on life insurance proceeds		(537,000	)		—
Decrease (increase) in other assets		2,420,000			(435,000	)
Increase (decrease) in other liabilities		511,000			(24,000	)
Net cash provided by operating activities		8,328,000			10,839,000

Cash flows from investing activities:
Purchase of securities available for sale		(44,841,000	)		(86,581,000	)
Proceeds from maturities and principal repayments on securities available-for-sale		22,880,000			20,546,000
Proceeds from sales and calls on securities available for sale		6,700,000			63,374,000
Proceeds from maturities and principal repayments on securities held to maturity		2,316,000			3,264,000
Proceeds from sales and calls on securities held to maturity		1,170,000			3,105,000
(Purchase) sale of FHLB-NY stock		(600,000	)		265,000
Net (increase) decrease in loans		(2,722,000	)		9,855,000
Proceeds from sale of other real estate owned		1,209,000			5,431,000
Purchase of bank owned life insurance		(3,000,000	)		—
Life insurance proceeds		1,055,000			—
Additions to premises and equipment		(246,000	)		(66,000	)
Net cash provided by (used in) investing activities		(16,079,000	)		19,193,000

Cash flows from financing activities:
Net increase in noninterest-bearing deposits		15,632,000			9,284,000
Net decrease in interest-bearing deposits		(28,730,000	)		(19,410,000	)
Net increase (decrease) in securities sold under agreements to repurchase		701,000			(7,691,000	)
Net increase (decrease) in short term borrowings		15,100,000			(4,700,000	)
Repayment of long term borrowings		—			(3,000,000	)
Cash dividends paid on common stock		(178,000	)		(766,000	)
Cash dividends paid on preferred stock		(463,000	)		(225,000	)
Payment of discount on dividend reinvestment plan		(1,000	)		(7,000	)
Issuance of common stock		74,000			172,000
Net cash provided by (used in) financing activities		2,135,000			(26,343,000	)

Net increase (decrease) in cash and cash equivalents		(5,616,000	)		3,689,000
Cash and cash equivalents - beginning		21,016,000			13,698,000
Cash and cash equivalents - ending	$	15,400,000		$	17,387,000

See notes to unaudited consolidated financial statements.

Index

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited)

	Nine Months Ended
	September 30,
	2013		2012
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	3,089,000	$	4,309,000
Cash paid during the period for income taxes	$	251,000	$	1,299,000
Transfers from loans to other real estate owned	$	349,000	$	2,758,000

See notes to unaudited consolidated financial statements.

Index

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

September 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 nine months ended September 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.

Index

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:

	September 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value

U.S. government-sponsored agencies	$	41,298,000	$	24,000	$	1,988,000	$	39,334,000
Obligations of state and political
subdivisions		13,420,000		218,000		160,000		13,478,000
Mortgage-backed securities - residential		116,350,000		534,000		2,438,000		114,446,000
Asset-backed securities (a)		9,874,000		10,000		58,000		9,826,000
Corporate debt		2,995,000		4,000		83,000		2,916,000

Total debt securities		183,937,000		790,000		4,727,000		180,000,000
Other equity investments		3,512,000		—		101,000		3,411,000
	$	187,449,000	$	790,000	$	4,828,000	$	183,411,000

	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 nine months ended September 30, 2013 were $200,000 and $6,700,000, respectively. Cash proceeds realized from calls and sales of securities available-for-sale for the three and nine months ended September 30, 2012 were $37,414,000 and $63,374,000, respectively. There were no gross gains realized on calls and sales during the three months ended September 30, 2013. Gross gains realized on calls and sales during the nine months ended September 30, 2013 totaled $2,000. There were no gross losses realized on calls and sales during the three and nine months ended September 30, 2013. Gross gains realized on calls and sales during the three and nine months ended September 30, 2012 totaled $898,000 and $1,336,000, respectively. Gross losses realized on calls and sales during the three and nine months ended September 30, 2012 totaled $7,000 and $7,000, respectively.

Index

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

	September 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		20,658,000		905,000		—		21,563,000
Mortgage-backed securities - residential		5,244,000		412,000		—		5,656,000
	$	26,161,000	$	1,351,000	$	—	$	27,512,000

	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

Cash proceeds realized from calls of securities held to maturity for the three and nine months ended September 30, 2013 were $920,000 and $1,170,000, respectively. There were no cash proceeds realized from calls of securities held to maturity for the three months ended September 30, 2012 and cash proceeds realized from calls of securities held to maturity for the nine months ended September 30, 2012 totaled $3,105,000. There were no gross gains and no gross losses realized on calls during the three and nine months ended September 30, 2013. There were no gross gains realized from calls for the three months ended September 30, 2012. Gross gains realized on calls during the nine months ended September 30, 2012 totaled $7,000. There were no gross losses realized on calls during the three and nine months ended September 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.

	September 30, 2013
	Amortized		Fair
	Cost		Value

Available-for-sale
Within one year	$	—	$	—
After one year, but within five years		7,609,000		7,553,000
After five years, but within ten years		30,160,000		29,322,000
After ten years		19,944,000		18,853,000
Mortgage-backed securities - residential		116,350,000		114,446,000
Asset-backed securities		9,874,000		9,826,000
Total	$	183,937,000	$	180,000,000

Held to maturity
Within one year	$	4,285,000	$	4,354,000
After one year, but within five years		11,931,000		12,569,000
After five years, but within ten years		4,524,000		4,750,000
After ten years		177,000		183,000
Mortgage-backed securities - residential		5,244,000		5,656,000
Total	$	26,161,000	$	27,512,000

Index

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

Available-for-Sale
September 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. government-
sponsored agencies	$	33,026,000	$	(1,988,000	)	$	—	$	—		$	33,026,000	$	(1,988,000	)
Obligations of state and
political subdivisions		5,476,000		(146,000	)		868,000		(14,000	)		6,344,000		(160,000	)
Mortgage-backed
securities - residential		67,110,000		(2,438,000	)		—		—			67,110,000		(2,438,000	)
Asset-backed securities		8,781,000		(58,000	)		—		—			8,781,000		(58,000	)
Corporate debt		2,417,000		(83,000	)		—		—			2,417,000		(83,000	)
Other equity investments		3,351,000		(101,000	)		—		—			3,351,000		(101,000	)
Total temporarily
impaired securities	$	120,161,000	$	(4,814,000	)	$	868,000	$	(14,000	)	$	121,029,000	$	(4,828,000	)

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	)
Total temporarily
impaired securities	$	50,735,000	$	(190,000	)	$	—	$	—	$	50,735,000	$	(190,000	)

Other-Than-Temporary-Impairment

A t September 30, 2013, there was one security 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. The securities cannot be prepaid in a manner that would result in the Corporation not receiving substantially all of its amortized cost. In addition, 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 September 30, 2013.

Index

Note 3. Loans and Nonperforming Loans

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

	September 30,			December 31,
	2013			2012

Commercial:
Secured by real estate	$	54,909,000		$	58,160,000
Other		25,845,000			31,254,000
Commercial real estate		253,084,000			242,763,000
Commercial construction		2,985,000			9,324,000
Residential real estate		75,770,000			67,200,000
Consumer:
Secured by real estate		26,058,000			30,982,000
Other		598,000			624,000
		90,000			116,000
Total gross loans		439,339,000			440,423,000

Less: Deferred loan fees, net of costs		(164,000	)		(50,000	)
Allowance for loan losses		10,704,000			10,641,000
		10,540,000			10,591,000

Loans, net	$	428,799,000		$	429,832,000

At September 30, 2013 and December 31, 2012, loan participations sold by the Corporation to other lending institutions totaled approximately $13,187,000 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 September 30, 2013
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period

Commercial	$	3,985,000	$	508,000		$	274,000	$	44,000	$	4,263,000
Commercial real estate		5,598,000		518,000			672,000		118,000		5,562,000
Construction		304,000		(191,000	)		—		—		113,000
Residential real estate		434,000		23,000			57,000		—		400,000
Consumer		410,000		23,000			142,000		—		291,000
Other loans		1,000		1,000			—		—		2,000
Unallocated		55,000		18,000			—		—		73,000
Total	$	10,787,000	$	900,000		$	1,145,000	$	162,000	$	10,704,000

Index

	For the nine months ended September 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	$	231,000		$	922,000	$	122,000	$	4,263,000
Commercial real estate		4,936,000		2,939,000			2,431,000		118,000		5,562,000
Construction		169,000		(58,000	)		24,000		26,000		113,000
Residential real estate		308,000		149,000			57,000		—		400,000
Consumer		352,000		64,000			145,000		20,000		291,000
Other loans		3,000		(3,000	)		—		2,000		2,000
Unallocated		41,000		28,000			—		4,000		73,000
Total	$	10,641,000	$	3,350,000		$	3,579,000	$	292,000	$	10,704,000

	For the three months ended September 30, 2012
	Balance,		Provision					Recoveries		Balance,
	beginning		charged			Loans		of loans		end
	of period		to operations			charged off		charged off		of period

Commercial	$	6,023,000	$	1,620,000		$	865,000	$	167,000	$	6,945,000
Commercial real estate		4,527,000		542,000			606,000		—		4,463,000
Construction		514,000		(137,000	)		20,000		3,000		360,000
Residential real estate		392,000		18,000			15,000		—		395,000
Consumer		437,000		(28,000	)		1,000		1,000		409,000
Other loans		4,000		(2,000	)		1,000		1,000		2,000
Unallocated		37,000		(13,000	)		—		—		24,000
Total	$	11,934,000	$	2,000,000		$	1,508,000	$	172,000	$	12,598,000

	For the nine months ended September 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	$	4,581,000		$	3,221,000	$	217,000	$	6,945,000
Commercial real estate		4,943,000		1,964,000			2,445,000		1,000		4,463,000
Construction		480,000		42,000			165,000		3,000		360,000
Residential real estate		303,000		107,000			15,000		—		395,000
Consumer		498,000		(42,000	)		48,000		1,000		409,000
Other loans		2,000		(1,000	)		1,000		2,000		2,000
Unallocated		10,000		14,000			—		—		24,000
Total	$	11,604,000	$	6,665,000		$	5,895,000	$	224,000	$	12,598,000

Index

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 September 30, 2013 and December 31, 2012.

	September 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	$	269,000	$	94,000	$	—	$	—	$	—	$	—	$	—	$	363,000

Collectively
evaluated for
impairment		3,994,000		5,468,000		113,000		400,000		291,000		2,000		73,000		10,341,000
Total ending
allowance
balance	$	4,263,000	$	5,562,000	$	113,000	$	400,000	$	291,000	$	2,000	$	73,000	$	10,704,000

Loans:
Loans
individually
evaluated for
impairment	$	8,369,000	$	15,528,000	$	852,000	$	650,000	$	817,000	$	—	$	—	$	26,216,000

Loans
collectively
evaluated for
impairment		72,385,000		237,556,000		2,133,000		75,120,000		25,839,000		90,000		—		413,123,000
Total ending
loan balance	$	80,754,000	$	253,084,000	$	2,985,000	$	75,770,000	$	26,656,000	$	90,000	$	—	$	439,339,000

Index

	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:

	September 30,		December 31,
	2013		2012

Commercial:
Secured by real estate	$	2,845,000	$	3,374,000
Other		105,000		261,000
Commercial real estate		10,852,000		10,083,000
Commercial construction		—		3,080,000
Residential real estate		650,000		413,000
Consumer:
Secured by real estate		817,000		800,000

Total nonperfoming loans	$	15,269,000	$	18,011,000

Index

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

	At and for the nine months ended September 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	$	7,696,000	$	6,160,000			$	6,417,000	$	161,000
Other		114,000		105,000				104,000		1,000
Commercial real estate		13,735,000		9,629,000				9,820,000		89,000
Commercial construction		1,266,000		852,000				3,212,000		28,000
Residential real estate		691,000		650,000				472,000
Consumer:
Secured by real estate		827,000		817,000				758,000

With an allowance recorded:
Commercial:
Secured by real estate		3,519,000		1,193,000	$	237,000		986,000		23,000
Other		1,915,000		911,000		32,000		1,116,000		38,000
Commercial real estate		8,097,000		5,899,000		94,000		3,381,000		35,000
Commercial construction								469,000		48,000
Residential real estate		—		—		—		46,000
Consumer:
Secured by real estate		—		—		—		86,000
	$	37,860,000	$	26,216,000	$	363,000	$	26,867,000	$	423,000

During the nine months ended September 30, 2013, no interest income was recognized on a cash basis.

Index

	At and for the year ended 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

During the year ended December 31, 2012, no interest income was recognized on a cash basis.

Index

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

	September 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	$	—	$	—	$	1,623,000	$	1,623,000	$	53,286,000	$	54,909,000
Other		—		247,000		105,000		352,000		25,493,000		25,845,000
Commercial real estate		—		—		8,640,000		8,640,000		244,444,000		253,084,000
Commercial construction		—		—		—		—		2,985,000		2,985,000
Residential real estate		—		136,000		650,000		786,000		74,984,000		75,770,000
Consumer:
Secured by real estate		—		—		674,000		674,000		25,384,000		26,058,000
Other		—		—		—		—		598,000		598,000
Other		—		—		—		—		90,000		90,000
Total	$	—	$	383,000	$	11,692,000	$	12,075,000	$	427,264,000	$	439,339,000

	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 September 30, 2013 and December 31, 2012, the Corporation had $12.1 million and $11.7 million, respectively, of loans the terms of which have been modified in troubled debt restructurings. Of these loans, $11.0 million and $10.4 million were performing in accordance with their terms, as modified, at September 30, 2013 and December 31, 2012, respectively. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of $221,000 and $246,000 have been allocated for the troubled debt restructurings at September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013 and December 31, 2012, the Corporation has committed $600,000 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 nine months ended September 30, 2013:

Index

	For the three months ended September 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		—	$	—	$	—		6	$	1,581,000	$	1,581,000
Other		—		—		—		4		660,000		660,000
Commercial real estate		1		1,994,000		1,994,000		—		—		—
Commercial construction		—		—		—		1		300,000		300,000
Total troubled debt restructurings		1	$	1,994,000	$	1,994,000		11	$	2,541,000	$	2,541,000

	For the nine months ended September 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		—	$	—	$	—		8	$	1,806,000	$	1,806,000
Other		1		17,000		17,000		5		3,735,000		3,735,000
Commercial real estate		1		1,994,000		1,994,000		—		—		—
Commercial construction		—		—		—		1		300,000		300,000
Total troubled debt restructurings		2	$	2,011,000	$	2,011,000		14	$	5,841,000	$	5,841,000

One loan was modified as a trouble debt restructuring during the three months ended September 30, 2013. During the nine months ended September 30, 2013, the terms of two loans were modified as troubled debt restructurings. The modification of the terms of a $17,000 loan represented a term out of a remaining balance on a matured loan. The modification of the terms of a $2.0 million loan represented a period of principal forbearance as well as some principal forgiveness, which is partially contingent on three years of satisfactory performance under the forbearance agreement.

For the nine months ended September 30, 2013, the troubled debt restructurings described above resulted in a net reduction in the allowance for loan losses of $300,000. Charge-offs for the nine months ended September 30, 2013 related to troubled debt restructurings totaled $1,121,000.

A loan is considered to be in payment default once it is contractually 90 days past due under the modified terms. In the nine months ended September 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.

Index

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 September 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:

	September 30, 2013
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total

Commercial:
Secured by real estate	$	41,666,000	$	9,092,000	$	4,151,000	$	—	$	—	$	54,909,000
Other		23,459,000		1,525,000		834,000		27,000		—		25,845,000
Commercial real estate		225,736,000		12,565,000		12,662,000		2,121,000		—		253,084,000
Commercial construction		972,000		2,013,000		—		—		—		2,985,000
Total	$	291,833,000	$	25,195,000	$	17,647,000	$	2,148,000	$	—	$	336,823,000

	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 September 30, 2013 and December 31, 2012.

	September 30, 2013
			Past Due and
	Current		Nonaccrual		Total

Residential real estate	$	74,983,000	$	786,000	$	75,769,000
Consumer:
Secured by real estate		25,384,000		674,000		26,058,000
Other		598,000		—		598,000
Total	$	100,965,000	$	1,460,000	$	102,425,000

Index

	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 other real estate owned (“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 OREO 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, reviews 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.

Index

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 September 30, 2013
Assets:
Available for sale securities
U.S. government -
sponsored agencies	$	39,334,000	$	—	$	39,334,000	$	—
Obligations of state and
political subdivisions		13,478,000		—		13,478,000		—
Mortgage-backed
securities - residential		114,446,000		—		114,446,000		—
Asset-backed securities		9,826,000				9,826,000
Corporate debt		2,916,000				2,916,000
Other equity investments		3,411,000		3,351,000		60,000		—
Total available for
sale securities	$	183,411,000	$	3,351,000	$	180,060,000	$	—

Liabilities:
Interest rate swap	$	614,000	$	—	$	614,000	$	—

	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	$	—

Index

There were no transfers of assets between Level 1 and Level 2 during the three and nine months ended September 30, 2013 or during the year ended December 31, 2012. There were no changes to the valuation techniques for fair value measurements as of September 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 September 30, 2013
Assets:
Impaired loans
Commercial:
Secured by real estate	$	6,930,000	$	—	$	—	$	6,930,000
Other		—		—		—		—
Commercial real estate		13,096,000		—		—		13,096,000
Commercial construction		852,000		—		—		852,000
Residential real estate		650,000		—		—		650,000
Consumer
Secured by real estate		817,000		—		—		817,000
Other Real Estate Owned		470,000						470,000
	$	22,815,000	$	—	$	—	$	22,815,000


	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 $22,663,000, with a valuation allowance of $318,000, resulting in an increase of the provision for loan losses of $517,000 and $2,985,000 for the three and nine months ended September 30, 2013.

Other real estate owned had a recorded investment value of $480,000 with a $10,000 valuation allowance at September 30, 2013. The $10,000 valuation allowance was recorded during the nine months ended September 30, 2013. At December 31, 2012, other real estate owned had a recorded investment value of $1,058,000 with no valuation allowance.

Index

For the Level 3 assets measured at fair value on a non-recurring basis at September 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	$	22,345,000	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	$	470,000	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 September 30, 2013

Financial assets:
Cash and cash equivalents	$	15,400,000	$	15,400,000	$	—	$	—
Securities available for sale		183,411,000		3,351,000		180,060,000		—
Securities held to maturity		26,161,000		—		27,512,000		—
Mortgage loans held for sale		910,000		—		910,000		—
Loans, net		428,799,000		—		—		436,861,000
Accrued interest receivable		2,058,000		—		706,000		1,351,000

Financial liabilities:
Deposits		577,156,000		439,719,000		137,977,000		—
FHLB-NY advances		40,100,000		—		40,483,000		—
Securities sold under
agreements to repurchase		8,044,000		—		8,367,000		—
Subordinated debenture		7,217,000		—		—		7,209,000
Accrued interest payable		373,000		2,000		353,000		18,000
Interest rate swap		614,000		—		614,000		—

Index

			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.

Index

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 September 30, 2013 and December 31, 2012, the fair value of such commitments were not material.

Limitations

The preceding fair value estimates were made at September 30, 2013 and December 31, 2012 based on pertinent market data and relevant information concerning 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 September 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 Per Share

Basic earnings per share is calculated by dividing net income 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 per share is computed similar to that of basic earnings 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 available to common shareholders (numerator) and the weighted average common stock outstanding (denominator) for both basic and diluted earnings per share.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

Net income	$	522,000	$	328,000	$	1,805,000	$	780,000
Dividends on preferred stock		170,000		112,000		463,000		225,000
Net income available to common stockholders	$	352,000	$	216,000	$	1,342,000	$	555,000

Weighted average shares		5,939,958		5,916,123		5,935,195		5,903,598
Effect of dilutive stock options		N/A		N/A		N/A		N/A
Total weighted average dilutive shares		5,939,958		5,916,123		5,935,195		5,903,598

Basic earnings per common share	$	0.06	$	0.04	$	0.23	$	0.09

Diluted earnings per common share	$	0.06	$	0.04	$	0.23	$	0.09

Stock options to purchase 1,101 and 4,849 shares of common stock were not considered in computing diluted earnings per share for the three and nine months ended September 30, 2013, respectively, because they were antidilutive. For the three and nine months ended September 30, 2012, stock options to purchase 6,983 and 42,321 shares of common stock, respectively, were not considered in computing diluted earnings per share of common stock because they were antidilutive.

Index

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 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 to or in parity with 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.

Index

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 nine months ended September 30, 2013.

	For the Three Months Ended September 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 June 30, 2013	$	(2,122,000	)	$	(389,000	)	$	(2,511,000	)
Other comprehensive income before
reclassifications		(354,000	)		20,000			(334,000	)
Amounts reclassified from
other comprehensive income		—			—			—
Other comprehensive income, net		(354,000	)		20,000			(334,000	)
Balance at September 30, 2013	$	(2,476,000	)	$	(369,000	)	$	(2,845,000	)

	For the Nine Months Ended September 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		(3,422,000	)		118,000			(3,304,000	)
Amounts reclassified from
other comprehensive income		(1,000	)		—			(1,000	)
Other comprehensive income, net		(3,423,000	)		118,000			(3,305,000	)
Balance at September 30, 2013	$	(2,476,000	)	$	(369,000	)	$	(2,845,000	)

The following table presents amounts reclassified from each component of accumulated other comprehensive income on a gross and net of tax basis for the nine months ended September 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

Index

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 $840,000 to $689.2 million at September 30, 2013 from $688.4 million at December 31, 2012. Cash and cash equivalents decreased $5.6 million to $15.4 million at September 30, 2013 from $21.0 million at December 31, 2012, reflecting growth in the securities portfolio. Securities available-for-sale increased $8.7 million to $183.4 million while securities held to maturity decreased $3.6 million to $26.2 million. Net loans decreased $1.0 million to $428.8 million at September 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 nine months of fiscal year 2013 as well as a $63,000 net increase in the allowance for loan losses. Loans held for sale totaled $910,000 at September 30, 2013, an increase of $126,000 from $784,000 at December 31, 2012. Bank owned life insurance increased $2.7 million to $13.2 million reflecting a $3.0 million purchase partially offset by a death benefit insurance payment received in the first quarter of 2013.

Deposits totaled $577.2 million at September 30, 2013, a decrease of $13.1 million from $590.3 million at December 31, 2012. The decline in deposits consisted of a $28.7 million decrease in interest-bearing accounts partially offset by a $15.6 million increase in noninterest-bearing accounts.

Index

FHLB – NY advances were $40.1 million at September 30, 2013 compared to $25.0 million at December 31, 2012. The increase in these borrowings was the result of a decrease in deposits.

In accordance with a notice received by the Corporation from the Federal Reserve Bank of New York (“FRB-NY”) under which the Corporation is required to obtain the prior written approval of FRB-NY in order to issue dividends, the Corporation solicited and received written approval in October 2013 from FRB-NY regarding (i) the payment of a cash dividend on preferred stock held by the U.S. Treasury under the Small Business Lending Fund program of approximately $170,000 (payable on January 2, 2014), (ii) the payment of a cash dividend to common shareholders of $0.01 per share, totaling approximately $59,000 (payable on November 15, 2013); and (iii) the payment of quarterly interest on Trust Preferred Securities totaling approximately $125,000 (payable on December 17, 2013).

Results of Operations

General

The Corporation reported net income of $522,000, or $0.06 diluted earnings per common share for the three months ended September 30, 2013, compared to net income of $328,000, or $0.04 diluted earnings per common share for the three months ended September 30, 2012. For the nine months ended September 30, 2013, the Corporation reported net income of $1.8 million, or $0.23 diluted earnings per common share compared to net income of $780,000, or $0.09 diluted earnings per common share, for the comparable prior year period.

Net Interest Income

Net interest income, on a tax equivalent basis, for the three and nine months ended September 30, 2013 was $5.6 million and $17.1 million, respectively, compared to $5.9 million and $17.9 million recorded in the prior year periods. The net interest rate spread and net yield on interest-earning assets for the three months ended September 30, 2013 were 3.31% and 3.49%, respectively, compared to 3.40% and 3.62% for the three months ended September 30, 2012. For the nine months ended September 30, 2013, the net interest rate spread and net yield on interest-earning assets were 3.41% and 3.60%, respectively, compared to 3.45% and 3.67% for the nine months ended September 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 nine months ended September 30, 2013 and 2012 including: (1) average assets, liabilities and shareholders’ 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.

Index

Analysis of Net Interest Income (Unaudited)

For the Three Months Ended September 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)	$	439,283		$	5,544			5.01	%	$	445,722		$	5,962			5.31	%
Taxable investment securities (1)		176,540			733			1.65			176,773			882			1.98
Tax-exempt investment securities (1) (2)		34,787			390			4.44			35,670			410			4.56
Other interest-earning assets		407			8			7.80			658			11			6.63
Total interest-earning assets		651,017			6,675			4.07			658,823			7,265			4.37

Non-interest-earning assets:
Allowance for loan losses		(11,282	)								(12,351	)
Other assets		51,306									55,923
Total assets	$	691,041								$	702,395


Liabilities and Stockholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits	$	230,406		$	188			0.32	%	$	243,105		$	236			0.39	%
Savings deposits		75,539			20			0.11			64,532			23			0.14
Time deposits		141,037			359			1.01			161,551			543			1.33
Repurchase agreements		7,684			93			4.80			13,885			179			5.11
FHLB-NY borrowing		26,662			153			2.28			25,096			151			2.39
Subordinated debenture		7,217			127			6.98			7,217			127			6.98
Total interest-bearing liabilities		488,545			940			0.76			515,386			1,259			0.97
Non-interest-bearing liabilities:
Demand deposits		145,668									125,443
Other liabilities		2,939									3,105
Stockholders' equity		53,889									58,461
Total liabilities and stockholders' equity	$	691,041								$	702,395

Net interest income (taxable equivalent basis)					5,735									6,006
Tax Equivalent adjustment					(139	)								(145	)
Net interest income				$	5,596								$	5,861

Net interest spread (taxable equivalent basis)								3.31	%								3.40	%

Net yield on interest-earning
assets (taxable equivalent basis) (3)								3.49	%								3.62	%

(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.

Index

Analysis of Net Interest Income (Unaudited)

For the Nine Months Ended September 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)	$	443,316		$	17,169			5.18	%	$	452,664		$	18,328			5.39	%
Taxable investment securities (1)		172,482			2,076			1.61			176,088			2,816			2.13
Tax-exempt investment securities (1) (2)		35,970			1,202			4.47			34,030			1,210			4.74
Other interest-earning assets		413			22			7.12			998			28			3.87
Total interest-earning assets		652,181			20,469			4.20			663,780			22,382			4.49

Non-interest-earning assets:
Allowance for loan losses		(11,432	)								(12,574	)
Other assets		49,333									54,286
Total assets	$	690,082								$	705,492


Liabilities and Stockholders' Equity

Interest-bearing liabilities:
Interest-bearing demand deposits	$	234,478		$	562			0.32	%	$	248,095		$	847			0.45	%
Savings deposits		72,300			58			0.11			61,674			84			0.18
Time deposits		145,745			1,180			1.08			163,954			1,748			1.42
Repurchase agreements		7,458			274			4.91			14,188			543			5.10
FHLB-NY borrowing		25,744			451			2.34			27,428			480			2.33
Subordinated debenture		7,217			377			6.98			7,217			379			7.00
Total interest-bearing liabilities		492,942			2,902			0.79			522,556			4,081			1.04
Non-interest-bearing liabilities:
Demand deposits		138,328									121,320
Other liabilities		3,093									3,027
Stockholders' equity		55,719									58,589
Total liabilities and stockholders' equity	$	690,082								$	705,492

Net interest income (taxable equivalent basis)					17,567									18,301
Tax Equivalent adjustment					(427	)								(429	)
Net interest income				$	17,140								$	17,872

Net interest spread (taxable equivalent basis)								3.41	%								3.45	%

Net yield on interest-earning
assets (taxable equivalent basis) (3)								3.60	%								3.67	%

(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.

Index

For the three months ended September 30, 2013, total interest income, on a tax equivalent basis, decreased $590,000 to $6.7 million, or 8.1%, 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 $1.9 million to $20.5 million for the nine months ended September 30, 2013, or 8.5%, compared to the same period for 2012. Consistent with the three month period, the decrease in the current nine 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 4.07% and 4.20% for the three and nine months ended September 30, 2013, respectively, compared to an average rate of 4.37% and 4.49% for the three and nine months ended September 30, 2012. The decline in the asset yield reflects the effect of a prolonged low interest rate environment. Average interest-earning assets decreased $7.8 million and $11.6 million for the three and nine months ended September 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 $6.4 million and $9.3 million for the three and nine months ended September 30, 2013, respectively.

Interest paid on deposits and borrowed money decreased $319,000 and $1.2 million for the three and nine months ended September 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 September 30, 2013, the total cost for interest-bearing liabilities declined to 0.76% representing a 21 basis point decline when compared to the same prior year period. The cost for deposits and borrowed money decreased 25 basis points from 1.04% for the nine month period ended September 30, 2012 to 0.79% for the comparable period in 2013. The average balance of total interest-bearing deposits and borrowings decreased $26.8 million and $29.6 million for the three and nine months ended September 30, 2013, respectively, from the comparable 2012 period. Average interest-bearing deposits decreased $22.2 million and average borrowings decreased $4.6 million for the three months ended September 30, 2013 when compared to the same prior year period. Likewise, for the nine months ended September 30, 2013 the change in interest-bearing deposits and borrowings was comprised of a $21.2 million decrease in average interest-bearing deposits and a $8.4 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 $900,000 and $3.4 million for the three and nine months ended September 30, 2013, respectively, compared to $2.0 million and $6.7 million for the three and nine months ended September 30, 2012, respectively. Nonaccrual loans of $15.3 million at September 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 $363,000 at September 30, 2013. During the nine months ended September 30, 2013, the Corporation charged off $3.6 million of loan balances and recovered $292,000 in previously charged off loans compared to $5.9 million and $224,000, respectively, during the same period in 2012.

The current period loan loss provision considers economic conditions that have contributed to 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 $971,000 and $3.4 million for the three and nine months ended September 30, 2013, respectively, compared to $1.7 million and $4.6 million for the prior year periods. For the three months ended September 30, 2013, there was $156,000 of gains on sales of other real estate owned while noninterest income included a net loss of $37,000 related to sales of other real estate owned for the three months ended September 30, 2012. Gains on sales of other real estate owned were $282,000 for the nine months ended September 30, 2013 compared to $432,000 for the comparable prior year period. Gains on sales of mortgage loans totaled $150,000 and $610,000 for the three and nine months ended September 30, 2013, respectively, compared to $162,000 and $727,000 for the three and nine months ended September 30, 2012, respectively. There were no gains on calls and sales of securities included in noninterest income for the three months ended September 30, 2013 and for the nine months ended September 30, 2013, noninterest income included just $2,000 from gains on calls and sales of securities. This compares to $891,000 and $1.3 million for the three and nine months ended September 31, 2012, respectively. The gain for the three months ended September 30, 2012 reflected a transaction executed to lower the Corporation’s risk exposure to rising interest rates and delever the balance sheet through the partial repayment of a higher costing wholesale repurchase agreement. A resulting gain was partially offset by a prepayment penalty discussed below. Noninterest income of $537,000 was recorded as a result of a death benefit insurance payment received in early 2013.

Index

Noninterest Expense

Noninterest expenses for the three and nine months ended September 30, 2013 was $4.9 million and $14.9 million, respectively, compared to $5.2 million and $14.8 million, respectively, 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. Included in noninterest expense for the prior year periods is a $691,000 prepayment premium resulting from the Corporation’s repayment of $7 million of a wholesale repurchase agreement.

Income Tax Expense

For the three months ended September 30, 2013, the Corporation recorded income tax expense of $271,000 compared to income tax expense of $46,000 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, income tax expense totaled $488,000 representing an effective tax rate of 21.3% compared to income tax expense of $193,000, or an effective tax rate of 19.8%, for the nine months ended September 30, 2012.

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. The Corporation manages this risk by maintaining reserves to absorb probable incurred loan losses. In determining the adequacy of the allowance for loan losses, management 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 endeavors 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:

Index

	September 30,			June 30,			March 31,			December 31,
	2013			2013			2013			2012
	(Dollars in thousands)

Nonaccrual loans (1)	$	15,269		$	14,716		$	17,479		$	18,011
Loans past due 90 days or more and accruing (2)		—			—			50			237
Total nonperforming loans		15,269			14,716			17,529			18,248

Other real estate owned		470			1,072			876			1,058
Total nonperforming assets	$	15,739		$	15,788		$	18,405		$	19,306

Performing restructured loans (3)	$	10,986		$	10,235		$	10,134		$	10,373

Allowance for loan losses	$	10,704		$	10,787		$	11,512		$	10,641

Nonperforming loans to total gross loans		3.48	%		3.33	%		3.97	%		4.14	%
Nonperforming assets to total assets		2.28	%		2.29	%		2.65	%		2.80	%
Allowance for loan losses to total gross loans		2.44	%		2.44	%		2.61	%		2.42	%
Allowance for loan losses to
nonperforming loans		70.10	%		73.30	%		65.67	%		58.31	%

(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.

(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 September 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 nine months ended September 30, 2013, nonaccrual loans have decreased $2.7 million to $15.3 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 70.10% at September 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.

Index

For loans not included in nonperforming loans, at September 30, 2013, the level of loans past due 30-89 days was only $383,000 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.

For the three and nine months ended September 30, 2013, the provision for loan losses was $900,000 and $3.4 million, respectively, compared to $2.0 million and $6.7 million for the three and nine months ended September 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 nine months ended September 30, 2013, net charge-offs were $982,000 and $3.3 million, respectively. For the three and nine months ended September 30, 2012, net charge-offs were $1.3 million and $5.7 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 September 30, 2013 and December 31, 2012, the Corporation had $12.1 million and $11.7 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $11.0 million and $10.4 million were performing in accordance with their new terms at September 30, 2013 and December 31, 2012, respectively. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of $221,000 and $246,000 were allocated for the troubled debt restructurings at September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013 and December 31, 2012 the Corporation had committed $600,000 and $241,000 respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

Index

As of September 30, 2013, there were $21.8 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 September 30, 2013, the minimum risk-based capital requirements to be considered adequately capitalized were 4% for Tier 1 capital and 8% for total capital.

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 September 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 September 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		8.80	%		4.00	%		5.00	%

Risk-based capital
Tier I
Corporation		13.43	%		4.00	%		N/A
Bank		13.13	%		4.00	%		6.00	%
Total
Corporation		14.70	%		8.00	%		N/A
Bank		14.39	%		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.

Index

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 $5.6 million during the first nine months of 2013. Net operating and financing activities provided $8.3 million and $2.1 million, respectively, and investing activities used $16.1 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 $21.0 million on an unsecured basis.

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 October 16, 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 November 1, 2013. The dividend is to be paid on November 15, 2013.

Index

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 September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Index

Part II -- Other Information

Item 6.

Exhibits

See Exhibit Index following this report.

Index

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: November 13, 2013	By:	/s/ Paul Van Ostenbridge
		Paul Van Ostenbridge
		President and Chief Executive Officer
		(Principal Executive Officer)




Date: November 13, 2013	By:	/s/ Claire M. Chadwick
		Claire M. Chadwick
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Index

EXHIBIT INDEX

Exhibit Number		Description of Exhibits

10.1		Change in Control Severance Agreement dated November 12, 2013 between the Corporation and Paul Van Ostenbridge
10.2		Change in Control Severance Agreement dated November 12, 2013 between the Corporation and Claire M. Chadwick
10.3		Change in Control Severance Agreement dated November 12, 2013 between the Corporation and Mark J. Maurer
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 September 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 Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text ¹

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 Corporation specifically incorporates it by reference.

Exhibit 10.1

CHANGE IN CONTROL severance AGREEMENT

THIS AGREEMENT, dated as of November 12, 2013, is by and between Atlantic Stewardship Bank (“the Bank”) and Stewardship Financial Corporation (“the Corporation”), a New Jersey corporation (the Bank and the Corporation being referred to collectively as “the Company”), and Paul Van Ostenbridge (the “Executive”).

RECITALS:

1. The Executive is an employee of the Company and is an important participant in management or administration of the Company.

2. The Company wishes to encourage the Executive to continue Executive’s career and services with the Company following a Change in Control (as hereinafter defined).

3. It would be in the best interests of the Company and its stockholders to ensure continuity in the management and administration of the Company in the event of a Change in Control by entering into this Agreement with the Executive.

Agreement

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Executive and the Company agree as follows:

1. Definitions .

a. “Board” shall mean the Board of Directors of the Company (the members of the Board of Directors of the Corporation are also the Board of Directors of the Bank).

b. “Cause” shall mean:

(i) the continued and willful failure of the Executive at any time to perform the Executive’s duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness, but including a continued and willful failure by the Executive for any other reason to attempt in good faith to meet reasonable, material performance expectations that are not measured by Company economic performance), after a written demand for performance is delivered to the Executive by the Company or its representative, which specifically identifies the manner in which the Company believes that the Executive has not attempted in good faith to perform the Executive’s duties and which gives the Executive no fewer than 30 days to cure the deficiency noted therein; or

(ii) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company; or

(iii) conviction of the Executive of a felony (other than a traffic-related felony) or a guilty or nolo contendere plea by the Executive with respect thereto; or

(iv) a material breach by the Executive of any material provision of this Agreement; provided that, if such breach is curable, the Company shall not have the right to terminate the Executive’s employment for Cause unless the Executive, having received written notice of the breach, fails to cure the breach within 30 days of receipt of such notice; or

(v) a willful violation by the Executive of a material legal requirement, or of any material written Company policy or procedure that is materially and demonstrably injurious to the Company; or

(vi) the Executive’s failure to obtain or maintain, or inability to qualify for, any license (other than a driver’s license) required by law for the performance of the Executive’s material job responsibilities, or the suspension or revocation of any such license held by the Executive as a result of an action or inaction by the Executive; provided that, if such failure, suspension or revocation is curable, the Company shall not have the right to terminate the Executive’s employment for Cause unless the Executive, having received written notice of the failure, does not cure the failure within a reasonable time (not less than 30 days after the receipt of such notice), provided, in no event shall Cause exist under this clause (vi) so long as the Executive is diligently pursuing a cure of such failure, suspension or revocation in good faith and the failure is cured within 120 days after receipt of notice.

c. “Change in Control” shall mean the date on which the earliest of the following events occurs:

(i) any Person, as defined in this Paragraph 1(c)(v) below, becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of 50% or more of (x) the then outstanding shares of common stock of the Corporation or (y) the combined voting power of the then outstanding securities of the Corporation entitled to vote generally in the election of directors (the “Company Voting Stock”);

(ii) any Person other than the Corporation or a wholly-owned subsidiary of the Corporation becomes the beneficial owner of 50% or more of (x) the then outstanding shares of common stock of the Bank or (y) the combined voting power of the then outstanding securities of the Bank entitled to vote generally in the election of directors;

(iii) the closing of a sale or other disposition (whether by merger, consolidation, reorganization or otherwise) of all or substantially all of the assets of the Corporation or the Bank, or the Corporation or the Bank adopts a plan of liquidation providing for the distribution of all or substantially all of its assets;

- 2 -

(iv) the Corporation or the Bank combines with another entity and is the surviving entity but, immediately after the combination, the stockholders of the Corporation or the Bank immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock or other ownership interests of the combined entity (there being excluded from the number of shares or other ownership interests held by such stockholders, but not from the voting stock of the combined entity, any shares or other ownership interests received by affiliates of such other entity in exchange for stock or other ownership interests of such other entity);

(v) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of the Change in Control Severance Agreement; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; provided, further, notwithstanding anything herein to the contrary, for purposes of this Agreement, a Change in Control shall not include any transaction, whether by bona fide public offering or private placement to institutional investors of any class or series of capital stock of the Company, determined by the Board to be effected for the purpose of equity financing, including the conversion of any debt securities of the Company into equity securities of the Company. The definition of a Change in Control under this Agreement is not intended to modify or otherwise affect the definition of such term or any similar term under any other plan or arrangement of the Company. For purposes of this Paragraph 1c, a “Person” means any individual, entity, or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended, other than employee benefit plans sponsored or maintained by the Company and corporations controlled by the Company.

d. “Good Reason” shall mean the occurrence of any of the following without the Executive’s consent:

(i) a material reduction by the Company in Executive’s base salary; or

(ii) a material reduction in Executive’s authority, duties, or responsibilities, including the budget over which Executive retains authority; or

(iii) any order from any person to whom the Executive reports, directing the Executive to take any action or to refrain from taking any action, in any case, that in Executive’s good-faith, considered and informed judgment violates any applicable legal or regulatory requirement, which order continues in effect and is not revoked after 30 business days’ written notice of objection from the Executive;

(iv) a material diminution in the authority, duties, or responsibilities of the person or persons to whom Executive is required to report (including, if Executive reports directly the board of directors, a requirement that Executive instead report to a corporate officer or employee);

- 3 -

(v) a material change in the geographic location at which Executive is required to work, which shall mean a requirement that Executive relocate to an office at least 50 miles from the Company’s corporate headquarters and at least 20 miles farther from the Executive’s principal residence than the headquarters prior to such relocation (“relocate” means to regularly report physically to a different location); or

(vi) the Company’s failure to require a successor entity to assume and agree to perform the Company’s obligations pursuant to Section 9.

No event described hereunder shall constitute Good Reason, unless the Executive has given written notice to the Company specifying the event relied upon for such termination within ninety (90) days after the occurrence of such event and the Company has not remedied such event within 30 days of receipt of such notice. The Company and Executive, upon mutual written agreement, may waive any of the foregoing provisions which would otherwise constitute Good Reason.

e. “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive days as a result of mental or physical incapacity, which qualifies the Executive for benefits under the Company’s long-term disability program covering the Executive and which is reasonably believed by the Company based on the facts available at the time to be total and permanent.

2. Term .

This Agreement shall be effective as of the date set forth in the first paragraph of this Agreement and shall continue indefinitely or, if a Change in Control occurs, until terminated by, or on behalf of, the Company not sooner than two years after the most recent Change in Control; provided, however , the Company’s obligations, if any, to provide payments and/or benefits pursuant to Section 3 of this Agreement and the obligations of the Company and the Executive under Section 5 of this Agreement shall survive the termination of this Agreement.

3. Severance Benefits .

a. If the Executive’s employment with the Company is terminated by the Company within six months preceding or two years following a Change in Control for any reason other than Cause, death, or Disability (for avoidance of doubt, transfer of employment between or among the Companies shall not constitute a termination of employment for purposes of this Agreement), or by the Executive for Good Reason within two years following a Change in Control:

(i) within five business days after such termination (or, if later, the date of the Change in Control), the Company shall pay or cause to be paid to the Executive (or if the Executive dies after such a termination of employment but before receiving all payments to which he has become entitled hereunder, to the estate of the Executive) the following amounts:

(A) accrued but unpaid salary; accrued but unpaid bonus awarded to the Executive; accrued but unused vacation and sick time in accordance with the Company’s leave policy or similar program, as may be amended from time to time; any benefits to which Executive is entitled under any other plans or programs then in effect; and any unreimbursed business expenses incurred prior to the date of termination, all as of the effective date of termination; and

- 4 -

(B) a lump sum cash amount equal to 24 months’ salary, plus an amount equal to 100% of any bonus awarded to Executive during the 24 months prior to termination; and

(ii) the Executive shall be entitled to the following additional severance benefits:

(A) notwithstanding anything in any other award notice or agreement providing otherwise, as applicable, (1) all of the Executive’s outstanding stock options that would have vested within twelve months following the date of termination had the Executive remained an employee of the Company shall become immediately vested and exercisable; and (2) all of the Executive’s outstanding shares of restricted stock and any other stock or stock-based award that otherwise would have vested within twelve months following the date of termination had the Executive remained an employee of the Company shall become immediately vested in full (at 100 % of target levels for any performance-based stock awards); and (3) all profit sharing plan awards that otherwise would have vested within twelve months following the date of termination had the Executive remained an employee of the Company shall become immediately vested in full; provided that the provisions of this paragraph are not intended to limit or restrict provisions as to vesting under plans or programs of the Company applicable to the Executive at the time that confer greater rights upon the Executive than those conferred under this Agreement;

(B) for a period commencing with the month in which termination of employment shall have become effective and ending 24 months thereafter, the Executive and, as applicable, the Executive’s covered dependents at the time of termination, shall be entitled to all benefits under the Company’s welfare benefit plans (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended), as if the Executive were still employed during such period, at the same level of benefits and at the same dollar cost to the Executive as the Company makes available for the period to employees of similar status generally. If and to the extent that equivalent benefits cannot be payable or provided under any such plan, the Company shall pay or provide (or cause to be paid or provided) equivalent benefits on an individual basis. If the date of termination precedes the Change in Control, such benefits shall be provided retroactively to the date of termination or, to the extent that such benefits may not be provided retroactively, the Company shall pay the Company’s cost of such benefits to the Executive. The benefits provided in accordance with this Section 3a(ii)(B) shall be secondary to any comparable benefits provided by another employer.

(C) the Company shall continue paying for the lease on the vehicle Executive is driving at the time, until the lease ends, at which time the Company shall purchase the vehicle and shall transfer title of the vehicle to Executive.

b. In the event of any termination of the Executive’s employment described in Section 3a, the Executive shall be under no obligation to seek other employment, and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment; provided, however , to the extent the Executive receives medical and health benefits from a subsequent employer, those benefits shall be primary to benefits provided pursuant to Section 3a(ii)(B).

- 5 -

c. It is intended that the payments and benefits provided under this Agreement are in lieu of, and not in addition to, severance payments and benefits provided under any other severance, change in control or similar plan or policies of the Companies (“Other Severance Benefits”). Unless waived by the Executive, any Other Severance Benefits the Executive receives, or will receive in the future, shall reduce payments and benefits provided hereunder dollar for dollar.

4. Nature of Obligation .

The Company shall not be required to establish a special or separate fund or other segregation of assets to assure payments under this Agreement, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest in or to any such investments, except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and the Executive or any other person. To the extent that any person acquires a right to receive payments under this Agreement such right shall be no greater than the right of an unsecured creditor.

5. Full Settlement; Litigation Expenses .

Except as provided below, the Company’s obligation to make or cause to be made the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses the Executive reasonably incurs as a result of any dispute or contest (regardless of the outcome thereof) by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement, plus in each case, interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code. Notwithstanding the foregoing, the Executive agrees to repay to the Company any such fees and expenses paid or advanced by the Company if and to the extent that the Company or such others obtains a judgment or determination that the Executive’s claim was frivolous or was without merit from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise. Notwithstanding any provision hereof or in any other agreement, the Company may offset any other obligation it has to the Executive by the amount of such repayment. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, he shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company’s obligations hereunder, in his sole discretion.

6. Tax Withholding .

The Company may withhold from any payments made under this Agreement all federal, state or other taxes as shall be required pursuant to any law or governmental regulation or ruling.

- 6 -

7. Entire Understanding .

This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter hereof and supersedes any prior severance, change in control or similar agreement between the Company and the Executive; provided, however , that, except as otherwise expressly provided in this Section 7 and in Section 3c, this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of any kind elsewhere provided, including any obligation of the Company to indemnify or provide liability insurance coverage to Executive.

8. Severability .

If, for any reason, anyone or more of the provisions or part of a provision contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement not held so invalid, illegal or unenforceable, and each other provision or part of a provision shall to the full extent consistent with law continue in full force and effect.

9. Consolidation, Merger, or Sale of Assets .

If the Company consolidates or merges into or with, or transfers all or substantially all of its assets to, another entity, the term “Company” as used herein shall mean such other entity, and this Agreement shall continue in full force and effect. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Agreement, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company’s obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

10. Notices .

All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, postage prepaid, first class as follows:

To the Company :

Atlantic Stewardship Bank
630 Godwin Avenue
Midland Park, NJ 07432-1405
Attention: Human Resources Department

To the Executive :

At the address (or to the facsimile number) last shown on the records of the Company

or to such other address as either party shall have previously specified in writing to the other.

11. No Attachment .

- 7 -

Except as required by law, no right by the Executive or Executive’s estate to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.

12. Binding Agreement .

This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and their respective permitted successors and assigns.

13. Modification and Waiver .

This Agreement may not be terminated, modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument signed by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

14. Headings of No Effect .

The section headings contained in this Agreement are included solely for convenience of reference and shall not in any way affect the meaning or interpretation of any of the provisions of this Agreement.

15. Executive Acknowledgment .

The Executive acknowledges that Executive has read and understands the provisions of this Agreement. The Company advises Executive to consult with Executive’s personal counsel regarding whether to enter into this Agreement. The Executive acknowledges that Executive has been given an opportunity for Executive’s personal legal counsel to review this Agreement and that the provisions of this Agreement are reasonable and that Executive has received a copy of this Agreement.

16. Not Compensation for Other Plans .

Except for amounts paid pursuant to Section 3a(i)(A) that are considered compensation, earnings or wages for purposes of any employee benefit plan of the Company, it is understood by all parties hereto that amounts paid and benefits provided hereunder are not to be considered compensation, earnings or wages for purpose of any employee benefit plan of the Company, including, but not limited to, any tax-qualified retirement plan.

17. Noncompetition and Confidentiality Agreements; Release .

Notwithstanding any provision herein to the contrary, the Company shall not have any obligation to pay (or cause to be paid) any amount or provide any benefit under this Agreement unless and until the Executive executes a release of all claims against the Company, its subsidiaries and other affiliates and related parties relating to the Executive’s employment and termination thereof, and any revocation period applicable to such release has expired. The release shall be in a form acceptable to the Company, and Executive and Company agree that the release will include the provisions of Exhibit A attached to this Agreement.

- 8 -

18. Governing Law .

The interpretation, construction, performance and the rights and remedies of the parties hereunder shall be governed by the internal laws of the State of New Jersey, without regard to the conflict of law provisions thereof. For the purpose of litigating disputes that may arise under this Agreement, the parties hereby agree that such litigation will be conducted in the federal or state courts of the State of New Jersey in and for Bergen County, and the Parties consent to the personal jurisdiction of those courts.

19. Code Section 409A Compliance .

a. If any provision of this Agreement (or of any award of compensation, including equity compensation or benefits) would cause the Executive to incur any additional tax or interest under Internal Revenue Code (“Code”) Section 409A or any regulations or Treasury guidance promulgated thereunder, the Company shall, after consulting with the Executive, reform such provision, to the extent possible, to comply with Code Section 409A; provided, that the Company agrees to make only such changes as are necessary to bring such provisions into compliance with Code Section 409A and to maintain, to the maximum extent practicable, the original intent and economic benefit to the Executive of the applicable provision without violating the provisions of Code Section 409A.

b. Notwithstanding any provision to the contrary in this Agreement, if the Executive is deemed on the date of termination of employment to be a “specified employee” within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment or the provision of any benefit that is required to be delayed in compliance with Section 409A(a)(2)(B) such payment or benefit shall not be made or provided (subject to the last sentence hereof) prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of the Executive’s “separation from service” (as such term is defined in Treasury Regulations issued under Code Section 409A) or (ii) the date of Executive’s death (the “Deferral Period”). Upon the expiration of the Deferral Period, all payments and benefits deferred pursuant to this Section 19 (whether they would have otherwise been payable in a single sum or in installments in the absence of such deferral) shall be paid or reimbursed to the Executive in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding the foregoing, to the extent that the foregoing applies to the provision of any ongoing welfare benefits to the Executive that would not be required to be delayed if the premiums therefor were paid by the Executive, the Executive shall pay the full cost of premiums for such welfare benefits during the Deferral Period and the Company shall pay (or cause to be paid) to the Executive an amount equal to the amount of such premiums paid by the Executive during the Deferral Period promptly after its conclusion.

20. Excise Tax

- 9 -

If any payments or benefits under this Agreement are subject to the excise tax under Code Section 4999, such payments nonetheless shall not be subject to any cutback, gross-up or other adjustment, except as the Company and the Executive may otherwise agree.

21. Counsel.

The Company recommends that Executive review this Agreement with Executive’s personal counsel before signing it. Executive acknowledges and understands that McCarter & English, LLP has acted solely as counsel to the Company in connection with the preparation, negotiation and execution of this Agreement and not as counsel to Executive.

IN WITNESS WHEREOF , the Company and the Executive have duly executed and delivered this Agreement as of the date first above written.

	ATLANTIC STEWARDSHIP BANK


	By:	/s/ Robert J. Turner
		Robert J. Turner
		Chairperson, Compensation Committee

	STEWARDSHIP FINANCIAL CORPORATION


	By:	/s/ Robert J. Turner
		Robert J. Turner
		Chairperson, Compensation Committee

	EXECUTIVE

	/s/ Paul Van Ostenbridge
	Paul Van Ostenbridge

- 10 -

EXHIBIT A

FORM OF RELEASE

1. Release of Claims.

The Executive recognizes that the payments and other benefits to be received under the Change in Control Severance Agreement include amounts and benefits above and beyond any amounts due under any other agreement or under the Company’s general policies or programs.

In consideration of, and as a condition to these payments, and to the extent allowed by law, Executive releases and forever discharges the Company and all of its affiliates, and all of their present or former officers, directors, shareholders, employees, agents, successors or assigns (the “Releasees”) from all claims or causes of action or other demands whatsoever, which Executive ever had or now has against the Releasees, arising out of or related to his employment relationship with the Company or the termination of that relationship, except as stated below (the “Claims”).

This release is binding on the Executive and Executive’s heirs, assigns, and/or representatives. This release includes, but is not limited to, the claims described below. If the law prohibits a release or waiver of any Claim, the Executive hereby waives the right to seek or accept damages in a proceeding under the Claim and/or hereby acknowledges that Executive has no valid claim under such statute or theory. The Claims released include any alleged violation by the Company of:

•

Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et seq.;

•

Sections 1981 through 1988 of Title 42 of the United States Code, as amended;

•

The Employment Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq.;

•

The Immigration Reform Control Act, as amended;

- 11 -

•

The Americans with Disabilities Act;

•

The Age Discrimination in Employment Act, as amended, and including the Older Workers Benefit Protection Act, 29 U.S.C. § 621 et seq.;

•

The Fair Labor Standards Act, as amended;

•

The Occupational Safety and Health Act, as amended;

•

The Family and Medical Leave Act;

•

The Consolidated Omnibus Budget Reconciliation Act, as amended;

•

The National Labor Relations Act, as amended;

•

The Sarbanes-Oxley Act, as amended;

•

the New Jersey Law Against Discrimination;

the New Jersey Conscientious Employee Protection Act;

the New Jersey Family Leave Act;

the New Jersey Wage Payment Law;

the New Jersey Wage and Hour Law;

Any federal, state or local laws against discrimination or protecting whistleblowers, or any other federal, state or local law or common law relating to employment, wages, hours, or any other terms and conditions of employment;

The Claims released also include:

• Any claim related to the Company’s stock incentive plans or other benefit plans or compensation plans;

• Any claim based in whole or in part on any public policy, contract, tort, or other common law claim or cause of action, including but not limited to breach of implied or express contract, intentional or negligent infliction of emotional distress, negligent misrepresentation, defamation, wrongful discharge;

- 12 -

•

Any claim or cause of action for commission, back wages, bonuses, or other compensation, including, but not limited to, commissions, back wages or compensation related to or arising out of any payments or sums the Company has received or may receive in the future from any source at any time;

•

Any claim or allegation for costs, fees, or other expenses, including attorneys’ fees, incurred in ay matter or proceeding.

2. Unknown Claims Released . The Executive understands that Executive is releasing claims that Executive may not know about. This is the Executive’s knowing and voluntary intent, even though the Executive recognizes that someday Executive might learn that some or all of the facts currently believed to be true are untrue and even though Executive might then regret having signed this Release. Nevertheless, the Executive assumes that risk and agrees that this Release shall remain effective in all respects in any such case.

3. Claims Not Released . Anything to the contrary notwithstanding contained herein, nothing herein shall release any Releasee from any claims or damages based on (i) any right the Executive may have to enforce this Release or the Change in Control Severance Agreement, (ii) any right or claim that arises after the date of this Release, (iii) any right the Executive may have to benefits or entitlements under any health benefits plan, (iv) the Executive’s eligibility for indemnification and advancement of expenses in accordance with applicable laws or the certificate of incorporation and by-laws of Company or any applicable agreement or insurance policy, or (v) any right the Executive may have to obtain contribution as permitted by law in the event of entry of judgment against the Executive as a result of any act or failure to act for which the Executive, on the one hand, and Company or any Releasee, on the other hand, are jointly liable. In addition, nothing in this Release shall preclude Executive from filing a charge with or participating in any manner in an investigation, hearing, or proceeding conducted by the Equal Employment Opportunity Commission, but Executive hereby waives any and all rights to recover compensation as a result of any such charge, investigation, hearing or proceeding.

- 13 -

4. No Participation in Claims . The Executive understands that if this Agreement were not signed, Executive could have the right to voluntarily assist other individuals or entities in bringing claims against the Releasees. The Executive hereby waives that right and agrees not to provide any such assistance, other than assistance in an investigation or proceeding conducted by an agency of the United States or of a state or local government.

5. Nonadmission of Liability . The this Release is not intended to imply any wrongdoing by Releasees or by Executive and shall not constitute evidence of any wrongdoing by Releasees or Executive.

6. Voluntary Agreement and Consultation with Counsel . The Executive’s decision to enter into this Release is a wholly free and voluntary decision. Before signing this Release, the Executive has had the opportunity for up to twenty-one (21) days to carefully consider the terms and ramifications of this Release and the opportunity to consult with Executive’s own attorneys and other advisors. The Company advises Executive to consult with Executive’s own attorney before signing this Release.

7. Governing Law and Interpretation . This Release shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws provisions.

8. Separate Enforceability of Terms . If any terms of this Release are declared invalid by any court of competent jurisdiction, the Release shall be deemed amended by excluding the invalid term or terms, and all remaining terms shall continue in full force and effect. The Executive and the Company agree to execute such amendments as may be necessary to accomplish the intent of this paragraph, which is to maintain in force all terms of this Release to the full extent permitted by law.

- 14 -

9. Limitations on Changing Release . This Release may not be modified, altered, or changed except in a writing signed by both parties.

10. Revocation; Effectiveness . The Executive may revoke this Release for a period of seven (7) days following the day Executive signs this Release. Any revocation within this period must be submitted, in writing, to the Company at the address listed below. The revocation must be delivered to Human Resources Department, Atlantic Stewardship Bank, 630 Godwin Avenue, Midland Park, NJ 07432, and delivered by hand or e-mail. This Release shall not become effective or enforceable until the revocation period has expired. If the last day of the revocation period is a Saturday, Sunday, or legal holiday in New Jersey, then the revocation period shall not expire until the next following day which is not a Saturday, Sunday, or legal holiday.

EXECUTIVE HAS HAD TWENTY ONE (21) DAYS TO CONSIDER THIS RELEASE AND CONFIRMS THAT THE COMPANY ADVISED EXECUTIVE TO CONSULT WITH PERSONAL COUNSEL BEFORE EXECUTING THE RELEASE.

EXECUTIVE AGREES THAT ANY MODIFICATIONS, MATERIAL OR OTHERWISE, MADE TO THIS RELEASE DO NOT RESTART OR AFFECT IN ANY MANNER THE ORIGINAL TWENTY ONE (21) DAY CONSIDERATION PERIOD.

EXECUTIVE FREELY AND KNOWINGLY, AND AFTER DUE CONSIDERATION, ENTERS INTO THIS AGREEMENT AND GENERAL RELEASE INTENDING TO WAIVE, SETTLE AND RELEASE ALL CLAIMS EXECUTIVE HAS OR MIGHT HAVE AGAINST THE RELEASEES.

IN WITNESS WHEREOF, the parties knowingly and voluntarily executed this Release as of the date set forth below:

Atlantic Stewardship Bank

By:	/s/ Robert J. Turner
	Robert J. Turner
	Chairperson, Compensation Committee

Date:	November 12, 2013

- 15 -



Executive:
/s/ Paul Van Ostenbridge
Paul Van Ostenbridge

Current personal mailing address:

- 16 -

Exhibit 10.2

CHANGE IN CONTROL severance AGREEMENT

RECITALS:

1. The Executive is an employee of the Company and is an important participant in management or administration of the Company.

2. The Company wishes to encourage the Executive to continue Executive’s career and services with the Company following a Change in Control (as hereinafter defined).

Agreement

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Executive and the Company agree as follows:

1. Definitions .

a. “Board” shall mean the Board of Directors of the Company (the members of the Board of Directors of the Corporation are also the Board of Directors of the Bank).

b. “Cause” shall mean:

(ii) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company; or

(iii) conviction of the Executive of a felony (other than a traffic-related felony) or a guilty or nolo contendere plea by the Executive with respect thereto; or

(v) a willful violation by the Executive of a material legal requirement, or of any material written Company policy or procedure that is materially and demonstrably injurious to the Company; or

c. “Change in Control” shall mean the date on which the earliest of the following events occurs:

- 2 -

d. “Good Reason” shall mean the occurrence of any of the following without the Executive’s consent:

(i) a material reduction by the Company in Executive’s base salary; or

(ii) a material reduction in Executive’s authority, duties, or responsibilities, including the budget over which Executive retains authority; or

- 3 -

(vi) the Company’s failure to require a successor entity to assume and agree to perform the Company’s obligations pursuant to Section 9.

2. Term .

3. Severance Benefits .

- 4 -

(B) a lump sum cash amount equal to 24 months’ salary, plus an amount equal to 100% of any bonus awarded to Executive during the 24 months prior to termination; and

(ii) the Executive shall be entitled to the following additional severance benefits:

- 5 -

4. Nature of Obligation .

5. Full Settlement; Litigation Expenses .

6. Tax Withholding .

The Company may withhold from any payments made under this Agreement all federal, state or other taxes as shall be required pursuant to any law or governmental regulation or ruling.

7. Entire Understanding .

- 6 -

8. Severability .

9. Consolidation, Merger, or Sale of Assets .

10. Notices .

	To the Company :
	Atlantic Stewardship Bank 630 Godwin Avenue Midland Park, NJ 07432-1405 Attention: Human Resources Department
	To the Executive :
	At the address (or to the facsimile number) last shown on the records of the Company

or to such other address as either party shall have previously specified in writing to the other.

11. No Attachment .

- 7 -

12. Binding Agreement .

This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and their respective permitted successors and assigns.

13. Modification and Waiver .

14. Headings of No Effect .

15. Executive Acknowledgment .

16. Not Compensation for Other Plans .

17. Noncompetition and Confidentiality Agreements; Release .

- 8 -

18. Governing Law .

19. Code Section 409A Compliance .

20. Excise Tax

- 9 -

21. Counsel.

IN WITNESS WHEREOF , the Company and the Executive have duly executed and delivered this Agreement as of the date first above written.

	ATLANTIC STEWARDSHIP BANK


	By:	/s/ Robert J. Turner
		Robert J. Turner
		Chairperson, Compensation Committee

	STEWARDSHIP FINANCIAL CORPORATION


	By:	/s/ Robert J. Turner
		Robert J. Turner
		Chairperson, Compensation Committee

	EXECUTIVE

	/s/ Claire M. Chadwick
	Claire M. Chadwick

- 10 -

EXHIBIT A

FORM OF RELEASE

1. Release of Claims.

•

Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et seq.;

•

Sections 1981 through 1988 of Title 42 of the United States Code, as amended;

•

The Employment Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq.;

•

The Immigration Reform Control Act, as amended;

- 11 -

•

The Americans with Disabilities Act;

•

The Age Discrimination in Employment Act, as amended, and including the Older Workers Benefit Protection Act, 29 U.S.C. § 621 et seq.;

•

The Fair Labor Standards Act, as amended;

•

The Occupational Safety and Health Act, as amended;

•

The Family and Medical Leave Act;

•

The Consolidated Omnibus Budget Reconciliation Act, as amended;

•

The National Labor Relations Act, as amended;

•

The Sarbanes-Oxley Act, as amended;

•

the New Jersey Law Against Discrimination;

the New Jersey Conscientious Employee Protection Act;

the New Jersey Family Leave Act;

the New Jersey Wage Payment Law;

the New Jersey Wage and Hour Law;

The Claims released also include:

• Any claim related to the Company’s stock incentive plans or other benefit plans or compensation plans;

- 12 -

•

Any claim or allegation for costs, fees, or other expenses, including attorneys’ fees, incurred in ay matter or proceeding.

- 13 -

5. Nonadmission of Liability . The this Release is not intended to imply any wrongdoing by Releasees or by Executive and shall not constitute evidence of any wrongdoing by Releasees or Executive.

7. Governing Law and Interpretation . This Release shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws provisions.

- 14 -

9. Limitations on Changing Release . This Release may not be modified, altered, or changed except in a writing signed by both parties.

EXECUTIVE HAS HAD TWENTY ONE (21) DAYS TO CONSIDER THIS RELEASE AND CONFIRMS THAT THE COMPANY ADVISED EXECUTIVE TO CONSULT WITH PERSONAL COUNSEL BEFORE EXECUTING THE RELEASE.

EXECUTIVE AGREES THAT ANY MODIFICATIONS, MATERIAL OR OTHERWISE, MADE TO THIS RELEASE DO NOT RESTART OR AFFECT IN ANY MANNER THE ORIGINAL TWENTY ONE (21) DAY CONSIDERATION PERIOD.

IN WITNESS WHEREOF, the parties knowingly and voluntarily executed this Release as of the date set forth below:

Atlantic Stewardship Bank

By:	/s/ Robert J. Turner
	Robert J. Turner
	Chairperson, Compensation Committee

Date:	November 12, 2013

- 15 -



Executive:

/s/ Claire M. Chadwick
Claire M. Chadwick

Current personal mailing address:

- 16 -

exhibit 10.3

CHANGE IN CONTROL severance AGREEMENT

RECITALS:

1. The Executive is an employee of the Company and is an important participant in management or administration of the Company.

2. The Company wishes to encourage the Executive to continue Executive’s career and services with the Company following a Change in Control (as hereinafter defined).

Agreement

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Executive and the Company agree as follows:

1. Definitions .

a. “Board” shall mean the Board of Directors of the Company (the members of the Board of Directors of the Corporation are also the Board of Directors of the Bank).

b. “Cause” shall mean:

(ii) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company; or

(iii) conviction of the Executive of a felony (other than a traffic-related felony) or a guilty or nolo contendere plea by the Executive with respect thereto; or

(v) a willful violation by the Executive of a material legal requirement, or of any material written Company policy or procedure that is materially and demonstrably injurious to the Company; or

c. “Change in Control” shall mean the date on which the earliest of the following events occurs:

- 2 -

d. “Good Reason” shall mean the occurrence of any of the following without the Executive’s consent:

(i) a material reduction by the Company in Executive’s base salary; or

(ii) a material reduction in Executive’s authority, duties, or responsibilities, including the budget over which Executive retains authority; or

- 3 -

(vi) the Company’s failure to require a successor entity to assume and agree to perform the Company’s obligations pursuant to Section 9.

2. Term .

3. Severance Benefits .

- 4 -

(B) a lump sum cash amount equal to 24 months’ salary, plus an amount equal to 100% of any bonus awarded to Executive during the 24 months prior to termination; and

(ii) the Executive shall be entitled to the following additional severance benefits:

- 5 -

4. Nature of Obligation .

5. Full Settlement; Litigation Expenses .

6. Tax Withholding .

The Company may withhold from any payments made under this Agreement all federal, state or other taxes as shall be required pursuant to any law or governmental regulation or ruling.

7. Entire Understanding .

- 6 -

8. Severability .

9. Consolidation, Merger, or Sale of Assets .

10. Notices .

	To the Company :
	Atlantic Stewardship Bank 630 Godwin Avenue Midland Park, NJ 07432-1405 Attention: Human Resources Department
	To the Executive :
	At the address (or to the facsimile number) last shown on the records of the Company

or to such other address as either party shall have previously specified in writing to the other.

11. No Attachment .

- 7 -

12. Binding Agreement .

This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Company and their respective permitted successors and assigns.

13. Modification and Waiver .

14. Headings of No Effect .

15. Executive Acknowledgment .

16. Not Compensation for Other Plans .

17. Noncompetition and Confidentiality Agreements; Release .

- 8 -

18. Governing Law .

19. Code Section 409A Compliance .

20. Excise Tax

- 9 -

21. Counsel.

IN WITNESS WHEREOF , the Company and the Executive have duly executed and delivered this Agreement as of the date first above written.

	ATLANTIC STEWARDSHIP BANK


	By:	/s/ Robert J. Turner
		Robert J. Turner
		Chairperson, Compensation Committee

	STEWARDSHIP FINANCIAL CORPORATION


	By:	/s/ Robert J. Turner
		Robert J. Turner
		Chairperson, Compensation Committee

	EXECUTIVE

	/s/ Mark J. Maurer
	Mark J. Maurer

- 10 -

EXHIBIT A

FORM OF RELEASE

1. Release of Claims.

•

Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et seq.;

•

Sections 1981 through 1988 of Title 42 of the United States Code, as amended;

•

The Employment Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq.;

•

The Immigration Reform Control Act, as amended;

- 11 -

•

The Americans with Disabilities Act;

•

The Age Discrimination in Employment Act, as amended, and including the Older Workers Benefit Protection Act, 29 U.S.C. § 621 et seq.;

•

The Fair Labor Standards Act, as amended;

•

The Occupational Safety and Health Act, as amended;

•

The Family and Medical Leave Act;

•

The Consolidated Omnibus Budget Reconciliation Act, as amended;

•

The National Labor Relations Act, as amended;

•

The Sarbanes-Oxley Act, as amended;

•

the New Jersey Law Against Discrimination;

the New Jersey Conscientious Employee Protection Act;

the New Jersey Family Leave Act;

the New Jersey Wage Payment Law;

the New Jersey Wage and Hour Law;

The Claims released also include:

• Any claim related to the Company’s stock incentive plans or other benefit plans or compensation plans;

- 12 -

•

Any claim or allegation for costs, fees, or other expenses, including attorneys’ fees, incurred in ay matter or proceeding.

- 13 -

5. Nonadmission of Liability . The this Release is not intended to imply any wrongdoing by Releasees or by Executive and shall not constitute evidence of any wrongdoing by Releasees or Executive.

7. Governing Law and Interpretation . This Release shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws provisions.

- 14 -

9. Limitations on Changing Release . This Release may not be modified, altered, or changed except in a writing signed by both parties.

EXECUTIVE HAS HAD TWENTY ONE (21) DAYS TO CONSIDER THIS RELEASE AND CONFIRMS THAT THE COMPANY ADVISED EXECUTIVE TO CONSULT WITH PERSONAL COUNSEL BEFORE EXECUTING THE RELEASE.

EXECUTIVE AGREES THAT ANY MODIFICATIONS, MATERIAL OR OTHERWISE, MADE TO THIS RELEASE DO NOT RESTART OR AFFECT IN ANY MANNER THE ORIGINAL TWENTY ONE (21) DAY CONSIDERATION PERIOD.

IN WITNESS WHEREOF, the parties knowingly and voluntarily executed this Release as of the date set forth below:

Atlantic Stewardship Bank

By:	/s/ Robert J. Turner
	Robert J. Turner
	Chairperson, Compensation Committee

Date:	November 12, 2013

Executive:
/s/ Mark J. Maurer
Mark J. Maurer

Current personal mailing address:

- 15 -

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:

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

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;

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;

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

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: November 13, 2013

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

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:

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

(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: November 13, 2013

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

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 September 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: November 13, 2013	/s/ Paul Van Ostenbridge
	Paul Van Ostenbridge
	President and Chief Executive Officer


Dated: November 13, 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.