1ST CONSTITUTION BANCORP (Form: 10-Q, Received: 08/08/2005 14:09:26)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2005

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

For the transition period from to

Commission file Number: 000-32891

1ST CONSTITUTION BANCORP

(Exact Name of Registrant as Specified in Its Charter)


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

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

(609) 655-4500

(Issuer’s Telephone Number, Including Area Code)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No ý

As of August 3, 2005, there were 3,267,291 shares of the registrant’s common stock, no par value, outstanding.

1ST CONSTITUTION BANCORP

FORM 10-Q

INDEX
			Page
PART I.		FINANCIAL INFORMATION

Item	1.	Financial Statements	1

		Consolidated Balance Sheets
		as of June 30, 2005 (unaudited)
		and December 31, 2004	1

		Consolidated Statements of Income
		for the Three Months and Six Months Ended
		June 30, 2005 (unaudited) and June 30, 2004 (unaudited)	2

		Consolidated Statements of Cash Flows
		for the Six Months Ended
		June 30, 2005 (unaudited) and June 30, 2004 (unaudited)	3

		Notes to Consolidated Financial Statements (unaudited)	4

Item	2.	Management’s Discussion and Analysis of Financial Condition
		and Results of Operations	8

Item	3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item	4.	Controls and Procedures	24

PART II		OTHER INFORMATION

Item	2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item	4.	Submission of Matters to a Vote of Security Holders	27

Item	6.	Exhibits	28

SIGNATURES			29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

1st Constitution Bancorp and Subsidiaries

Consolidated Balance Sheets

	June 30, 2005	December 31, 2004

ASSETS	(unaudited)
CASH AND DUE FROM BANKS	$8,617,915	$7,898,395
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS	3,427,367	26,014

Total cash and cash equivalents	12,045,282	7,924,409

INVESTMENT SECURITIES:
Available for sale, at fair value	73,227,363	85,588,649
Held to maturity (fair value of $16,321,591 and $12,292,250 in 2005 and 2004, respectively)	16,225,433	12,167,137

Total investment securities	89,452,796	97,755,786

LOANS HELD FOR SALE	10,428,648	9,927,881
LOANS	225,802,570	210,653,051
Less- Allowance for loan losses	(2,190,736)	(2,005,169)

Net loans	223,611,834	208,647,882

PREMISES AND EQUIPMENT, net	2,204,602	2,324,219
ACCRUED INTEREST RECEIVABLE	1,574,312	1,444,493
BANK OWNED LIFE INSURANCE	6,765,112	6,643,502
OTHER ASSETS	1,046,391	1,162,268

Total assets	$347,128,977	$335,830,440


LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits
Non-interest bearing	$60,552,017	$50,794,581
Interest bearing	218,299,949	226,092,452

Total deposits	278,851,966	276,887,033
OTHER BORROWINGS	32,800,000	25,200,000
REDEEMABLE SUBORDINATED DEBENTURES	5,155,000	5,155,000
ACCRUED INTEREST PAYABLE	1,130,168	982,020
ACCRUED EXPENSES AND OTHER LIABILITIES	1,589,313	816,003

Total liabilities	319,526,447	309,040,056


SHAREHOLDERS’ EQUITY:
Common stock, no par value; 30,000,000 shares authorized; 3,324,578 shares issued and
3,260,340 and 3,311,621 outstanding as of June 30, 2005 and December 31, 2004,
respectively	22,324,472	22,255,402
Retained earnings	6,902,163	4,725,257
Treasury Stock, shares at cost (64,238 shares at June 30, 2005 and 5,199 shares at
December 31, 2004, respectively)	(1,271,424)	(86,896)
Accumulated other comprehensive loss	(352,681)	(103,379)

Total shareholders’ equity	27,602,530	26,790,384

Total liabilities and shareholders’ equity	$347,128,977	$335,830,440

See accompanying notes to consolidated financial statements.

1st Constitution Bancorp and Subsidiaries
Consolidated Statements of Income
( Unaudited )

	Three months ended June 30,		Six months ended June 30,
INTEREST INCOME	2005	2004	2005	2004

Interest and fees on loans	$4,126,583	$3,172,033	$8,038,521	$6,256,631
Interest on securities
Taxable	734,494	787,495	1,482,753	1,601,009
Tax-exempt	168,304	83,652	323,675	167,651
Interest on Federal funds sold and
short-term investments	6,926	646	12,140	6,857

Total interest income	5,036,307	4,043,826	9,857,089	8,032,148


INTEREST EXPENSE
Interest on deposits	968,462	760,851	1,921,652	1,508,178
Interest on securities sold under	351,863	245,472	603,789	469,196
agreement to repurchase and other borrowed funds
Interest on redeemable subordinated debentures	85,269	63,454	160,269	125,637

Total interest expense	1,405,594	1,069,777	2,685,710	2,103,011

Net interest income	3,630,713	2,974,049	7,171,379	5,929,137
Provision for loan losses	135,000	60,000	195,000	120,000

Net interest income after provision for loan losses	3,495,713	2,914,049	6,976,379	5,809,137


NON-INTEREST INCOME
Service charges on deposit accounts	170,385	121,514	329,245	248,146
Gain on sale of loans held for sale	460,303	443,477	750,266	609,322
Income on bank-owned life insurance	55,496	59,250	121,610	118,500
Other income	123,430	70,114	230,295	133,755

Total other income	809,614	694,355	1,431,416	1,109,723


NON-INTEREST EXPENSE
Salaries and employee benefits	1,412,547	1,315,901	2,766,543	2,413,175
Occupancy expense	221,681	238,071	690,101	483,927
Other operating expenses	987,301	682,120	1,735,094	1,362,311

Total other expense	2,621,529	2,236,092	5,191,738	4,259,413

Income before income taxes	1,683,798	1,372,312	3,216,057	2,659,447
Income taxes	552,424	441,611	1,039,152	852,939

Net income	$1,131,374	$930,701	$2,176,905	$1,806,508


NET INCOME PER SHARE
Basic	$0.34	$0.29	$0.66	$0.55
Diluted	$0.33	$0.27	$0.63	$0.52

See accompanying notes to consolidated financial statements

1st Constitution Bancorp and Subsidiaries
Consolidated Statements Of Cash Flows
( Unaudited )
	Six months ended June 30,
	2005	2004

OPERATING ACTIVITIES:
Net income	$2,176,905	$1,806,508
Adjustments to reconcile net income
to net cash provided by operating activities-
Provision for loan losses	195,000	120,000
Depreciation and amortization	257,556	157,543
Net amortization on securities	81,640	222,294
Gain on sale of loans held for sale	(750,266)	(609,322)
Originations of loans held for sale	(29,439,737)	(40,000,337)
Proceeds from sales of loans held for sale	29,689,236	41,013,235
Increase in accrued interest receivable	(129,819)	(119,669)
Income on Bank-owned life insurance	(121,610)	(118,500)
Decrease (increase) in other assets	278,644	(195,051)
Increase in accrued interest payable	148,148	35,688
Increase in accrued expenses and other liabilities	773,310	41,576

Net cash provided by operating activities	3,159,007	3,353,965

INVESTING ACTIVITIES:

Purchases of securities -
Available for sale	0	(28,454,928)
Held to maturity	(4,169,000)	0
Proceeds from maturities and prepayments of securities -
Available for sale	11,875,495	14,112,721
Held to maturity	102,787	227,200
Net increase in loans	(15,158,952)	(25,153,364)
Capital expenditures	(137,939)	(623,963)

Net cash used in investing activities	(7,487,609)	(39,892,334)

FINANCING ACTIVITIES:

Issuance of common stock, net	69,070	-
Purchase of treasury stock	(1,184,528)	(235,340)
Net increase in demand, savings and time deposits	1,964,933	7,645,500
Net increase in securities sold under agreements to repurchase	-	11,266
Net increase in other borrowings	7,600,000	23,700,000

Net cash provided by financing activities	8,449,475	31,121,426

Increase (decrease) in cash and cash equivalents	4,120,873	(6,416,843)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD	7,924,409	14,702,886

CASH AND CASH EQUIVALENTS
AT END OF PERIOD	$12,045,282	$8,286,043

SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest	$2,537,562	$2,067,323
Income taxes	$590,000	$1,161,112


See accompanying notes to consolidated financial statements

1st Constitution Bancorp and Subsidiaries
Notes To Consolidated Financial Statements
June 30, 2005 (Unaudited)

(1) Summary of Significant Accounting Policies

The accompanying unaudited Consolidated Financial Statements herein have been prepared by 1st Constitution Bancorp (the “Company”), in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. These consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2004, filed with the SEC on March 24, 2005.

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

(2) Net Income Per Common Share

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

Diluted net income per common share is computed by dividing net income by the weighted average number of shares outstanding, as adjusted for the assumed exercise of potential common stock options, using the treasury stock method. All share information has been restated for the effect of a (i) 5% stock dividend declared on December 17, 2004 and paid on January 31, 2005 to shareholders of record on January 18, 2005, and (ii) a two-for-one stock split in the form of a stock dividend declared on January 20, 2005 and paid on February 28, 2005 to shareholders of record on February 10, 2005.

The following tables illustrate the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations.

	Three Months Ended June 30, 2005

		Weighted-
		average	Per share
	Income	shares	amount

Basic EPS
Net income available to common stockholders	$1,131,373	3,304,845	$0.34

Effect of dilutive securities
Options and Grants	-	132,953	(0.01)


Diluted EPS
Net income available to common stockholders
plus assumed conversion	$1,131,373	3,437,798	$0.33


All options have been included in the computation of diluted earnings per share.


	Three Months Ended June 30, 2004

		Weighted-
		average	Per share
	Income	shares	Amount

Basic EPS
Net income available to common stockholders	$930,701	3,279,553	$0.29

Effect of dilutive securities
Options and Grants	-	168,823	(0.02)


Diluted EPS
Net income available to common stockholders
plus assumed conversion	$930,701	3,448,376	$0.27

All options have been included in the computation of diluted earnings per share.

	Six Months Ended June 30, 2005

		Weighted-
		average	Per share
	Income	shares	Amount

Basic EPS
Net income available to common stockholders	$2,176,904	3,307,451	$0.66

Effect of dilutive securities
Options and Grants	-	134,076	(0.03)


Diluted EPS
Net income available to common stockholders
plus assumed conversion	$2,176,904	3,441,527	$0.63

All options have been included in the computation of diluted earnings per share.

	Six Months Ended June 30, 2004

		Weighted-
		average	Per share
	Income	shares	Amount

Basic EPS
Net income available to common stockholders	$1,806,508	3,282,898	$0.55

Effect of dilutive securities
Options and Grants	-	169,848	(0.03)


Diluted EPS
Net income available to common stockholders
plus assumed conversion	$1,806,508	3,452,746	$0.52

All options have been included in the computation of diluted earnings per share.

(3) Stock-Based Compensation

Stock-based compensation is accounted for under the intrinsic value based method as prescribed by Accounting Principals Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Included below are the pro forma disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transaction and Disclosure” which assumes the fair value based method of accounting had been adopted.

	Three months ended June 30,

	2005	2004

Net income -
As reported	$1,131,373	$930,701
Deduct: Stock-based employee compensation
determined under fair value based method for
stock options, net of related tax effects	(6,385)	(6,357)

Pro forma	$1,124,988	$924,344


Net income per share -
As reported -
Basic	$0.34	$0.29
Diluted	$0.33	$0.27
Pro forma -
Basic	$0.34	$0.28
Diluted	$0.33	$0.27

	Six months ended June 30,

	2005	2004

Net income -
As reported	$2,176,904	$1,806,508
Deduct: Stock-based employee compensation
determined under fair value based method for
stock options, net of related tax effects	(12,770)	(12,714)

Pro forma	$2,164,134	$1,793,794


Net income per share -
As reported -
Basic	$0.66	$0.55
Diluted	$0.63	$0.52
Pro forma -
Basic	$0.65	$0.55
Diluted	$0.63	$0.52

FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)). Statement 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. Statement 123(R) generally requires that an entity account for those transactions using the fair-value-based method; and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees , which was permitted under Statement 123, as

originally issued. Statement 123(R) requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Company beginning January 1, 2006. The Company must use either the modified prospective or the modified retrospective transition method. Early adoption of Statement 123(R) for interim or annual periods for which financial statements or interim reports have not been issued is permitted. The adoption of Statement 123(R) is expected to reduce reported net income and earnings per share. Management is evaluating Statement 123(R) and has not yet determined its full impact on the consolidated financial statements of the Company.

(4) Variable Interest Entities

Management has determined that the 1 ^st Constitution Capital Trust I (the “Trust”) qualifies as a variable interest entity under FASB Interpretation 46 (“FIN 46”). In 2002, the Trust issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trust holds, as its sole asset, subordinated debentures issued by the Company in 2002. Prior to December 31, 2003, the Trust was included in the Company’s consolidated balance sheet and statements of income. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions of which were required to be applied to certain variable interest entities, including the Trust, by March 31, 2004. The Company adopted the provisions under FIN 46, as interpreted by FIN 46(R), and accordingly deconsolidated the Trust as of December 31, 2003.

In March 2005, the Federal Reserve Board adopted a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the final rule, the Company expects to include all of its $5.2 million in trust preferred securities in Tier 1 capital.

(5) Segment Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises’ products or services, or about the countries in which the enterprises earn revenues and hold assets, and about major customers, regardless of whether the information is used in making operating decisions.

Substantially all of the Company’s business is conducted through its banking subsidiary and involves the delivery of loan and deposit products to customers. The Company makes operating decisions and assesses performance based on an ongoing review of these banking operations, which constitute the only operating segment for financial reporting.

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

The following discussion of the operating results and financial condition at June 30, 2005 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three and six month periods ended June 30, 2005 are not necessarily indicative of results to be attained for any other period.

This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Company’s Form 10-K (Management’s Discussion and Analysis of Financial Condition and Results of Operations) for the year ended December 31, 2004, as filed with the SEC on March 24, 2005.

General

Throughout the following sections, the “Company” refers to 1 ^st Constitution Bancorp and its wholly owned subsidiaries, 1 ^st Constitution Bank and 1 ^st Constitution Capital Trust I, the “Bank” refers to 1 ^st Constitution Bank, and the “Trust” refers to 1 ^st Constitution Capital Trust I. The purpose of this discussion and analysis is to assist in the understanding and evaluation of the Company’s financial condition, changes in financial condition, and results of operations.

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.

The Bank operates nine branches, and has two subsidiaries, 1 ^st Constitution Investment Company of Delaware, Inc., which manages an investment portfolio, and FCB Assets Holdings, Inc., which is used by the Bank to manage and dispose of repossessed real estate.

The Trust, an unconsolidated subsidiary of the Company, was created to issue trust preferred securities to assist the Company to raise additional regulatory capital.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about our confidence and strategies and our expectations about new and existing programs and products, relationships, opportunities,

technology and market conditions. These statements may be identified by such forward-looking terminology as “expect,” “believe,” “anticipate,” or by expressions of confidence such as “continuing” or “strong” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, expected cost savings not being realized or not being realized within the expected time frame; income or revenues being lower than expected or operating costs higher; competitive pressures in the banking or financial services industries increasing significantly; business disruption related to program implementation or methodologies; weakening of general economic conditions nationally or in New Jersey; changes in legal and regulatory barriers and structures; and unanticipated occurrences delaying planned programs or initiatives or increasing their costs or decreasing their benefits, as well as other risks and uncertainties detailed from time to time in filings of the Company with the U.S. Securities and Exchange Commission. Actual results may differ materially from such forward-looking statements. These forward-looking statements speak only as of the date of this document.

New Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)). Statement 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. Statement 123(R) generally requires that an entity account for those transactions using the fair-value-based method; and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees , which was permitted under Statement 123, as originally issued. Statement 123(R) requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Company beginning January 1, 2006. The Company must use either the modified prospective or the modified retrospective transition method. Early adoption of Statement 123(R) for interim or annual periods for which financial statements or interim reports have not been issued is permitted. The adoption of Statement 123(R) is expected to reduce reported net income and earnings per share. Management is evaluating Statement 123(R) and has not yet determined its full impact on the consolidated financial statements of the Company.

In March 2005 the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 requires an entity to recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event if the amount can be reasonably estimated. The Interpretation provides guidance to evaluate whether fair value is reasonably estimable. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. FIN 47 is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods' financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 also carries forward the guidance in APB Opinion No. 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted. Our adoption of SFAS No. 154 will not have an impact on our financial condition or results of operations.

On June 29, 2005, the FASB directed its Staff to issue proposed Staff Position No. 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1," which provides implementation guidance on matters such as impairment evaluations for declines in fair value caused by increases in interest rates and/or sector spreads, as final. The final Staff Position, to be retitled Staff Position No. FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," or FSP No. 115-1, will supersede Emerging Issues Task Force, or EITF, Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," and EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value," and is expected to be issued in August 2005. FSP No. 115-1 will replace the guidance set forth in paragraphs 10-18 of EITF Issue No. 03-1 with references to existing other-than-temporary guidance and will codify the guidance set forth in EITF Topic No. D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. FSP No. 115-1 is to be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. We do not expect the final issuance of FSP No. 115-1 to have a material impact on our financial condition or results of operations.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2005 and June 30, 2004

Summary

The Company realized net income of $1,131,374 for the three months ended June 30, 2005, an increase of 21.6% from the $930,701 reported for the three months ended June 30, 2004. Diluted net income per share was $0.33 for the three months ended June 30, 2005 compared to $0.27 per diluted share for the three months ended June 30, 2004.

Key performance ratios continued to improve for 2005. Return on average assets and return on average equity were 1.34% and 16.75% for the three months ended June 30, 2005 compared to 1.23% and 15.55%, respectively, for the three months ended June 30, 2004.

All prior year share information has been restated for the effect of a 5% stock dividend declared on December 17, 2004 and paid on January 31, 2005 to shareholders of record on January 18, 2005, and the Company’s two-for-one stock split in the form of a stock dividend declared on January 20, 2005 and paid on February 28, 2005 to shareholders of record on February 10, 2005.

A significant factor impacting the Company’s net interest income has been the rising level of market interest rates that evolved during the latter half of 2004 and continued through the second quarter of 2005. The Federal Reserve Bank’s Open Market Committee (“FOMC”) held eight meetings in 2004 and held four meetings in the first and second quarters of 2005. Beginning with the June 30, 2004 meeting, the FOMC increased short-term interest rates by 25 basis points and continued with a series of 25 basis point increases in each of the next four meetings in 2004 and in each of the four meetings in 2005. The immediate benefit of these interest rate increases to the Company’s investment security purchases and floating rate assets resulted in a 60 basis point increase in the yield on total interest-earning assets. In addition, management’s ability to lag the interest rate increases on deposits coupled with a tight discipline in deposit pricing resulting in a 38 basis point increase to the Company’s net interest margin. Management expects the FOMC to continue its program of increasing the targeted Federal Funds rate over the next few months and has structured the Company’s balance sheet to an asset sensitive position in order to continue to benefit from this rising market rates environment.

Earnings Analysis

Interest Income

Interest income for the three months ended June 30, 2005 was $5,036,307, increasing by 24.5% from the $4,043,826 reported in the three months ended June 30, 2004. This is primarily attributable to the rising interest rate environment that evolved during the latter half of 2004 and continued through the first half of 2005. For the three months ended June 30, 2005, average interest earning assets increased $30,704,459 or 10.7%, to $318,965,663 compared to $288,261,204 for the three months ended June 30, 2004. The increase in interest income resulting from increases in earning asset volume was complemented by an increase in the average yield earned on these assets. For the three months ended June 30, 2005, the average yield on earning assets increased 73 basis points to 6.43% from 5.70% for the three months ended June 30, 2004.

Interest Expense

Interest expense for the three months ended June 30, 2005 was $1,405,594, an increase of $335,817 from $1,069,777 reported for the three months ended June 30, 2004. Total average interest bearing liabilities increased by $20,614,502 to $251,014,803 for the three months ended June 30, 2005 from $230,400,301 for the three months ended June 30, 2004. The average cost of interest bearing liabilities increased 38 basis points to 2.25% for the three months ended June 30, 2005 from 1.87% for the three months ended June 30, 2004, primarily as a result of an increase in market-driven rates paid on deposits and short-term borrowed funds.

Net Interest Income

The Company’s net interest income for the three months ended June 30, 2005 was $3,630,713, an increase of 22.1% from the $2,974,049 reported for June 30, 2004. The net interest margin, on a fully taxable equivalent basis, increased 46 basis points to 4.67% for the three months ended June 30, 2005 from 4.21% for the three months ended June 30, 2004. The increase in the net interest margin was primarily the result of interest earning assets repricing faster than interest bearing liabilities in the rising current rate environment, combined with a lower level of net amortization of premiums on mortgage-backed investment securities. Net amortization expense decreased to $35,025 for the three months ended June 30, 2005 versus $103,375 for the three months ended June 30, 2004.

Provision for Loan Losses

Management maintains the allowance for loan losses at a level that is considered adequate to absorb losses on existing loans that may become uncollectible based upon an evaluation of known and inherent risks in the loan portfolio. Additions to the allowance are made by charges to the provision for loan losses. The evaluation considers a complete review of the following specific factors: historical losses by loan category, non-accrual loans, problem loans as identified through internal classifications, collateral values, and the growth and size of the portfolio. Additionally, current economic conditions and local real estate market conditions are considered. As a result of this evaluation process, the Company’s provision for loan losses was $136,000 for the three months ended June 30, 2005 and $60,000 for the three months ended June 30, 2004.

Non-Interest Income

Total non-interest income increased $115,259, or 16.6%, to $809,614 for the three months ended June 30, 2005 from $694,355 for the three months ended June 30, 2004. Service charges on deposit accounts amounted to $170,385 for the three months ended June 30, 2005 compared to $121,514 for the three months ended June 30, 2004. In early 2005, the Bank performed a comparative study of competitors’ service charges throughout its marketplace and, based on the study’s findings, increased the service charge components and structured it to be more consistent with those competitors. This comparative study of fees and charges has also resulted in the current period increase in other income to $123,430 for the three months ended June 30, 2005 compared to $70,114 for the three months ended June 30, 2004. Included in this component are fees assessed for ATM usage, wire transfer execution, lock box services and other branch network services.

Non-Interest Expense

Non-interest expense increased $385,437, or 17.2%, to $2,621,529 for the three months ended June 30, 2005, from $2,236,092 for the three months ended June 30, 2004. Salaries and employee benefits increased $96,646 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004, primarily due to (a) increased branch staffing levels as a result of the opening of two new branches during the latter half of 2004 plus (b) normal employee salary increases. Other expenses increased $305,181, primarily as a result of costs related to making these new branches operational.

An important industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources. The Company’s efficiency ratio for the quarter ended June 30, 2005 was 59.1% compared to 61.0% for the quarter ended June 30, 2004.

Six Months Ended June 30, 2005 and June 30, 2004

Summary

The Company realized net income of $2,176,905 for the six months ended June 30, 2005, an increase of $307,397, or 20.5%, over the $1,806,508 realized for the six months ended June 30, 2004. Net income per diluted share was $0.63 for the six months ended June 30, 2005 compared to $0.52 per diluted share for the six months ended June 30, 2004.

Key performance ratios continued to improve during the six months ended June 30, 2005. Return on average assets and return on average equity were 1.31% and 16.24%, respectively, for the six months ended June 30, 2005 compared to 1.22% and 15.23%, respectively, for the six months ended June 30, 2004.

Earnings Analysis

Interest Income

For six months ended June 30, 2005, total interest income was $9,857,089, an increase of $1,824,941 or 22.7%, compared to total interest income of $8,032,148 for the six months ended June 30, 2004. The following table sets forth the Company’s consolidated average balances of assets, liabilities and shareholders’ equity as well as interest income and expense on related items, and the Company’s average rate for the six month periods ended June 30, 2005 and 2004.


Average Balance Sheets with Resultant Interest and Rates

(yields on a tax-equivalent basis)	Six months ended June 30, 2005			Six months ended June 30, 2004
	Average		Average	Average		Average
	Balance	Interest	Rate	Balance	Interest	Rate

Assets:
Federal Funds Sold/Short-Term Investments	$822,842	$12,140	2.98%	$1,470,637	$6,857	0.94%
Securities:
Collateralized Mortgage Obligations/
Mortgage Backed Securities	78,188,981	1,482,753	3.79%	86,413,399	1,601,009	3.71%
States and Political Subdivisions	18,342,690	479,038	5.22%	8,798,030	248,124	5.64%

Total	96,531,671	1,961,791	4.88%	95,211,429	1,849,133	3.88%

Loan Portfolio:
Commercial	34,715,326	1,233,274	7.16%	27,476,059	1,065,942	7.78%
Installment	2,378,152	99,508	8.44%	4,018,497	160,307	8.00%
Commercial Mortgages and
Construction Wholesale	140,446,826	4,843,739	6.95%	116,413,575	3,453,538	5.95%
Residential Mortgages and
Construction Retail	14,368,887	465,815	6.54%	26,517,639	611,300	4.62%
All Other Loans	27,737,793	1,396,185	10.15%	10,662,621	965,545	10.90%

Total	219,646,984	8,038,521	7.38%	185,088,391	6,256,632	6.78%

Total Interest-Earning Assets	317,001,497	10,012,452	6.37%	281,770,457	8,112,622	5.77%


Allowance for Loan Losses	(2,089,823)			(1,855,314)
Cash and Due From Bank	8,589,865			7,243,985
Other Assets	11,794,168			10,363,623

Total Assets	$335,295,707			$297,522,751


Interest-Bearing Liabilities:
Money Market and NOW Accounts	$103,936,299	$588,311	1.14%	$84,886,100	$383,258	0.91%
Savings Accounts	25,683,040	89,925	0.71%	26,959,284	69,622	0.52%
Certificates of Deposit	75,583,738	1,061,988	2.83%	73,205,894	923,469	2.53%
Certificates of Deposit of $100,000 and Over	12,256,921	181,428	2.98%	10,760,904	131,829	2.46%
Federal Funds Purchased/Other Borrowed Funds	28,435,260	603,789	4.26%	23,627,392	469,197	3.98%
Redeemable Subordinated Debentures	5,155,000	160,269	6.41%	5,155,000	125,637	5.03%

Total Interest-Bearing Liabilities	251,050,258	2,685,710	2.16%	224,594,574	2,103,012	1.88%


Net Interest Spread			4.21%			3.89%


Demand Deposits	54,459,629			46,517,113
Other Liabilities	2,759,437			2,433,112

Total Liabilities	308,269,324			273,544,799
Shareholders' Equity	27,026,383			23,977,952

Total Liabilities and Shareholders' Equity	335,295,707			297,522,751

Net Interest Margin		$6,326,742	4.66%		$6,009,610	4.28%

The current year increase in interest income resulted from higher average balances in the securities and loan portfolios combined with higher average yields earned on the loan portfolio. Net amortization of premiums on mortgage-backed investment securities decreased to $81,640 for the six months ended June 30, 2005 compared to $222,294 for the six months ended June 30, 2004. Average loans increased $34,558,593, or 18.7%, to $219,646,984 for the six months ended June 30, 2005 from $185,088,391 for the six months ended June 30, 2004, while the yield on the portfolio increased 60 basis points to 7.38% for the six months ended June 30, 2005 from 6.78% for the six months ended June 30, 2004. The higher loan yield reflected the higher interest rate environment that evolved during the latter half of 2004 and continued through the first half of 2005.

Average securities increased $1,320,242, or 1.4%, from $95,211,429 for the six months ended June 30, 2004 to $96,531,671 for the six months ended June 30, 2005, while the yield on the securities portfolio increased 100 basis points to 4.88% for the six months ended June 30, 2005 from 3.88% for the six months ended June 30, 2004.

Overall, the yield on the Company’s total interest-earning assets increased 60 basis points to 6.37% for the six months ended June 30, 2005 from 5.77% for the six months ended June 30, 2004.

Interest Expense

Total interest expense for the six months ended June 30, 2005 was $2,685,710, an increase of $582,699, or 27.7%, compared to $2,103,011 for the six months ended June 30, 2004. The increase in interest expense for the current period resulted primarily from the impact of higher levels of interest-bearing liabilities priced at higher market interest rate levels. The average rate paid on interest bearing liabilities for the six months ended June 30, 2005 increased 28 basis points to 2.16% from 1.88% for the six months ended June 30, 2004.

Net Interest Income

The Company’s net interest income for the six months ended June 30, 2005 was $7,171,379, an increase of $1,242,242, or 21.0%, compared to $5,929,137 for the six months ended June 30, 2004. The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest-earning assets, was 4.66% for the six months ended June 30, 2005 compared to 4.28% for the six months ended June 30, 2004.

Provision for Loan Losses

Management maintains the allowance for loan losses at a level that is considered adequate to absorb losses on existing loans that may become uncollectible based upon an evaluation of known and inherent risks in the loan portfolio. Additions to the allowance are made by charges to the provision for loan losses. The evaluation considers a complete review of the following specific factors: historical losses by loan category, non-accrual loans, problem loans as identified through internal classifications, collateral values, and the growth and size of the portfolio. Additionally, current economic conditions and local real estate market conditions are considered. As a result of this evaluation process, the Company’s provision for loan losses was $195,000 for the six months ended June 30, 2005 and $120,000 for the six months ended June 30, 2004.

Non-Interest Income

Total non-interest income for the six months ended June 30, 2005 was $1,431,416, an increase of $321,693, or 29.0%, from non-interest income of $1,109,723 for the six months ended June 30, 2004.

Gain on sale of loans held for sale represents the largest single source on non-interest income. Gain on sale of loans held for sale for the six months ended June 30, 2005 was $750,266 compared to $609,322 for the six months ended June 30, 2004. The current interest rate environment in 2005, with a continued lower level of long term market notes, has greatly fueled the volume of mortgage loan originations and subsequent secondary market mortgage loan sales.

Service charges on deposit accounts were $329,245 for the six months ended June 30, 2005 compared to $248,146 for the six months ended June 30, 2004. Service charge income increased in 2005 principally due to management’s actions to restructure service charges and fees based on the results of a comparative study of market fees performed in early 2005. This also resulted in an increase in the other income component of non-interest income to $230,295 for the six months ended June 30, 2005 compared to $133,755 for the six months ended June 30, 2004.

Income from Bank Owned Life Insurance (“BOLI”) amounted to $121,610 for the six months ended June 30, 2005, compared to $118,500 for the six months ended June 30, 2004. In 2001, the Company purchased $6.0 million in tax-free BOLI assets which partially offset the cost of employee benefit plans and reduced the overall effective tax rate.

Non-Interest Expense

Total non-interest expense for the six months ended June 30, 2005 was $5,191,738, an increase of $932,325, or 21.9%, compared to non-interest expense of $4,259,413 for the six months ended June 30, 2004.

The following table presents the major components of non-interest expense for the six months ended June 30, 2005 and 2004.


Non-interest Expenses
	Six months ended June 30,
	2005	2004

Salaries and employee benefits	$2,766,543	$2,413,175
Occupancy expense	690,101	483,927
Equipment expense	240,119	226,865
Marketing	170,122	132,808
Computer services	302,401	288,227
Regulatory, professional and other fees	480,445	290,472
Office expense	200,878	204,668
All other expenses	341,129	219,271

	$5,191,738	$4,259,413

Salaries and employee benefits increased $353,368 to $2,766,543 for the six months ended June 30, 2005 compared to $2,413,175 for the six months ended June 30, 2004. This increase reflects the increase in staffing levels due to the opening of new branches during the latter half of 2004 plus normal employee salary increases.

The Company’s efficiency ratio decreased modestly to 60.3% for the six months ended June 30, 2005 compared to a ratio of 60.5% for the six months ended June 30, 2004.

Financial Condition

June 30, 2005 Compared with December 31, 2004

Total consolidated assets at June 30, 2005 amounted to $347,128,977, an increase of $11,298,537, or 3.4%, compared to $335,830,440 at December 31, 2004. The growth in the Company’s asset base was primarily due to increases in the loan and securities portfolios.

The following discussion addresses the major components of the Company’s balance sheet.

Cash and Cash Equivalents

Cash and Cash Equivalents at June 30, 2005 totaled $12,045,282 compared to $7,924,409 at December 31, 2004. Cash and cash equivalents at June 30, 2005 consisted of cash and due from banks of $8,617,282 and Federal funds sold/short term investments of $3,427,367. The corresponding balances at December 31, 2004 were $7,898,395 and $26,014, respectively. The balance of cash and cash equivalents at June 30, 2005 increased primarily due to an end-of-month inflow of non-interest bearing deposits.

Investment Securities

Securities represented 25.8% of total assets at June 30, 2004 and 29.1% at December 31, 2004. Total securities decreased $8,302,990, or 8.5%, at June 30, 2005 to $89,452,796 compared to $97,775,786 at December 31, 2004.

Securities available for sale totaled $73,227,363 at June 30, 2005, a decrease of $12,361,286, or 14.4% from December 31, 2004. During the six months ended June 30, 2005, $4,169,000 of securities held to maturity were purchased and funded by calls and maturities of securities held to maturity, securities available for sale and short-term investments.

Securities held to maturity totaled $16,225,433 at June 30, 2005, an increase of $4,058,296, or 33.4%, from December 31, 2004.

Loans

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

The following table sets forth the classification of loans by major category at June 30, 2005 and December 31, 2004.


Loan Portfolio Composition	June 30, 2005		December 31, 2004
		%		%
Component	Amount	of total	Amount	of total

Construction loans	$94,736,172	42.0%	$88,027,024	41.8%
Residential real estate loans	8,877,777	3.9%	9,815,366	4.7%
Commercial and industrial loans	105,249,850	46.6%	96,021,077	45.6%
Loans to individuals	16,143,486	7.1%	16,002,619	7.6%
Lease financing	35,499	0.0%	74,543	0.0%
All other loans	759,786	0.3%	712,422	0.3%

	$225,802,570	100.0%	$210,653,051	100.0%

The loan portfolio increased $15,149,519, or 7.2%, at June 30, 2005 to $225,802,570 from $210,653,051 at December 31, 2004. The ability of the Company to enter into larger loan relationships and management’s philosophy of relationship banking are key factors in the Company’s strategy for loan growth. Strong competition from both bank and non-bank competitors could result in comparatively lower yields on new and established lending relationships. The ultimate collectability of the loan portfolio and the recovery of the carrying amount of real estate are subject to changes in the Company’s market region's economic environment and real estate market.

Non-Performing Assets

Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are composed of (1) loans on a non-accrual basis, (2) loans which are contractually past due 90 days or more as to interest and principal payments but have not been classified as non-accrual, and (3) loans whose terms have been restructured to provide a reduction or deferral of interest on principal because of a deterioration in the financial position of the borrower.

The Company’s policy with regard to non-accrual loans varies by the type of loan involved. Generally, commercial loans are placed on a non-accrual status when they are 90 days past due unless these loans are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or interest is in doubt. Consumer loans are generally charged off after they become 90 days past due. Residential mortgage loans are not generally placed on a non-accrual status unless the value of the real estate has deteriorated to the point that a potential loss of principal or interest exists. Subsequent payments are credited to income only if collection of principal is not in doubt.

Nonaccrual loans amounted to $1,200,649 at June 30, 2005, compared to $1,049,411 at December 31, 2004. As the table demonstrates, despite the amount of non-performing assets at June 30, 2005, loan quality and ratios remain strong. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.


Non-Performing Assets and Loans	June 30,	December 31,
	2005	2004

Non-Performing loans:
Loans 90 days or more past due and still accruing	$0	$63,130
Non-accrual loans	1,200,649	1,049,411

Total non-performing loans	1,200,649	1,112,541
Other real estate owned	0	0

Total non-performing assets	$1,200,649	$1,112,541


Non-performing loans to total loans	0.66%	0.50%
Non-performing assets to total assets	0.43%	0.33%

The Company had no restructured loans at June 30, 2005 and December 31, 2004. Impaired loans totaled $1,200,649 at June 30, 2005 and $1,049,411 at December 31, 2004.

Allowance for Loan Losses

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

Management utilizes a systematic and documented allowance adequacy methodology for loan losses that requires specific allowance assessment based on a credit risk rating for all loans, including real estate mortgages and consumer loans. Loans are risk rated based on internal reviews and evaluations performed by the lending staff. These evaluations consider a complete review of the following specific factors: financial conditions and past credit history of the borrowers and guarantors and appraised collateral values. These evaluations are, in turn, examined by the Company’s internal loan review specialist. A formal loan review function, independent of loan origination, is used to identify and monitor risk classifications. The allowance methodology assigns reserves based upon credit risk ratings for all loans. The reserves are based upon various factors, including historical performance, and the current economic environment. Management continually reviews the process used to determine the adequacy of the allowance for loan losses. Allocations to the allowance for loan losses, both specific and general, are determined after this review.

The allowance for loan losses amounted to $2,190,736 at June 30, 2005, an increase of $185,567 from December 31, 2004. The ratio of the allowance for loan losses to total loans was 0.97% at June 30, 2005 and 0.95% at December 31, 2004, respectively. The quality of the loan portfolio remained strong and it is management’s belief that the allowance for loan losses is adequate in relation to credit risk exposure levels.

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


Allowance for Loan Losses	June 30,	June 30,
	2005	2004

Balance, beginning of period	$2,005,169	$1,786,632


Provision charged to operating expenses	195,000	120,000

Loans charged off
Construction loans
Residential real estate loans
Commercial and commercial real estate	(10,182)
Loans to individuals
Lease financing
All other loans

	(10,182)	0


Recoveries
Construction loans
Residential real estate loans
Commercial and commercial real estate	749
Loans to individuals
Lease financing
All other loans

	749	0


Net (charge offs) / recoveries	(9,433)	0


Balance, end of period	$2,190,736	$1,906,632


Loans:
At year end	$225,802,570	$189,103,670
Average during the year	226,830,164	185,088,391
Net charge offs to average loans outstanding	0.00%	0.00%

Allowance for loan losses to:
Total loans at year end	0.97%	1.01%
Non-performing loans	182.46%	420.77%

Deposits

Deposits, which include demand deposits (interest bearing and non-interest bearing), savings and time deposits, are a fundamental and cost-effective source of funding. The Company offers a variety of products designed to attract and retain customers, with the Company’s primary focus being on building and expanding long-term relationships.

Total deposits increased $1,964,933, or 0.7%, to $278,851,966 at June 30, 2005 from $276,887,033 at December 31, 2004. This increase in total deposits was the net result of a $9,757,436 increase in non-interest bearing deposits to $60,552,017, and a $7,792,503 decrease in interest bearing deposits to $218,299,949.

Other Borrowings

Other Borrowings are mainly comprised of fixed rate convertible advances from the Federal Home Loan Bank (“FHLB”) and overnight funds purchased. These borrowings are primarily used to fund asset growth not supported by deposit generation. FHLB advances are fully secured by marketable securities and qualifying one-to-four family mortgage loans. The balance of other borrowings at June 30, 2005 consisted of fixed rate term FHLB borrowings of $23,500,000 and overnight funds purchased of $9,300,000. The balance of other borrowings at December 31, 2004 consisted of fixed rate term FHLB borrowings of $15,500,000 and overnight funds purchased of $9,700,000.

Shareholders’ Equity And Dividends

Shareholders’ equity at June 30, 2005 totaled $27,602,530, an increase of $812,146, or 3.0%, from $26,790,384 at December 31, 2004. Book value per common share rose to $8.47 at June 30, 2005 from $7.31 at December 31, 2004.

The increase in shareholders’ equity and book value per share resulted primarily from net income of $2,176,905 less the effect of stock buybacks and the increase in unrealized holding losses on securities.

The Company’s stock is listed for trading on the Nasdaq National Market System, under the symbol “FCCY.”

On March 12, 2001, the Company announced that the Board of Directors authorized a stock repurchase program allowing for the repurchase of a limited number of the Company’s common shares at management’s discretion on the open market. The Company undertook this repurchase program in order to increase shareholder value. The company completed its previous common stock repurchase program in July 2005. On July 21, 2005, the Board of Directors authorized a new common stock repurchase program under which the Company may purchase in open market or privately negotiated transactions up to 5% of its common shares outstanding on the date of the approval of the stock repurchase program. A table disclosing repurchases of Company shares made during the second quarter ended June 30, 2005 is set forth under Part II, Item 2 of this report, Unregistered Sales of Equity Securities and Use of Proceeds .

The table below presents the actual capital amounts and ratios of the Company for the periods indicated:


Capital Ratios
	Amount	Ratio

As of June 30, 2005 -
Total capital to risk weighted assets	$35,145,946	13.75%
Tier 1 capital to risk weighted assets	32,955,210	12.89%
Tier 1 capital to average assets	32,955,210	9.76%

As of December 31, 2004 -
Total capital to risk weighted assets	$33,898,932	13.99%
Tier 1 capital to risk weighted assets	31,893,763	13.17%
Tier 1 capital to average assets	31,893,763	10.16%

The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1 capital to risk weighted assets ratio of 4.0% and a total capital to risk weighted assets ratio of 8.0% . To be considered “well capitalized,” an institution must have a minimum Tier 1 leverage ratio of 5.0% . At June 30, 2005, the ratios of the Company exceeded the ratios required to be considered well capitalized. It is management’s goal to monitor and maintain adequate capital levels to continue to support asset growth and continue its status as a well-capitalized institution.

Liquidity

At June 30, 2005, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors withdrawal requirements, and other operational and customer credit needs could be satisfied.

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Liquidity management refers to the Company’s ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers. In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank’s ability to meet its liquidity needs. On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities. On the liability side, the primary source of liquidity is the ability to generate core deposits. Short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earnings assets.

The Company has established a borrowing relationship with the FHLB which further supports and enhances liquidity.

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At June 30, 2005, the balance of cash and cash equivalents was $12,045,282.

Net cash provided by operating activities totaled $3,159,007 in the six months ended June 30, 2005 compared to $3,353,965 in the six months ended June 30, 2004. The primary sources of funds are net income from operations adjusted for provision for loan losses, depreciation expenses, and net proceeds from sales of loans held for sale.

Net cash used in investing activities totaled $7,487,609 in the six months ended June 30, 2005 compared to $39,892,334 used in investing activities in the six months ended June 30, 2004. The current period amount was the result of a lower volume of securities purchases and loan originations for the six months ended June 30, 2005.

Net cash provided by financing activities amounted to $8,449,475 in the six months ended June 30, 2005 compared to $31,121,426 provided by financing activities in the six months ended June 30, 2004. The amount for the six months ended June 30, 2005 resulted primarily from a higher level in FHLB borrowings combined with a lower level of deposit growth during this period compared to the six months ended June 30, 2004.

The securities portfolio is also a source of liquidity, providing cash flows from maturities and periodic repayments of principal. During the six months ended June 30, 2005, maturities and prepayments of investment securities totaled $11,978,282. Another source of liquidity is the loan portfolio, which provides a steady flow of payments and maturities.

Interest Rate Sensitivity Analysis

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

To measure the impacts of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The economic value of equity is likely to be different as interest rates change. Results falling outside prescribed ranges require action by management. At June 30, 2005 and December 31, 2004, the Company’s variance in the economic value equity as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points is within the negative 3% guideline, as shown in the tables below.

The market capitalization of the Company should not be equated to the EVPE, which only deals with the valuation of balance sheet cash flows using conservative assumptions. Calculated core deposit premiums may be less than what is available in an outright sale. The model does not consider potential premiums on floating rate loan sales, the impact of overhead expense, non-interest income, taxes, industry market price multiples and other factors reflected in the market capitalization of a company.

Market Risk Analysis

June 30, 2005

Change in Interest Rates	Flat	-200bp	+200bp

Economic Value of Portfolio Equity	$41,813,000	$38,533,000	$39,993,000
Change		(3,280,000)$	($1,820,000)
Change as a Percentage of Assets		(-0.94%)	(-0.52%)

December 31, 2004

Change in Interest Rates	Flat	-200bp	+200bp

Economic Value of Portfolio Equity	$38,221,000	$34,681,000	$35,641,000
Change		(3,540,000)	(2,580,000)
Change as a Percentage of Assets		(-1.05%)	(-0.77%)

Item 4.

Controls and Procedures.

The Company’s chief executive officer and chief financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on

Form 10-Q. Based upon such evaluation, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

The Company’s chief executive officer and chief financial officer have also concluded that there have not been any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

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

Issuer Purchases of Equity Securities

On March 12, 2001, the Company announced that the Board of Directors authorized a stock repurchase program allowing for the repurchase of a limited number of the Company’s shares at management’s discretion on the open market. The Company undertook this repurchase program in an effort to increase shareholder value. The following table provides common stock repurchases made by or on behalf of the Company during the three months ended June 30, 2005.

	Issuer Purchases of Equity Securities ⁽¹⁾

					Maximum
				Total Number of	Number of
				Shares Purchased	Shares That
		Total		As Part of	May Yet be
		Number	Average	Publicly	Purchased
		of Shares	Price Paid	Announced Plan	Under the Plan
Period		Purchased	Per Share	or Program	or Program (2)


Beginning	Ending

April 1, 2005	April 30, 2005	992	$20.15	992	52,636
May 1, 2005	May 31, 2005	0	--	0	52,636
June 1, 2005	June 30, 2005	50,000	$17.75	50,000	2,636


	Total	50,992	$17.80	50,992	2,636

_________________

(1)		The common stock repurchase program covers a maximum of 140,290 shares of common
		stock of the Company, representing 5% of the outstanding common stock of the
		Company on December 31, 2000. This common stock repurchase program was
		terminated in July 2005, subsequent to the period covered by this report.

(2)		Subsequent to the period covered by this report, on July 21, 2005, the Board of Directors
		authorized a new common stock repurchase program under which the Company may
		purchase in open market or privately negotiated transactions up to 5% of its common
		shares outstanding on the date of the approval of the stock repurchase program. The
		information in this column has not been adjusted to reflect the shares available under the
		new plan.

Item 4. Submission of Matters to a Vote of Securities Holders.

The Company’s Annual Meeting of Shareholders (the “Annual Meeting”) was held on May 19, 2005.

There were present at the Annual Meeting in person or by proxy shareholders holding an aggregate of 3,034,922 shares of common stock of a total number of 3,324,578 shares of common stock issued, outstanding and entitled to vote at the Annual Meeting.

At the Annual Meeting, Robert F. Mangano was re-elected as a Class III director of the Company, with 3,021,468 shares votes cast for and 13,454 shares withheld. Directors whose term of office continued following the meeting were Frank E. Walsh, III, David C. Reed, William M. Rue, and Charles Crow, III.

A vote of the shareholders was taken at the Annual Meeting on the proposal to approve the adoption of 1 ^ST Constitution Bancorp 2005 Equity Incentive Plan. The proposal was approved by the shareholders with 1,638,889 shares voting in favor of the proposal and 223,264 shares voting against the proposal. There were 1,158,281 abstentions and broker non-votes.

A vote of the shareholders was taken at the Annual Meeting on the proposal to approve and ratify the appointment of Grant Thornton LLP as the Company’s independent auditor for the year ending December 31, 2005. The proposal was approved by the shareholders, with 3,017,554 shares voting in favor of the proposal, and 13,874 shares voting against the proposal. There were 3,494 abstentions and broker non-votes.

Item 6.		Exhibits

		3(i)		Certificate of Incorporation of the Company (incorporated by
				reference to Exhibit 3(i) to the Company’s Form 10-K filed with
				the SEC on March 24, 2005)

		3(ii)		Bylaws of the Company (incorporated by reference to Exhibit
				3(ii) to the Company’s Form 10-QSB filed with the SEC on May
				14, 2003)

		10.17		The 1st Constitution Bancorp 2005 Equity Incentive Plan
				(incorporated by reference to Appendix A of the Company’s
				definitive proxy statement filed with the SEC on April 15, 2005)

		10.18	*	Form of Restricted Stock Agreement under the 1st Constitution
				Bancorp 2005 Equity Incentive Plan

		10.19	*	Form of Nonqualified Stock Option Agreement under the 1st
				Constitution Bancorp 2005 Equity Incentive Plan

		10.20	*	Form of Incentive Stock Option Agreement under the 1st
				Constitution Bancorp 2005 Equity Incentive Plan

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

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

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


	* Filed herewith

SIGNATURES

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

		1 ^ST CONSTITUTION BANCORP


Date: August 8, 2005	By:	ROBERT F. MANGANO

		Robert F. Mangano
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: August 8, 2005	By:	JOSEPH M. REARDON

		Joseph M. Reardon
		Senior Vice President and Treasurer
		(Principal Accounting Officer)

Exhibit 10.20

Name:______________________________

No. of Options:_____________________

1 ^ST CONSTITUTION BANCORP

INCENTIVE STOCK OPTION AGREEMENT

This INCENTIVE STOCK OPTION AGREEMENT (this “Agreement”) is made this ________day of _______, 200__(the “Award Date”) between 1 ^ST CONSTITUTION BANCORP, a New Jersey corporation (the “Company”) and ___________________ (the “Participant”). Capitalized terms used in this Agreement but not defined upon their first usage shall have the meanings ascribed to them in the Company’s 2005 Equity Incentive Plan, as it may be amended from time to time (the “Plan”).

1. Grant of Option . The Company hereby grants to the Participant the right and option (the “Option”) to purchase ______ shares of the Company’s common stock, no par value (the “Shares”) at a price of $ [no less than FMV of Award Date] per share (the “Option Price”) pursuant to the Plan, subject to the terms and conditions of the Plan and this Agreement. The Option shall expire on ________________ (the “Expiration Date”).

2. Type of Option . To the extent possible, this Option is intended to be treated by the Company as an “incentive stock option” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). To the extent that, at or subsequent to grant, all or a portion of the Option ceases to qualify as an incentive stock option because of a failure to satisfy the requirements of Section 422 of the Code, all or such portion of the Option shall be treated by the Company as a “nonqualified stock option”.

3. Incorporation by Reference of the Plan . The Plan is hereby incorporated by reference into this Agreement. The Participant hereby acknowledges receipt of a copy of the Plan and represents and warrants to the Company that the Participant has read and understands the terms and conditions of the Plan. The execution of this Agreement by the Participant constitutes the Participant’s acceptance of and agreement to the terms and conditions of the Plan and this Agreement.

4. Vesting of Option . Unless the Committee provides for earlier vesting, the Option shall vest in accordance with the following schedule:

Percentage of Options	Scheduled Vesting Date

________________	_____anniversary of Award Date
________________	_____anniversary of Award Date

5. Exercise . The Participant may exercise some or all of the Option by delivering to the Company, a completed notice of exercise in the form attached to this Agreement, together with payment in full of the aggregate Exercise Price.

6. Form of Payment . Payment of the aggregate Exercise Price may be made in one of the following methods:

(a)	Cash, certified or bank cashier’s check.

(b) Shares of the Company’s common stock duly endorsed for transfer to the Company with signature guaranteed, which may be (i) shares which were received by the Participant upon exercise of one or more incentive stock options, but only if such shares had been held by the Participant for a least the greater of (A) two years from the date the incentive stock options were granted or (B) one year after the transfer of shares to the Participant, (ii) shares which were received by the Participant upon exercise of one or more nonqualified stock options, but only if such shares had been held by the Participant for at least six months, or (iii) shares which were received by the Participant upon the vesting of one or more shares of restricted stock of the Company, but only if and to the extent that such shares had been held by the Participant for at least six months after vesting.

7.	Effect of Termination of Employment.

(a) Termination of Employment Upon Death, Disability or Retirement . Upon termination of the Participant’s employment with the Company or its subsidiaries or affiliates by reason of death, disability (as

determined by the Committee), or [retirement at or after age ____], all unvested Options shall become fully vested and exercisable, and may be exercised by the Participant, the Participant’s estate, beneficiary, or representative, as the case may be, for a period of three months after the date of termination of service or until the Expiration Date, whichever is shorter.

(b) Termination of Employment For Other Reasons . Upon termination of the Participant’s employment with the Company or its subsidiaries or affiliates prior to the Expiration Date for any reason other than death, disability, or retirement, all unvested Options shall expire and terminate upon the date of termination of service.

8. No Shareholder Rights . The Participant shall not have any rights as a shareholder of the Company with respect to any Shares which may be purchased by exercise of this Option unless and until the Option is duly and fully exercised.

9. Limits on Transferability . The Option shall not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, other than by will or the laws of descent and distribution, or as otherwise permitted by the Committee.

10. Tax Withholding Obligations . In order to satisfy any withholding or similar tax requirements relating to the Options, the Company has the right to deduct or withhold from any payroll or other payment to a Participant, or require the Participant to remit to the Company, an appropriate payment or other provision, which may include the withholding of Shares.

11. Change in Control . Upon a Change in Control, all non-forfeited Options shall become fully exercisable and vested, subject to compliance with legal and other requirements.

12. Trading Black Out Policies . The Participant agrees to abide by all trading “black out” policies established from time to time by the Company.

13. No Employment Rights . Nothing in this Agreement will confer upon the Participant any right to continued employment with the Company or its subsidiaries or affiliates or affect the right of the Company to terminate the employment of the Participant at any time for any reason.

14. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to principals of conflicts of laws, and applicable provisions of federal law.

IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date and year first above written.

1 ^ST CONSTITUTION BANCORP

By: __________________________________

[Name]

Member of the Compensation Committee

PARTICIPANT:

_______________________________

[NAME]

NOTICE OF EXERCISE OF INCENTIVE STOCK OPTION

Date:_____________________

1 ^st Constitution Bancorp

P.O. Box 634

2650 Route 130 North

Cranbury, New Jersey 08512

Attention: Secretary

Re:	1 ^st Constitution Bancorp (the “Company”) 2005 Equity Incentive Plan

I hereby exercise the option (“Option”) granted pursuant to the attached Incentive Stock Option Agreement (the “Agreement”) to acquire ______shares of the Company’s common stock (the “Shares”) at the exercise price of $_____ per share, for an aggregate exercise price of $_____.

My enclosed form of payment is (check one):

____	cash in the amount of $______
____	certified or bank cashier’s check in the amount of $_____
____	by surrender of shares of the Company’s common stock with a value of $_____ represented by certificate number_____, duly endorsed for transfer to the Company with signature guaranteed, which may be (i) shares which were received by the Participant upon exercise of one or more incentive stock options, but only if such shares had been held by the Participant for a least the greater of (A) two years from the date the incentive stock options were granted or (B) one year after the transfer of shares to the Participant, (ii) shares which were received by the Participant upon exercise of one or more nonqualified stock options, but only if such shares had been held by the Participant for at least six months, or (iii) shares which were received by the Participant upon the vesting of one or more shares of restricted stock of the Company, but only if and to the extent that such shares had been held by the Participant for at least six months after vesting.

In the event that I dispose of the shares being purchased pursuant to the exercise of the Option prior to the date that is one year after exercise of the Option (or prior to the date that is two years after the grant of the Option), I hereby agree to immediately give notice of such fact to the Company. If the Company is required to satisfy any federal, state or local income or employment tax withholding obligations as a result of such early disposition of the shares being purchased pursuant to this Option exercise, I agree to satisfy the amount of such withholding in the manner that the Company prescribes.

Please make a notation on the Agreement to evidence the exercise of the Option as set forth in this Notice and return the Agreement, if any Options remain thereunder, along with a certificate representing the Shares to me at the address below:

__________________________________

Name:

__________________________________

(PRINT ADDRESS)

1.	I have reviewed this quarterly report on Form 10-Q of 1 ^st Constitution Bancorp;

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

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

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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

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


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

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

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

1.	I have reviewed this quarterly report on Form 10-Q of 1 ^st Constitution Bancorp;

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

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

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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

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


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

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

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

Percentage of Shares	Scheduled Vesting Date

________________	_____anniversary of Award Date
________________	_____anniversary of Award Date