UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
 
 FORM
10-K
 (Mark
One)
 x           ANNUAL
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
fiscal year ended December 31, 2008
 
 o           TRANSITION
REPORT UNDER 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
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            IRS
      Employer Identification Number)
 
 2650
      Route 130, P.O. Box 634, Cranbury, NJ  08512(Address
      of Principal Executive Offices, including Zip Code)
 
 (609)
      655-4500(Registrant’s
      telephone number, including area code)
 
 SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
 Common
      Stock, No Par Value
              Stock
      Purchase Rights Relating to Common Stock, No Par Value
 
 SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
 None(Title
      of Class)
  
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No
x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o     No
x
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x    No o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
  
  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
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer
                  o
                  
                  Accelerated
      filer
                  oNon-accelerated
      filer
                  o
                  
                  Smaller
      reporting company
                  x(Do
      not check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  oNo x
 
 The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the price at which the common stock
was last sold, or the average bid and asked price of such common stock, as of
the last business day of the registrant’s most recently completed second
quarter, is $39,578,000.
 
 As of
March 25, 2009, 4,216,255 shares of the registrant’s common stock were
outstanding.
 
 Portions
of the registrant’s definitive Proxy Statement for its 2009 Annual Meeting of
Shareholders are incorporated by reference into Part III of this
report.
    
  FORM10-KTABLE OF
      CONTENTSPART
    IItem
      1.
              Business
              
              1Item
      1A.
              Risk
      Factors
              
              11Item
      1B.
              Unresolved
      Staff Comments
              
              17Item
      2.
              Properties
              
              17Item
      3.
              Legal
      Proceedings
              
              18Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              
              18PART
      IIItem
      5.
              Market
      for Registrant’s Common Equity, Related Shareholder Matters
      and Issuer
                Purchases
      of Equity Securities
              
              18Item
      6.
              Selected
      Financial Data
              
              19Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
              
              19Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              38Item
      8.
              Financial
      Statements and Supplementary Data
              
              38Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              
              38Item
      9A.
              Controls
      and Procedures
              
              38Item
      9B.
              Other
      Information
              
              39PARTIIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              
              39Item
      11.
              Executive
      Compensation
              
              39Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
                Shareholder
      Matters
              
              40Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              
              41Item
      14.
              Principal
      Accounting Fees and Services
              
              41PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules
              
              41SIGNATURES
              
              45
  i
  Forward-Looking
Statements
  This
Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 relating to,
without limitation, our future economic performance, plans and objectives for
future operations, and projections of revenues and other financial items that
are based on our beliefs, as well as assumptions made by and information
currently available to us. The words “may,” “will,” “anticipate,” “should,”
“would,” “believe,” “contemplate,” “could,” “project,” “predict,” “expect,”
“estimate,” “continue,” and “intend,” as well as other similar words and
expressions of the future, are intended to identify forward-looking
statements.
  These
forward-looking statements generally relate to our plans, objectives and
expectations for future events and include statements about our expectations,
beliefs, plans, objectives, intentions, assumptions and other statements that
are not historical facts. These statements are based upon our opinions and
estimates as of the date they are made. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, such
forward-looking statements are subject to known and unknown risks and
uncertainties that may be beyond our control, which could cause actual results,
performance and achievements to differ materially from results, performance and
achievements projected, expected, expressed or implied by the forward-looking
statements.
  Examples
of events that could cause actual results to differ materially from historical
results or those anticipated, expressed or implied include, without limitation,
changes in the overall economy and the interest rate environment; the ability of
customers to repay their obligations; the adequacy of the allowance for loan
losses; competition; significant changes in accounting, tax or regulatory
practices and requirements; changes in deposit flows, loan demand or real estate
values; legislation or regulatory changes; changes in loan delinquency rates or
in our levels of non-performing assets; changes in the economic climate in the
market areas in which we operate; and the economic impact of any future
terrorist threats and attacks, acts of war or threats thereof and the response
of the United States to any such threats and attacks. Although management has
taken certain steps to mitigate any negative effect of the aforementioned items,
significant unfavorable changes could severely impact the assumptions used and
have an adverse effect on profitability.
  Additional
information concerning the factors that could cause actual results to differ
materially from those in the forward-looking statements is contained in Item 1.
“Business”, Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, and elsewhere in this Annual Report on Form 10-K and
in our other filings with the Securities and Exchange Commission (the
“SEC”).  We undertake no obligation to publicly revise any
forward-looking statements or cautionary factors, except as required by
law.
  PART
I
 
 Item
1.  Business.
  1st
Constitution Bancorp
  1st
Constitution Bancorp (the “Company”) is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended. The Company was organized
under the laws of the State of New Jersey in February 1999 for the purpose of
acquiring all of the issued and outstanding stock of 1st Constitution Bank (the
“Bank”) and thereby enabling the Bank to operate within a bank holding company
structure. The Company became an active bank holding company on July 1, 1999.
The Company has 2 employees, of  which 2 are full-time employees. The
Bank is a wholly-owned subsidiary of the Company. Other than its investment in
the Bank, the Company currently conducts no other significant business
activities.
  The main
office of the Company and the Bank is located at 2650 Route 130 North, Cranbury,
New Jersey 08512, and the telephone number is (609) 655-4500.
  1st
Constitution Bank
 
 The Bank,
a commercial bank formed under the laws of the State of New Jersey, engages in
the business of commercial and retail banking. As a community bank, the Bank
offers a wide range of services (including demand, savings and time deposits and
commercial and consumer/installment loans) to individuals, small businesses and
not-for-profit organizations principally in Middlesex, Mercer and Somerset
Counties, New Jersey. The Bank conducts its operations through its main office
located in Cranbury, New Jersey, and operates ten additional branch offices in
downtown Cranbury, Hamilton Square, Hightstown, Jamesburg, Montgomery, Perth
Amboy, Plainsboro, West Windsor, Fort Lee and Princeton, New Jersey. The Bank’s
deposits are insured up to applicable legal limits by the Federal Deposit
Insurance Corporation (“FDIC”).  The Bank has 115 employees, of which
111 are full-time employees.
  1
  Management
efforts focus on positioning the Bank to meet the financial needs of the
communities in Middlesex, Mercer and Somerset Counties and the Fort Lee
area of Bergen County and to provide financial services to individuals,
families, institutions and small businesses. To achieve this goal, the Bank is
focusing its efforts on:
 
 ·
            personal
      service;
 
 ·
            expansion
      of its branch network;
 
 ·
            innovative
      product offerings; and
 
 ·
            technological
      advances and e-commerce.
 
 Personal
Service
 
 The Bank
provides a wide range of commercial and consumer banking services to
individuals, families, institutions and small businesses in central New Jersey
and the Fort Lee area of Bergen County. The Bank’s focus is to understand
the needs of the community and the customers and tailor products, services and
advice to meet those needs. The Bank seeks to provide a high level of
personalized banking services, emphasizing quick and flexible responses to
customer demands.
  Expansion
of Branch Banking
  The Bank
continually evaluates opportunities for branch bank expansion, either mini
branches or full service branches, to continue to grow and meet the needs of the
community.
  Innovative
Product Offerings
  In
January 2008, the Bank’s Mortgage Warehouse Unit introduced a revolving line of
credit that is available to licensed mortgage banking companies (the “Warehouse
Line of Credit”) and that has been successful since inception.  The
Warehouse Line of Credit is used by the mortgage banker to originate one-to-four
family residential mortgage loans that are pre-sold to the secondary mortgage
market, which includes state and national banks, national mortgage banking
firms, insurance companies and government-sponsored enterprises, including the
Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage
Corporation (“FHLMC”) and others.  On average, an advance under the
Warehouse Line of Credit remains outstanding for a period of less than 30 days,
with repayment coming directly from the sale of the loan into the secondary
mortgage market.  Interest (the spread between our borrowing cost and
the rate charged to the client) and a transaction fee are collected by the Bank
at the time of repayment.  Additionally, customers of the Warehouse
Lines of Credit are required to maintain deposit relationships with the Bank
that, on average, represent 10% to 15% of the loan balances.  The Bank
had outstanding Warehouse Line of Credit advances of $106,000,231 at December
31, 2008.
  Technological
Advances and e-Commerce
  The Bank
recognizes that customers want to receive service via their most convenient
delivery channel, be it the traditional branch office, by telephone, ATM, or the
internet. For this reason, the Bank continues to enhance its e-commerce
capabilities. At www.1stconstitution.com, customers have easy access to online
banking, including account access, and to the Bank’s bill payment system.
Consumers can apply online for loans and interact with senior management through
the e-mail system. Business customers have access to cash management information
and transaction capability through the Bank’s online Business Express product
offering. This overall expansion in electronic banking offers the Bank’s
customers another means to access the Bank’s services easily and at their own
convenience.
  2
  Competition
  The Bank
experiences substantial competition in attracting and retaining deposits and in
making loans. In attracting deposits and borrowers, the Bank competes with
commercial banks, savings banks, and savings and loan associations, as well as
regional and national insurance companies and non-bank financial institutions,
regulated small loan companies and local credit unions, regional and national
issuers of money market funds and corporate and government
borrowers.  Within the direct market area of the Bank, there are a
significant number of offices of competing financial institutions.  In
New Jersey generally, and in the Bank’s local market specifically, large
commercial banks, as well as savings banks and savings and loan associations,
including Provident Savings Bank and Hudson City Savings Bank, hold a dominant
market share and there has been significant merger activity in the last few
years, creating even larger competitors.
  Locally,
the Bank’s most direct competitors include Bank of America, PNC Bank, Wachovia
Bank, and Sovereign Bank.  The Bank is at a competitive disadvantage
compared with these larger national and regional commercial and savings
banks.  By virtue of their larger capital, asset size or reserves,
many of such institutions have substantially greater lending limits (ceilings on
the amount of credit a bank may provide to a single customer that are linked to
the institution’s capital) and other resources than the Bank.  Many
such institutions are empowered to offer a wider range of services, including
trust services, than the Bank and, in some cases, have lower funding costs (the
price a bank must pay for deposits and other borrowed monies used to make loans
to customers) than the Bank.  In addition to having established
deposit bases and loan portfolios, these institutions, particularly large
national and regional commercial and savings banks, have the financial ability
to finance extensive advertising campaigns and to allocate considerable
resources to locations and products perceived as profitable.
  In
addition, non-bank financial institutions offer services that compete for
deposits with the Bank.  For example, brokerage firms and insurance
companies offer such instruments as short-term money market funds, corporate and
government securities funds, mutual funds and annuities.  It is
expected that competition in these areas will continue to increase. Some of
these competitors are not subject to the same degree of regulation and
supervision as the Company and the Bank and therefore may be able to offer
customers more attractive products than the Bank.
  However,
management of the Bank believes that loans to small and mid-sized businesses and
professionals, which represent the main commercial loan business of the Bank,
are not always of primary importance to the larger banking institutions. The
Bank competes for this segment of the market by providing responsive
personalized services, local decision-making, and knowledge of its customers and
their businesses.
  Lending
Activities
  The
Bank’s lending activities include both commercial and consumer loans. Loan
originations are derived from a number of sources including real estate broker
referrals, mortgage loan companies, direct solicitation by the Bank’s loan
officers, existing depositors and borrowers, builders, attorneys, walk-in
customers and, in some instances, other lenders. The Bank has established
disciplined and systematic procedures for approving and monitoring loans that
vary depending on the size and nature of the loan.
  Commercial
Lending
  The Bank
offers a variety of commercial loan services including term loans, lines of
credit, and loans secured by equipment and receivables. A broad range of
short-to-medium term commercial loans, both secured and unsecured, are made
available to businesses for working capital (including inventory and
receivables), business expansion (including acquisition and development of real
estate and improvements), and the purchase of equipment and machinery. The Bank
also makes construction loans to real estate developers for the acquisition,
development and construction of residential subdivisions.
  Commercial
loans are granted based on the borrower’s ability to generate cash flow to
support its debt obligations and other cash related expenses. A borrower’s
ability to repay commercial loans is substantially dependent on the success of
the business itself and on the quality of its management. As a general practice,
the Bank takes as collateral a security interest in any available real estate,
equipment, inventory, receivables or other personal property of its borrowers,
although occasionally the Bank makes commercial loans on an unsecured basis.
Generally, the Bank requires personal guaranties of its commercial loans to
offset the risks associated with such loans.
  3
  Residential
Consumer Lending
  A portion
of the Bank’s lending activities consists of the origination of fixed and
adjustable rate residential first mortgage loans secured by owner-occupied
property located in the Bank’s primary market areas. Home mortgage lending is
unique in that a broad geographic territory may be serviced by originators
working from strategically placed offices either within the Bank’s traditional
banking facilities or from affordable storefront locations in commercial
buildings. The Bank also offers construction loans, second mortgage home
improvement loans and home equity lines of credit.
  The Bank
finances the construction of individual, owner-occupied houses on the basis of
written underwriting and construction loan management guidelines. First mortgage
construction loans are made to contractors secured by real estate that is both a
pre-sold and a “speculation” basis. Such loans are also made to qualified
individual borrowers and are generally supported by a take-out commitment from a
permanent lender.  The Bank makes residential construction loans to
individuals who intend to erect owner occupied housing on a purchased parcel of
real estate. The construction phase of these loans has certain risks, including
the viability of the contractor, the contractor’s ability to complete the
project and changes in interest rates.
  In most
cases, the Bank will sell its mortgage loans with terms of 15 years or more in
the secondary market. The sale to the secondary market allows the Bank to hedge
against the interest rate risks related to such lending operations. This
brokerage arrangement allows the Bank to accommodate its clients’ demands while
eliminating the interest rate risk for the 15- to 30- year period generally
associated with such loans.
  The Bank
in most cases requires borrowers to obtain and maintain title, fire, and
extended casualty insurance, and, where required by applicable regulations,
flood insurance.  The Bank maintains its own errors and omissions
insurance policy to protect against loss in the event of failure of a mortgagor
to pay premiums on fire and other hazard insurance policies. Mortgage loans
originated by the Bank customarily include a “due on sale” clause, which gives
the Bank the right to declare a loan immediately due and payable in certain
circumstances, including, without limitation, upon the sale or other disposition
by the borrower of the real property subject to a mortgage. In general, the Bank
enforces due on sale clauses. Borrowers are typically permitted to refinance or
repay loans at their option without penalty.
  Non-Residential
Consumer Lending
  Non-residential
consumer loans made by the Bank include loans for automobiles, recreation
vehicles, and boats, as well as personal loans (secured and unsecured) and
deposit account secured loans. The Bank also conducts various indirect lending
activities through established retail companies in its market areas.
Non-residential consumer loans are attractive to the Bank because they typically
have a shorter term and carry higher interest rates than are charged on other
types of loans. Non-residential consumer loans, however, do pose additional risk
of collectibility when compared to traditional types of loans, such as
residential mortgage loans granted by commercial banks.
  Consumer
loans are granted based on employment and financial information solicited from
prospective borrowers as well as credit records collected from various reporting
agencies. Stability of the borrower, willingness to pay and credit history are
the primary factors to be considered. The availability of collateral is also a
factor considered in making such a loan. The Bank seeks collateral that can be
assigned and has good marketability with a clearly adequate margin of value. The
geographic area of the borrower is another consideration, with preference given
to borrowers in the Bank’s primary market areas.
 
 Supervision
and Regulation
  Banking
is a complex, highly regulated industry. The primary goals of the bank
regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of monetary policy. In furtherance of those goals,
Congress has created several largely autonomous regulatory agencies and enacted
a myriad of legislation that governs banks, bank holding companies and the
banking industry. This regulatory framework is intended primarily for the
protection of depositors and not for the protection of the Company’s
shareholders.  Descriptions of, and references to, the statutes and
regulations below are brief summaries thereof, and do not purport to be
complete. The descriptions are qualified in their entirety by reference to the
specific statutes and regulations discussed.
 
 State
and Federal Regulations
  The
Company is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended (the “BHCA”). As a bank holding company, the Company is
subject to inspection, examination and supervision by the Board of Governors of
the Federal Reserve System (the “Federal Reserve Board”) and is required to file
with the Federal Reserve Board an annual report and such additional information
as the Federal Reserve Board may require pursuant to the BHCA. The Federal
Reserve Board may also make examinations of the Company and its subsidiaries.
The Company is subject to capital standards similar to, but separate from, those
applicable to the Bank.
  4
  Under the
BHCA, bank holding companies that are not financial holding companies generally
may not acquire the ownership or control of more than 5% of the voting shares,
or substantially all of the assets, of any company, including a bank or another
bank holding company, without the Federal Reserve Board’s prior approval. The
Company has not applied to become a financial holding company but did obtain
such approval to acquire the shares of the Bank. A bank holding company that
does not qualify as a financial holding company is generally limited in the
types of activities in which it may engage to those that the Federal Reserve
Board had recognized as permissible for bank holding companies prior to the date
of enactment of the Gramm-Leach-Bliley Financial Services Modernization Act of
1999.  For example, a holding company and its banking subsidiary are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or lease or sale of any property or the furnishing of
services.  At present, the Company does not engage in any significant
activity other than owning the Bank.
  In
addition to federal bank holding company regulation, the Company is registered
as a bank holding company with the New Jersey Department of Banking and
Insurance (the “Department”). The Company is required to file with the
Department copies of the reports it files with the federal banking and
securities regulators.
 
 As a
result of its participation in the Troubled Asset Relief Program (‘TARP”)
Capital Purchase Program (the “CPP”) under the Emergency Economic Stabilization
Act of 2008 (“EESA”) through the sale by the Company of its Fixed Rate
Cumulative Perpetual Preferred Stock, Series B (“Preferred Stock Series B”) to
the United States Department of the Treasury (the “Treasury”) the Company is
subject to restrictions contained in the agreement between the Treasury and the
Company related to the sale of the Preferred Stock Series B which among other
things restricts the payment of cash dividends or making other distributions by
the Company on its common stock or the repurchase of its shares of common stock
or other capital stock or other equity securities of any kind of the Company or
any of its or its affiliates’ trust preferred securities until the third
anniversary of the purchase of the Preferred Stock Series B by the Treasury with
certain exceptions without approval of the Treasury and the Company is
prohibited by the terms of the Preferred Stock Series B from paying dividends on
the common stock of the Company or redeeming or otherwise acquiring its common
stock or certain other of its equity securities unless all dividends on the
Preferred Stock Series B have been declared and either paid in full or set aside
with certain limited exceptions.
 
 In
addition, EESA and guidance issued by the Treasury limit executive compensation
and require the reporting of information to the Treasury and others and limit
the deductibility for Federal income tax purposes of compensation paid to
certain executives in excess of $500,000 per year and the payment of certain
severance  and change in control payments to certain
executives.  The American Recovery and Reinvestment Act of 2009 (the
“Stimulus Package Act”) contains further limitations on the payment of
compensation to certain executives of the Company or the Bank, the claw back of
certain compensation paid to certain executives of the Company or the Bank and
imposes new corporate governance requirements on the Company, including the
inclusion of a non-binding “say to pay” proposal in the Company’s annual proxy
statement.
 
 The Board
of Governors of the Federal Reserve System has issued a supervisory letter to
bank holding companies that contains guidance on when the board of directors of
a bank  holding company should eliminate or defer or severely limit
dividends including for example when net income available for shareholders for
the past four quarters net of previously paid dividends paid during that period
is not sufficient to fully fund the dividends. The letter also contains guidance
on the redemption of stock by bank holding companies which urges bank holding
companies to advise the Federal Reserve of any such redemption or repurchase of
common stock for cash or other value which results in the net reduction of a
bank holding company’s capital at the beginning of the quarter below the capital
outstanding at the end of the quarter.
 
 Capital
Adequacy
 
 The
Company is required to comply with minimum capital adequacy standards
established by the Federal Reserve Board. There are two basic measures of
capital adequacy for bank holding companies and the depository institutions that
they own: a risk based measure and a leverage measure. All applicable capital
standards must be satisfied for a bank holding company to be considered in
compliance.
  5
  The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
required each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of non-traditional activities. In
addition, pursuant to FDICIA, each federal banking agency has promulgated
regulations, specifying the levels at which a bank would be considered “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” or “critically undercapitalized,” and to take certain
mandatory and discretionary supervisory actions based on the capital level of
the institution.
  The
regulations implementing these provisions of FDICIA provide that a bank will be
classified as “well capitalized” if it (i) has a total risk-based capital ratio
of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least
6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv)
meets certain other requirements. A bank will be classified as “adequately
capitalized” if it (i) has a total risk-based capital ratio of at least 8.0
percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent,
(iii) has a Tier 1 leverage ratio of (a) at least 4.0 percent, or (b) at least
3.0 percent if the institution was rated 1 in its most recent examination and is
not experiencing or anticipating significant growth, and (iv) does not meet the
definition of “well capitalized.” A bank will be classified as
“undercapitalized” if it (1) has a total risk-based capital ratio of less than
8.0 percent, (2) has a Tier 1 risk-based capital ratio of less than 4.0 percent,
or (3) has a Tier 1 leverage ratio of (A) less than 4.0 percent, or (B) less
than 3.0 percent if the institution was rated 1 in its most recent examination
and is not experiencing or anticipating significant growth. A bank will be
classified as “significantly undercapitalized” if it (I) has a total risk-based
capital ratio of less than 6.0 percent, (II) has a Tier 1 risk-based capital
ratio of less than 3.0 percent, or (III) has a Tier 1 leverage ratio of less
than 3.0 percent. An institution will be classified as “critically
undercapitalized” if it has a tangible equity to total assets ratio that is
equal to or less than 2.0 percent. An insured depository institution may be
deemed to be in a lower capitalization category if it receives an unsatisfactory
examination.
  As of
December 31, 2008, the Bank’s capital ratios exceed the requirements to be
considered a well capitalized institution under these regulations.
 
 The
risk-based capital guidelines for bank holding companies such as the Company
currently require a minimum ratio of total capital to risk-weighted assets
(including off-balance sheet activities, such as standby letters of credit) of
8%. At least half of the total capital is required to be Tier 1 capital,
consisting principally of common shareholders’ equity, non-cumulative perpetual
preferred stock, a limited amount of cumulative perpetual preferred stock and
minority interest in the equity accounts of consolidated subsidiaries, less
goodwill. The remainder of the total capital (Tier 2 capital) may consist of a
limited amount of subordinated debt and intermediate-term preferred stock,
certain hybrid capital instruments and other debt securities, perpetual
preferred stock and a limited amount of the general loan loss allowance. At
December 31, 2008, the Company maintained a Tier 1 capital ratio of 17.03% and
total qualifying capital ratio of 17.90%.
  In
addition to the risk-based capital guidelines, the federal banking regulators
established minimum leverage ratio (Tier 1 capital to total assets) guidelines
for bank holding companies. These guidelines provide for a minimum leverage
ratio of 3% for those bank holding companies which have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are required to maintain a
leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company’s
leverage ratio at December 31, 2008 was 14.05%.
  On April
10, 2002, 1st Constitution Capital Trust I (“Trust I”), a statutory business
trust and a wholly owned subsidiary of the Company, issued $5.0 million of
variable rate trust preferred securities (the “Trust Preferred Securities”) in a
pooled institutional placement transaction maturing April 22,
2032.  Trust I utilized the $5.0 million proceeds along with $155,000
invested in Trust I by the Company to purchase $5,155,000 of floating rate
subordinated debentures issued by the Company and due to mature on April 22,
2032 (the “Subordinated Debentures”).  The Subordinated Debentures
constituted the sole assets of Trust I, had terms that mirrored the Trust
Preferred Securities and were redeemable in whole or in part prior to maturity
after April 22, 2007.  Trust I was obligated to distribute all
proceeds of a redemption of these Subordinated Debentures, whether voluntary or
upon maturity, to holders of the Trust Preferred Securities.  The
Company’s obligation with respect to the Trust Preferred Securities and the
Subordinated Debentures, when taken together, provided a full and unconditional
guarantee on a subordinated basis by the Company of the obligations of Trust I
to pay amounts when due on the Trust Preferred Securities.  On
February 23, 2007, the Company notified Wilmington Trust Company, as Indenture
Trustee, of the Company’s intention to redeem the Subordinated Debentures on
April 22, 2007, and the Company redeemed the Subordinated Debentures on that
date, as discussed below.
  6
 
 On May
30, 2006, the Company established 1st Constitution Capital Trust II, a Delaware
business trust and wholly owned subsidiary of the Company (“Trust II”), for the
sole purpose of issuing $18 million of trust preferred securities (the “Capital
Securities”).  Trust II utilized the $18 million proceeds along with
$557,000 invested in Trust II by the Company to purchase $18,557,000 of floating
rate junior subordinated debentures issued by the Company and due to mature on
June 15, 2036.  The Capital Securities were issued in connection with
a pooled offering involving approximately 50 other financial institution holding
companies.  All of the Capital Securities were sold to a single
pooling vehicle.   The floating rate junior subordinated
debentures are the only asset of Trust II and have terms that mirrored the
Capital Securities.   These debentures are redeemable in
whole or in part prior to maturity after June 15, 2011.  Trust
II is obligated to distribute all proceeds of a redemption of these
debentures, whether voluntary or upon maturity, to holders of the Capital
Securities.  The Company’s obligation with respect to the Capital
Securities and the debentures, when taken together, provided a full and
unconditional guarantee on a subordinated basis by the Company of the
obligations of Trust II to pay amounts when due on the Capital
Securities.  Interest payments on the floating rate junior
subordinated debentures flow through Trust II to the pooling
vehicle.
  Effective
April 22, 2007, the Company redeemed all of the Trust I Subordinated
Debentures.  The redemption price was 100% of the aggregate $5,155,000
principal amount of the Subordinated Debentures, plus approximately $236,882 of
accrued interest thereon through the redemption date.  As a result of
the redemption of the Subordinated Debentures, a like amount of capital
securities issued by Trust I was redeemed under the same terms and
conditions.  This redemption does not impact the Capital Securities
issued by Trust II on May 30, 2006.
 
 On
December 23, 2008, pursuant to the TARP CPP under EESA, the Company entered into
a Letter Agreement, including the Securities Purchase Agreement – Standard
Terms, with the Treasury pursuant to which the Company issued and sold, and the
Treasury purchased (i) 12,000 shares of the Company’s Preferred Stock Series B
and (ii) a ten-year warrant to purchase up to 200,222 shares of the Company’s
common stock, no par value, at an initial exercise price of $8.99 per share, for
aggregate cash consideration of $12,000,000.  As a result of the 5%
stock dividend paid on February 2, 2009 to holders of record as of the close of
business on January 20, 2009, the shares of common stock initially underlying
the warrant were adjusted to 210,233 shares and the initial exercise price was
adjusted to $8.562 per share.
 
 The
Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per
year for the first five years and thereafter at a rate of 9% per year and has a
liquidation preference of $1,000 per share. The warrant provides for the
adjustment of the exercise price and the number of shares of the Company’s
common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other
assets to holders of the Company’s common stock, and upon certain issuances of
the Company’s common stock at or below a specified price relative to the initial
exercise price. The warrant is immediately exercisable and expires ten years
from the issuance date. If, on or prior to December 31, 2009, the Company
receives aggregate gross cash proceeds of not less than $12,000,000 from
qualified equity offerings announced after October 13, 2008, the number of
shares of common stock issuable pursuant to the Treasury’s exercise of the
warrant will be reduced by one-half of the original number of shares. In
addition, the Treasury has agreed not to exercise voting power with respect to
any shares of common stock issued upon exercise of the warrant.
  Restrictions
on Dividends
  The
primary source of cash to pay dividends, if any, to the Company’s shareholders
and to meet the Company’s obligations is dividends paid to the Company by the
Bank. Dividend payments by the Bank to the Company are subject to the New Jersey
Banking Act of 1948 (the “Banking Act”) and the Federal Deposit Insurance Act
(the “FDIA”). Under the Banking Act and the FDIA, the Bank may not pay any
dividends if after paying the dividend, it would be undercapitalized under
applicable capital requirements. In addition to these explicit limitations, the
federal regulatory agencies are authorized to prohibit a banking subsidiary or
bank holding company from engaging in an unsafe or unsound banking practice.
Depending upon the circumstances, the agencies could take the position that
paying a dividend would constitute an unsafe or unsound banking
practice.
 
 It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the immediately
preceding year and only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividend that undermines the bank holding company’s ability to serve as a source
of strength to its banking subsidiary.  A bank holding company may not
pay dividends when it is insolvent.
  7
  The
Company has never paid a cash dividend and the Company’s Board of Directors has
no plans to pay a cash dividend in the foreseeable future.   In
addition, please refer to the discussion above of the Preferred Stock Series B
under the heading “Supervision and Regulation” for additional restrictions on
cash dividends.
 
 The Bank
paid a stock dividend every year from 1993 to 1999, when it was acquired by the
Company. The Company has paid a stock dividend every year since its formation in
1999.  From 1999 through 2006, the Company paid a 5% stock dividend
each year.  On December 21, 2006, the Company declared a 6% stock
dividend, which was paid on January 31, 2007 to shareholders of record as of the
close of business on January 23, 2007.  On December 20, 2007, the
Company declared another 6% stock dividend, which was paid on February 6, 2008
to shareholders of record as of the close of business on January 23,
2008.  On December 18, 2008, the Company declared a 5% stock dividend,
which was paid  on February 2, 2009 to shareholders of record as of
the close of business on January 20, 2009.  The Company also declared
a two-for-one stock split on January 20, 2005, which was paid on February 28,
2005 to shareholders of record as of the close of business on February 10,
2005.  All share and per share data has been retroactively adjusted
for the stock split and stock dividends.
  Priority
on Liquidation
  The
Company is a legal entity separate and distinct from the Bank. The rights of the
Company as the sole shareholder of the Bank, and therefore the rights of the
Company’s creditors and shareholders, to participate in the distributions and
earnings of the Bank when the Bank is not in bankruptcy, are subject to various
state and federal law restrictions as discussed above under the heading
“Restrictions of Dividends.”  In the event of a liquidation or other
resolution of an insured depository institution such as the Bank, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of an obligation of the
institution to its shareholders (the Company) or any shareholder or creditor of
the Company. The claims on the Bank by creditors include obligations in respect
of federal funds purchased and certain other borrowings, as well as deposit
liabilities.
  Financial
Institution Legislation
  The
Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization Act”)
became effective in early 2000. The Modernization Act:
  ·
            allows
      bank holding companies meeting management, capital and Community
      Reinvestment Act standards to engage in a substantially broader range of
      non-banking activities than is permissible for a bank holding company,
      including insurance underwriting and making merchant banking investments
      in commercial and financial companies; if a bank holding company elects to
      become a financial holding company, it files a certification, effective in
      30 days, and thereafter may engage in certain financial activities without
      further approvals;
 
 ·
            allows
      banks to establish subsidiaries to engage in certain activities which a
      financial holding company could engage in, if the bank meets certain
      management, capital and Community Reinvestment Act
    standards;
 
 ·
            allows
      insurers and other financial services companies to acquire banks and
      removes various restrictions that currently apply to bank holding company
      ownership of securities firms and mutual fund advisory companies; and
      establishes the overall regulatory structure applicable to financial
      holding companies that also engage in insurance and securities
      operations.
  
 The
Modernization Act modified other financial laws, including laws related to
financial privacy and community reinvestment.
  The
Modernization Act also amends the BHCA and the Bank Merger Act to require the
federal banking agencies to consider the effectiveness of a financial
institution’s anti-money laundering activities when reviewing an application
under these acts.
  8
  Additional
proposals to change the laws and regulations governing the banking and financial
services industry are frequently introduced in Congress, in the state
legislatures and before the various bank regulatory agencies. The likelihood and
timing of any such changes and the impact such changes might have on the Company
cannot be determined at this time.
 
 The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30,
2002, added new legal requirements affecting corporate governance, accounting
and corporate reporting for companies with publicly traded
securities.
 
 The
Sarbanes-Oxley Act provides for, among other things:
  ·
            a
      prohibition on personal loans made or arranged by the issuer to its
      directors and executive officers (except for loans made by a bank subject
      to Regulation O);
 
 ·
            independence
      requirements for audit committee
members;
 
 ·
            disclosure
      of whether at least one member of the audit committee is a “financial
      expert” (as such term is defined by the SEC) and if not, why
      not;
 
 ·
            independence
      requirements for outside auditors;
 
 ·
            a
      prohibition by a company’s registered public accounting firm from
      performing statutorily mandated audit services for the company if the
      company’s chief executive officer, chief financial officer, comptroller,
      chief accounting officer or any person serving in equivalent positions had
      been employed by such firm and participated in the audit of such company
      during the one-year period preceding the audit initiation
      date;
 
 ·
            certification
      of financial statements and annual and quarterly reports by the principal
      executive officer and the principal financial
  officer;
 
 ·
            the
      forfeiture of bonuses or other incentive-based compensation and profits
      from the sale of an issuer’s securities by directors and senior officers
      in the twelve month period following initial publication of any financial
      statements that later require restatement due to corporate
      misconduct;
 
 ·
            disclosure
      of off-balance sheet transactions;
 
 ·
            two-business
      day filing requirements for insiders filing Forms
  4;
 
 ·
            disclosure
      of a code of ethics for financial officers and filing a Form 8-K for a
      change or waiver of such code;
 
 ·
            “real
      time” filing of periodic reports;
 
 ·
            posting
      of certain SEC filings and other information on the company
      website;
 
 ·
            the
      reporting of securities violations “up the ladder” by both in-house and
      outside attorneys;
 
 ·
            restrictions
      on the use of non-GAAP financial
measures;
 
 ·
            the
      formation of a public accounting oversight board;
  and
 
 ·
            various
      increased criminal penalties for violations of securities
      laws.
  Additionally,
Section 404 of the Sarbanes-Oxley Act requires that a public company subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), include in its annual report (i) a management’s report on
internal control over financial reporting assessing the company’s internal
controls, and (ii) an auditor’s attestation report, completed by the registered
public accounting firm that prepares or issues an accountant’s report which is
included in the company’s annual report, attesting to the effectiveness of
management’s internal control assessment.  Because we are neither a
“large accelerated filer” nor an “accelerated filer”, under current rules we
were not required to provide management’s report on internal control over
financial reporting until we filed our annual report for 2007, and compliance
with the auditor’s attestation report requirement is not required until we file
our annual report for 2009.
  9
  Each of
the national stock exchanges, including the Nasdaq Global Market where the
Company’s common stock is listed, have implemented new corporate governance
rules, including rules strengthening director independence requirements for
boards, and the adoption of charters for the nominating, corporate governance,
and audit committees.  The rule changes are intended to, among other
things, make the board of directors independent of management and allow
shareholders to more easily and efficiently monitor the performance of companies
and directors.  These increased burdens have increased the Company’s
legal and accounting fees and the amount of time that the Board of Directors and
management must devote to corporate governance issues.
  Effective
August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Company’s
principal executive officer and principal financial officer are each required to
certify that the Company’s Quarterly and Annual Reports do not contain any
untrue statement of a material fact. The rules have several requirements,
including having these officers certify that: they are responsible for
establishing, maintaining and regularly evaluating the effectiveness of the
Company’s internal controls; they have made certain disclosures to the Company’s
auditors and the audit committee of the Board of Directors about the Company’s
internal controls; and they have included information in the Company’s Quarterly
and Annual Reports about their evaluation and whether there have been
significant changes in the Company’s internal controls or in other factors that
could significantly affect internal controls subsequent to the
evaluation.
  As part
of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted
the International Money Laundering Abatement and Financial Anti-Terrorism Act of
2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in
consultation with the heads of other government agencies, to adopt special
measures applicable to financial institutions such as banks, bank holding
companies, broker-dealers and insurance companies. Among its other provisions,
the Act requires each financial institution: (i) to establish an anti-money
laundering program; (ii) to establish due diligence policies, procedures and
controls that are reasonably designed to detect and report instances of money
laundering in United States private banking accounts and correspondent accounts
maintained for non-United States persons or their representatives; and (iii) to
avoid establishing, maintaining, administering, or managing correspondent
accounts in the United States for, or on behalf of, a foreign shell bank that
does not have a physical presence in any country. In addition, the Act expands
the circumstances under which funds in a bank account may be forfeited and
requires covered financial institutions to respond under certain circumstances
to requests for information from federal banking agencies within 120
hours.
 
 The
Department of Treasury has issued regulations implementing the due diligence
requirements. These regulations require minimum standards to verify customer
identity and maintain accurate records, encourage cooperation among financial
institutions, federal banking agencies, and law enforcement authorities
regarding possible money laundering or terrorist activities, prohibit the
anonymous use of “concentration accounts,” and require all covered financial
institutions to have in place an anti-money laundering compliance
program.
  The Bank,
a New Jersey-chartered commercial bank, is subject to supervision and
examination by the New Jersey Department of Banking and
Insurance.  The Bank is also subject to regulation by the FDIC, which
is its principal federal bank regulator.
  The Bank
must comply with various requirements and restrictions under federal and state
law, including the maintenance of reserves against deposits, restrictions on the
types and amounts of loans that may be granted and the interest that may be
charged thereon, limitations on the types of investments that may be made and
the services that may be offered, and restrictions on dividends as described in
the preceding section. Consumer laws and regulations also affect the operations
of the Bank. In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve Board which
influence the money supply and credit availability in the national
economy.
  10
  Community
Reinvestment Act
  Under the
Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a bank
has a continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low-
and moderate-income neighborhoods. CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with CRA. CRA
requires the FDIC to assess an institution’s record of meeting the credit needs
of its community and to take such record into account in its evaluation of
certain applications by the applicable institution. The CRA requires public
disclosure of an institution’s CRA rating and requires that the FDIC provide a
written evaluation of an institution’s CRA performance utilizing a four-tiered
descriptive rating system. An institution’s CRA rating is considered in
determining whether to grant charters, branches and other deposit facilities,
relocations, mergers, consolidations and acquisitions. Performance less than
satisfactory may be the basis for denying an application. At its last CRA
examination, the Bank was rated “satisfactory” under CRA.
 
 FIRREA
  Under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”),
a depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.  These
provisions have commonly been referred to as FIRREA’s “cross guarantee”
provisions. Further, under FIRREA, the failure to meet capital guidelines could
subject a bank to a variety of enforcement remedies available to federal
regulatory authorities.
  FIRREA
also imposes certain independent appraisal requirements upon a bank’s real
estate lending activities and further imposes certain loan-to-value restrictions
on a bank’s real estate lending activities.  The bank regulators have
promulgated regulations in these areas.
  Insurance
of Deposits
  Subject
to the immediately following paragraph, the Bank’s deposits are insured up to a
maximum of $250,000 per depositor through December 31, 2009 under the
Deposit Insurance Fund. The FDICIA is applicable to depository institutions and
deposit insurance. The FDICIA requires the FDIC to establish a risk-based
assessment system for all insured depository institutions. Under this
legislation, the FDIC is required to establish an insurance premium assessment
system based upon: (i) the probability that the insurance fund will incur a loss
with respect to the institution, (ii) the likely amount of the loss, and (iii)
the revenue needs of the insurance fund. In compliance with this mandate, the
FDIC has developed a matrix that sets the assessment premium for a particular
institution in accordance with its capital level and overall rating by the
primary regulator. Under the matrix as currently in effect, the assessment rate
ranges from 0 to 27 basis points of assessed deposits. The Bank is also subject
to a quarterly FICO assessment.
  In
October 2008, the FDIC announced the Temporary Liquidity Guarantee Program,
under which any participating depository institution would be able to provide
full deposit insurance coverage for non-interest bearing transaction accounts,
regardless of the dollar amount.  Under the program,
effective December 5, 2008, insured depository institutions that have not
opted out of the Temporary Liquidity Guaranty Program will be subject to a 0.10%
surcharge applied to non-interest bearing transaction deposit account balances
in excess of $250,000, which surcharge will be added to the institution’s
existing risk-based deposit insurance assessments.  The Bank opted in
the FDIC Temporary Liquidity Guaranty Program.
 
 In
February 2009, the FDIC announced that it would impose an emergency special
assessment of 0.20% surcharge on all insured institutions to be collected on
September 30, 2009 and that it may also impose possible additional special
assessments of up to 0.10% to maintain public confidence in the Deposit
Insurance Fund. The FDIC subsequently reduced the amount of the emergency
special assessment to 0.10% in March 2009.
  Item
1A.  Risk Factors.
 
 The following are some important
factors that could cause the Company’s actual results to differ materially from
those referred to or implied in any forward-looking statement.  These
are in addition to the risks and uncertainties discussed elsewhere in this
Annual Report on Form 10-K and the Company’s other filings with the
SEC.
  11
  Recent
negative developments in the financial services industry and the U.S. and global
credit markets may adversely impact our operations and results.
  Negative
developments in the latter half of 2007 and through early 2009 in the capital
markets have resulted in uncertainty in the financial markets in general with
the expectation of the general economic downturn continuing throughout 2009.
Loan portfolio performances have deteriorated at many institutions resulting
from, amongst other factors, a weak economy and a decline in the value of the
collateral supporting their loans. The competition for our deposits has
increased significantly due to liquidity concerns at many of these same
institutions. Stock prices of bank holding companies, like ours, have been
negatively affected by the current condition of the financial markets, as has
our ability, if needed, to raise capital or borrow in the debt markets compared
to recent years.  As a result, there is a potential for new federal or
state laws and regulations regarding lending and funding practices and liquidity
standards, and financial institution regulatory agencies are expected to be very
aggressive in responding to concerns and trends identified in examinations,
including the expected issuance of many formal enforcement
actions.  Negative developments in the financial services industry and
the impact of new legislation in response to those developments could negatively
impact our operations by restricting our business operations, including our
ability to originate or sell loans, and adversely impact our financial
performance.
  Decreases
in local real estate values would adversely affect the value of property used as
collateral for our loans. Adverse changes in the economy also may have a
negative effect on the ability of our borrowers to make timely repayments of
their loans, which would have an adverse impact on our earnings.
 
 The
Company faces significant competition.
  The
Company faces significant competition from many other banks, savings
institutions and other financial institutions which have branch offices or
otherwise operate in the Company’s market area. Non-bank financial institutions,
such as securities brokerage firms, insurance companies and money market funds,
engage in activities which compete directly with traditional bank business,
which has also led to greater competition. Many of these competitors have
substantially greater financial resources than the Company, including larger
capital bases that allow them to attract customers seeking larger loans than the
Company is able to accommodate and the ability to aggressively advertise their
products. There can be no assurance that the Company and the Bank will be able
to successfully compete with these entities in the future.
 
 The
Company is subject to interest rate risk.
  The
Company’s earnings are largely dependent upon its net interest income. Net
interest income is the difference between interest income earned on
interest-earning assets such as loans and securities and interest expense paid
on interest-bearing liabilities such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond the Company’s
control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Board of Governors
of the Federal Reserve System. Changes in monetary policy, including changes in
interest rates, could influence not only the interest the Company receives on
loans and securities and the amount of interest it pays on deposits and
borrowings, but such changes could also affect (i) the Company’s ability to
originate loans and obtain deposits, (ii) the fair value of the Company’s
financial assets and liabilities, and (iii) the average duration of the
Company’s mortgage-backed securities portfolio. If the spread between the
interest rates paid on deposits and other borrowings and the interest rates
received on loans and other investments narrows, the Company’s net interest
income, and therefore earnings, could be adversely affected. Earnings could also
be adversely affected if the interest rates received on loans and other
investments fall more quickly than the interest rates paid on deposits and other
borrowings.
  Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
Company’s results of operations, any substantial, unexpected, prolonged change
in market interest rates could have a material adverse effect on the Company’s
financial condition and results of operations.
  The
Company is subject to risks associated with speculative construction
lending.
  The risks
associated with speculative construction lending include the borrower’s
inability to complete the construction process on time and within budget, the
sale of the project within projected absorption periods, the economic risks
associated with real estate collateral, and the potential of a rising interest
rate environment. Such loans may include financing the development and/or
construction of residential subdivisions. This activity may involve financing
land purchase, infrastructure development (i.e. roads, utilities, etc.), as well
as construction of residences or multi-family dwellings for subsequent sale by
developer/builder. Because the sale of developed properties is integral to the
success of developer business, loan repayment may be especially subject to the
volatility of real estate market values. Management has established underwriting
and monitoring criteria to minimize the inherent risks of speculative commercial
real estate construction lending.  Further, management concentrates
lending efforts with developers demonstrating successful performance on
marketable projects within the Bank’s lending areas.
  12
  Federal
and state government regulation impacts the Company’s operations.
  The
operations of the Company and the Bank are heavily regulated and will be
affected by present and future legislation and by the policies established from
time to time by various federal and state regulatory authorities. In particular,
the monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of banks in the past and are expected to continue to do
so in the future. Among the instruments of monetary policy used by the Federal
Reserve Board to implement its objectives are changes in the discount rate
charged on bank borrowings. It is not possible to predict what changes, if any,
will be made to the monetary policies of the Federal Reserve Board or to
existing federal and state legislation or the effect that such changes may have
on the future business and earnings prospects of the Company.
  The
Company and the Bank are subject to examination, supervision and comprehensive
regulation by various federal and state agencies. Compliance with the rules and
regulations of these agencies may be costly and may limit growth and restrict
certain activities, including payment of dividends, investments, loans and
interest rate charges, interest rates paid on deposits, and locations of
offices. The Bank is also subject to capitalization guidelines set forth in
federal legislation.
  The laws
and regulations applicable to the banking industry could change at any time, and
we cannot predict the impact of these changes on our business and profitability.
Because government regulation greatly affects the business and financial results
of all commercial banks and bank holding companies, the cost of compliance could
adversely affect the Company’s ability to operate profitably.
 
 If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings could decrease.
  We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans. In determining the amount of the allowance for loan losses, we review
our loans and our loss and delinquency experience, and we evaluate economic
conditions. If our assumptions are incorrect, our allowance for loan losses may
not be sufficient to cover losses inherent in our loan portfolio, resulting in
additions to our allowance. Material additions to our allowance would materially
decrease our net income.
  In
addition, bank regulators periodically review our allowance for loan losses and
may require us to increase our provision for loan losses or recognize further
loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities might have a material
adverse effect on our financial condition and results of
operations.
  We
have significant investments in mortgage-backed securities and securities of
this kind may be subject to deterioration in value in certain market
conditions.
  The
Company has a significant investment in collateralized mortgage obligations and
trust preferred securities.  At December 31, 2008, the Company held
collateralized mortgage obligations in the available for sale and held to
maturity portfolios with aggregate fair values of $6,777,632 and $8,767,537,
respectively.  These securities had a net unrealized loss of
$196,418.  The Company also held trust preferred securities in the
available for sale and held to maturity portfolios with aggregate fair values of
$1,281,806 and $346,988, respectively, and a net unrealized loss of
$1,808,335 at December 31, 2008.  Several financial institutions have
reported significant write-downs of the value of mortgage-related and trust
preferred securities.  Certain of these types of securities may also not be
marketable except at significant discounts.  While management of the
Company is unaware of any other-than-temporarily impairment in the Company’s
portfolio of these securities, market, entity or industry conditions could
further deteriorate and result in the recognition of future impairment losses
related to these securities.
  13
  We
had a materialweakness in our internal control over
financial reporting as of December 31, 2007, and we cannot assure that we have
developed an effective remediation plan..
  We
identified deficiencies constituting material weaknesses in our internal control
over financial reporting as of December 31, 2007 and have subsequently developed
and implemented a plan to remediate such deficiencies.  We believe
that such plan has adequately addressed these deficiencies, but there can be no
assurance that we have discovered all of the deficiencies that may exist in our
internal control over financial reporting.
 
 The
price of our common stock may fluctuate.
  The price
of our common stock on the NASDAQ Global Market constantly changes and recently,
given the uncertainty in the financial markets, has fluctuated widely. We expect
that the market price of our common stock will continue to fluctuate. Holders of
our common stock will be subject to the risk of volatility and changes in
prices.
  Our
common stock price can fluctuate as a result of a variety of factors, many of
which are beyond our control. These factors include:
  ·
            quarterly
      fluctuations in our operating and financial
  results;
  ·
            operating
      results that vary from the expectations of management, securities analysts
      and investors;
  ·
            changes
      in expectations as to our future financial performance, including
      financial estimates by securities analysts and
  investors;
  ·
            events
      negatively impacting the financial services industry which result in a
      general decline in the market valuation of our common
    stock;
  ·
            announcements
      of material developments affecting our operations or our dividend
      policy;
  ·
            future
      sales of our equity securities;
  ·
            new
      laws or regulations or new interpretations of existing laws or regulations
      applicable to our business;
  ·
            changes
      in accounting standards, policies, guidance, interpretations or
      principles; and
  ·
            general
      domestic economic and market
conditions.
  In
addition, recently the stock market generally has experienced extreme price and
volume fluctuations, and industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause our stock price to decrease
regardless of our operating results.
  The
Company is subject to liquidity risk.
 
 Liquidity
risk is the potential that the Company will be unable to meet its obligations as
they become due, capitalize on growth opportunities as they arise, or pay
regular dividends because of an inability to liquidate assets or obtain adequate
funding in a timely basis, at a reasonable cost and within acceptable risk
tolerances.
 
 Liquidity
is required to fund various obligations, including credit commitments to
borrowers, mortgage and other loan originations, withdrawals by depositors,
repayment of borrowings, dividends to shareholders, operating expenses and
capital expenditures.
 
 Liquidity
is derived primarily from retail deposit growth and retention; principal and
interest payments on loans; principal and interest payments; sale, maturity and
prepayment of investment securities; net cash provided from operations and
access to other funding sources.
  14
  Our
access to funding sources in amounts adequate to finance our activities could be
impaired by factors that affect us specifically or the financial services
industry in general. Factors that could detrimentally impact our access to
liquidity sources include a decrease in the level of our business activity due
to a market downturn or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a
severe disruption of the financial markets or negative views and expectations
about the prospects for the financial services industry as a whole as evidenced
by turmoil faced by banking organizations in 2008 in the domestic and worldwide
credit markets.
  Our
agreements with the Treasury impose restrictions and obligations on us that
limit our ability to pay cash dividends and, repurchase our common stock or
trust  preferred securities.
  On
December 23, 2008, we issued Preferred Stock Series B and a warrant to
purchase our common stock to the Treasury as part of its TARP CPP.  Prior
to December 23, 2011, unless we have redeemed all of the Preferred Stock Series
B or the Treasury has transferred all of the Preferred Stock Series B to a third
party, the consent of the Treasury will be required for us to, among other
things, pay cash dividends on our common stock or repurchase our common stock or
other trust preferred securities (with certain exceptions, including the
repurchase of our common stock in connection with an employee benefit plan in
the ordinary course of business and consistent with past practice).
  Our
shares of Preferred Stock Series B impact net income available to our common
stockholders and our earnings per share.
  As long
as there are shares of Preferred Stock Series B outstanding, no dividends may be
paid on our common stock unless all dividends on the Preferred Stock Series B
have been paid in full.  The dividends declared on our Preferred Stock
Series B will reduce the net income available to common shareholders and our
earnings per common share.  Additionally, warrants to purchase the
Company’s common stock issued to the Treasury, in conjunction with the issuance
of shares of Preferred Stock Series B, may be dilutive to our earnings per
share.  The shares of Preferred Stock Series B will also receive
preferential treatment in the event of liquidation, dissolution or winding up of
the Company.
  We are
not required to declare cash dividends on our common stock and have never paid a
cash dividend on our common stock.  Until the earlier of (i) December 23,
2011 or (ii) the date the Treasury no longer owns any shares of Preferred Stock
Series B, we may not pay any dividends on our common stock without obtaining the
prior consent of the Treasury.
  Future
offerings of debt or other securities may adversely affect the market price of
our stock.
  In the
future, we may attempt to increase our capital resources or, if our or the
Bank’s capital ratios fall below the required minimums, we or the Bank could be
forced to raise additional capital by making additional offerings of debt or
preferred equity securities, including medium-term notes, trust preferred
securities, senior or subordinated notes and preferred stock.  Upon
liquidation, holders of our debt securities and shares of preferred stock and
lenders with respect to other borrowings will receive distributions of our
available assets prior to the holders of our common stock.  Additional
equity offerings may dilute the holdings of our existing shareholders or reduce
the market price of our common stock, or both.  Holders of our common
stock are not entitled to preemptive rights or other protections against
dilution.
  The
Company may lose lower-cost funding sources.
 
 Checking,
savings, and money market deposit account balances and other forms of customer
deposits can decrease when customers perceive alternative investments, such as
the stock market, as providing a better risk/return tradeoff.  If
customers move money out of bank deposits and into other investments, the
Company could lose a relatively low-cost source of funds, increasing its funding
costs and reducing the Company’s net interest income and net
income.
 
 There
may be changes in accounting policies or accounting standards.
 
 The
Company’s accounting policies are fundamental to understanding its financial
results and condition.  Some of these policies require use of
estimates and assumptions that may affect the value of the Company’s assets or
liabilities and financial results.  The Company identified its
accounting policies regarding the allowance for loan losses, security
impairment, goodwill and other intangible assets, and income taxes to be
critical because they require management to make difficult, subjective and
complex judgments about matters that are inherently uncertain.  Under
each of these policies, it is possible that materially different amounts would
be reported under different conditions, using different assumptions, or as new
information becomes available.
  15
  From time
to time the Financial Accounting Standards Board and the SEC change the
financial accounting and reporting standards that govern the form and content of
the Company’s external financial statements.  In addition, accounting
standard setters and those who interpret the accounting standards (such as the
FASB, SEC, banking regulators and the Company’s outside auditors) may change or
even reverse their previous interpretations or positions on how these standards
should be applied.  Changes in financial accounting and reporting
standards and changes in current interpretations may be beyond the Company’s
control, can be hard to predict and could materially impact how the Company
reports its financial results and condition.  In certain cases, the
Company could be required to apply a new or revised standard retroactively or
apply an existing standard differently (also retroactively) which may result in
the Company restating prior period financial statements in material
amounts.
  The
Company encounters continuous technological change.
 
 The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and
services.  The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs.  The Company’s future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide
products and services that will satisfy customer demands, as well as to create
additional efficiencies in the Company’s operations.  Many of the
Company’s competitors have substantially greater resources to invest in
technological improvements.  The Company may not be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to its
customers.  Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on the Company’s business and, in turn, the Company’s financial condition
and results of operations.
 
 The
Company is subject to operational risk.
 
 The
Company faces the risk that the design of its controls and procedures, including
those to mitigate the risk of fraud by employees or outsiders, may prove to be
inadequate or are circumvented, thereby causing delays in detection of errors or
inaccuracies in data and information.  Management regularly reviews
and updates the Company’s internal controls, disclosure controls and procedures,
and corporate governance policies and procedures.  Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met.  Any failure or circumvention of the
Company’s controls and procedures or failure to comply with regulations related
to controls and procedures could have a material adverse effect on the Company’s
business, results of operations and financial condition.
 
 The
Company may also be subject to disruptions of its systems arising from events
that are wholly or partially beyond its control (including, for example,
computer viruses or electrical or telecommunications outages), which may give
rise to losses in service to customers and to financial loss or
liability.  The Company is further exposed to the risk that its
external vendors may be unable to fulfill their contractual obligations (or will
be subject to the same risk of fraud or operational errors by their respective
employees as is the Company) and to the risk that the Company’s (or its
vendors’) business continuity and data security systems prove to be
inadequate.
  The
Company’s performance is largely dependent on the talents and efforts of highly
skilled individuals.  There is intense competition in the financial
services industry for qualified employees.  In addition, the Company
faces increasing competition with businesses outside the financial services
industry for the most highly skilled individuals.  The Emergency
Economic Stabilization Act and the agreements between the Company and the
Treasury related to the purchase of the Company’s Preferred Stock Series B and
common stock warrants place restrictions on the Company’s ability to pay
compensation to its senior officers.  The Company’s business
operations could be adversely affected if it were unable to attract new
employees and retain and motivate its existing employees.
  16
  There
may be claims and litigation.
 
 From time
to time as part of the Company’s normal course of business, customers make
claims and take legal action against the Company based on actions or inactions
of the Company.  If such claims and legal actions are not resolved in
a manner favorable to the Company, they may result in financial liability and/or
adversely affect the market perception of the Company and its products and
services.  This may also impact customer demand for the Company’s
products and services.  Any financial liability or reputation damage
could have a material adverse effect on the Company’s business, which, in turn,
could have a material adverse effect on its financial condition and results of
operations.
 
 Item
1B.  Unresolved Staff Comments.
 
 Not
applicable.
 
 Item
2.  Properties.
  The
following table provides certain information with respect to our offices as of
December 31, 2008:
  Location
                                                        Leased
      or
                                                          Owned
                                                        Original
      Year Leased
                                                          or
      Acquired
                                                        Year
      of Lease
                                                          ExpirationMain
      Office2650
      Route 130
                                                        Leased
                                                        1989
                                                        2010Cranbury,
      New JerseyVillage
      Office74
      North Main Street
                                                        Owned
                                                        2005Cranbury,
      New JerseyMontgomery
      Office947
      State Road
                                                        Leased
                                                        1995
                                                        2013Princeton,
      New JerseyPlainsboro
      OfficePlainsboro Village Center
                                                        Leased
                                                        1998
                                                        202111
      Shalks Crossing RoadPlainsboro,
      New JerseyHamilton
      Office3659
      Nottingham Way
                                                        Leased
                                                        1999
                                                        2014Hamilton,
      New JerseyPrinceton
      OfficeThe
      Windrows at Princeton Forrestal
                                                        Leased
                                                        2001
                                                        2011200
      Windrow DrivePrinceton,
      New JerseyPerth
      Amboy Office145
      Fayette Street
                                                        Leased
                                                        2003
                                                        2018Perth
      Amboy, New JerseyJamesburg
      Office1
      Harrison Street
                                                        Owned
                                                        2002Jamesburg,
      New JerseyWest
      Windsor Office44
      Washington Road
                                                        Leased
                                                        2004
                                                        2019Princeton Jct,
      New Jersey
  17
 
 Fort
      Lee Office180
      Main Street
                          Leased
                          2006
                          2014Fort
      Lee, New JerseyHightstown
      Office140
      Mercer Street
                          Leased
                          2007
                          2014Hightstown,
      New JerseyMortgage
      Warehouse Funding Office
                          Leased
                          2008
                          2009580
      Howard AvenueFranklin Township,
      New Jersey
  Management
believes the foregoing facilities are suitable for the Company’s and the Bank’s
present and projected operations.
 
 Item
3.  Legal Proceedings.
  The
Company may, in the ordinary course of business, become a party to litigation
involving collection matters, contract claims and other legal proceedings
relating to the conduct of its business.  The Company may also have
various commitments and contingent liabilities which are not reflected in the
accompanying consolidated statement of condition.  Management is not
aware of any present legal proceedings or contingent liabilities and commitments
that would have a material impact on the Company’s financial position or results
of operations.
  Item
4.  Submission of Matters to a Vote of Security Holders.
  No
matters were submitted to a vote of the Company’s shareholders during the fourth
quarter of the fiscal year ended December 31, 2008.
  PART
II
  Item
5.  Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities.
  The
common stock of the Company trades on the Nasdaq Global Market under the trading
symbol “FCCY”.  The following are the high and low sales prices per
share for 2008 and 2007, as reported on the Nasdaq Global Market.
  2008
                                                              
                                                              
                                                              2007High
                                                              
                                                              
                                                              Low
                                                              
                                                              
                                                              High
                                                              
                                                              
                                                              LowFirst
      Quarter
                                                              
                                                              $
                                                              14.10
                                                              
                                                              
                                                              $
                                                              10.47
                                                              (1)
                                                              
                                                              
                                                              $
                                                              17.38
                                                              
                                                              
                                                              $
                                                              15.30
                                                              (1)Second
      Quarter
                                                              
                                                              
                                                              12.68
                                                              
                                                              
                                                              
                                                              10.20
                                                              (1)
                                                              
                                                              
                                                              
                                                              16.75
                                                              
                                                              
                                                              
                                                              15.16
                                                              (1)Third
      Quarter
                                                              
                                                              
                                                              11.33
                                                              
                                                              
                                                              
                                                              7.75
                                                              (1)
                                                              
                                                              
                                                              
                                                              15.96
                                                              
                                                              
                                                              
                                                              13.08
                                                              (1)Fourth
      Quarter
                                                              
                                                              
                                                              12.15
                                                              
                                                              
                                                              
                                                              6.44
                                                              (1)
                                                              
                                                              
                                                              
                                                              14.90
                                                              
                                                              
                                                              
                                                              12.62
                                                              (1)
  (1)  Prices
have been retroactively adjusted for the 5% stock dividend declared December 18,
2008 and paid February 2, 2009 to shareholders of record as of the close of
business on January 20, 2009.
  As of
March 25, 2009, there were approximately 325 record holders of the Company’s
common stock.
  The
Company paid a 5% stock dividend on February 2, 2009, and 6% stock dividends on
February 6, 2008 and January 31, 2007.  All per share data has been
retroactively adjusted for stock dividends.
 
 The
Company has never paid a cash dividend and there are no plans to pay a cash
dividend at this time.  In addition, please refer to the discussion
above of the Preferred Stock Series B under the heading “Supervision and
Regulation” for additional restrictions on cash dividends.
  18
  Issuer
Purchases of Equity Securities
 
 In 2005,
the Board of Directors authorized a stock repurchase program under which the
Company may repurchase in open market or privately negotiated transactions up to
5% of its common shares outstanding at that date.  The Company
undertook this repurchase program in order to increase shareholder
value.  The following table provides common stock repurchases made by
or on behalf of the Company during the three months ended December 31,
2008.
  Issuer
Purchases of Equity Securities (1)
  Period
              
              Total
                Number
      of
                Shares
                Purchased
              
              Average
                Price
      Paid
                Per
      Share
              
              Total
      Number
                of
                Shares
                Purchased
                As
      Part of
                Publicly
                Announced
                Plan
      or
                Program
              
              Maximum
                Number
      of
                Shares
      That
                May
                Yet
      be
                Purchased
                Under
      the
                Plan
      or
                ProgramBeginning
              EndingOctober
      1, 2008
              October
      31, 2008
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              165,761November
      1, 2008
              November
      30, 2008
              
              
              1,786
              
              
              
              8.48
              
              
              
              1,786
              
              
              
              163,975December
      1, 2008
              December
      31, 2008
              
              
              1,114
              
              
              
              8.05
              
              
              
              1,114
              
              
              
              162,861Total
              
              
              2,900
              
              
              $
              8.31
              
              
              
              2,900
              
              
              
              162,861
  _________________
 
 (1)
            The
      Company’s common stock repurchase program covers a maximum of 195,076
      shares of common stock of the Company, representing 5% of the outstanding
      common stock of the Company on July 21, 2005, as adjusted for subsequent
      stock dividends.
 
 As a
result of the Company’s issuance on December 23, 2008 of Preferred Stock Series
B and a warrant to purchase common stock to the Treasury as part of its
TARP CPP, the Company may not repurchase its common stock or other equity
securities except under certain limited circumstances.  Please refer
to the discussion above of the Preferred Stock Series B under the heading
“Supervision and Regulation” for restrictions on the Company’s repurchase of its
common stock or other equity securities.
 
 Item
6.  Selected Financial Data.
 
 Not
required.
  Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operation.
  This
discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this
report.  Throughout the following sections, the “Company” refers to
1st Constitution Bancorp and its wholly owned subsidiaries, 1st Constitution
Bank, 1st Constitution Capital Trust I, and 1st Constitution Capital Trust II,
the “Bank” refers to 1st Constitution Bank, and the “Trusts” refers to 1st
Constitution Capital Trust I and 1st Constitution Capital Trust II,
collectively.  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.
  19
  Critical
Accounting Policies and Estimates
  “Management’s
Discussion and Analysis of Financial Condition and Results of Operation” is
based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.  Note
1 to the Company’s Consolidated Financial Statements for the year ended December
31, 2008 contains a summary of the Company’s significant accounting
policies.  Management believes the Company’s policies with respect to
the methodologies for the determination of the allowance for loan losses and for
determining other-than-temporary security impairment involve 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.  These critical policies and their application
are periodically reviewed with the Audit Committee and the Board of
Directors.  The provision 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 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
collectibility 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 to it, 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 Company’s allowance for loan losses.  Such
agencies may require the Company to make additional provisions for loan losses
based upon information available to them at the time of their
examination.  Furthermore, the majority of the Company’s loans are
secured by real estate in the State of New Jersey.  Accordingly, the
collectibility of a substantial portion of the carrying value of the Company’s
loan portfolio is susceptible to changes in local market conditions and may be
adversely affected should real estate values decline or the Central New Jersey
area experience an adverse economic shock.  Future adjustments to the
allowance for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond the Company’s control.
  Management utilizes various inputs to
determine the fair value of its investment portfolio.  To the extent
they exist, unadjusted quoted market prices in active markets (level 1) or
quoted prices on similar assets (level 2) are utilized to determine the fair
value of each investment in the portfolio.  In the absence of quoted
prices, valuation techniques would be used to determine fair value of any
investments that require inputs that are both significant to the fair value
measurement and unobservable (level 3).  Valuation techniques are
based on various assumptions, including, but not limited to cash flows, discount
rates, rate of return, adjustments for nonperformance and liquidity, and
liquidation values.  A significant degree of judgment is involved in
valuing investments using level 3 inputs.  The use of different
assumptions could have a positive or negative effect on consolidated financial
condition or results of operations.
 
 Management must periodically evaluate
if unrealized losses (as determined based on the securities valuation
methodologies discussed above) on individual securities classified as held to
maturity or available for sale in the investment portfolio are considered to be
other-than-temporary.  The analysis of other-than-temporary impairment
requires the use of various assumptions, including, but not limited to, the
length of time an investment’s book value is greater than fair value, the
severity of the investment’s decline, as well as any credit deterioration of the
investment.  If the decline in value of an investment is deemed to be
other-than-temporary, the investment is written down to fair value and a
non-cash impairment charge is recognized in the period of such
evaluation.
 
 Results
of Operations
  The
Company reported net income for the 12 months ended December 31, 2008 of
$2,759,458, a decrease of 49.3% from the $5,442,782 reported for the 12 months
ended December 31, 2007.   The decrease is due primarily to the
effects of the declining level of market interest rates during 2008 plus the
higher level of nonperforming assets compared to the prior year, both resulting
in a lower level of net interest income for the year ended December 31, 2008
compared with the year ended December 31, 2007.  Diluted net income
per share was $0.65 for the year ended December 31, 2008 compared to $1.29
reported for the year ended December 31, 2007.  Basic net income per
share for the year ended December 31, 2008 was $0.66 as compared to the $1.31
reported for the year ended December 31, 2007.  All share information
has been restated for the effect of a 5% stock dividend declared on December 18,
2008 and paid on February 2, 2009 to shareholders of record on January 20,
2009.
  Return on
average assets (“ROA”) and return on average equity (“ROE”) were 0.56% and
6.52%, respectively, for the year ended December 31, 2008, compared to 1.29% and
14.32%, respectively, for the year ended December 31, 2007.  Key
performance ratios declined for the 2008 fiscal year as compared to the prior
year due to the lower net income for the year ended December 31, 2008 as
compared to the year ended December 31, 2007.
  20
  A
significant factor impacting the Company’s net interest income has been the
declining level of market interest rates and the resulting compression of the
Company’s net interest margin.  The net interest margin for the year
ended December 31, 2008 was 3.64% as compared to the 4.57% net interest margin
recorded for the year ended December 31, 2007, a reduction of 93 basis
points.  The Federal Reserve has decreased the level of market
interest rates by 400 basis points since January 1, 2008.  Since the
majority of the Company’s interest earning assets earn at floating rates, these
interest rate reductions have resulted in a decreased level of interest
income.  The Company will continue to closely monitor the mix of
earning assets and funding sources to maximize net interest income during this
challenging interest rate environment.
  The
Company has a significant investment in federal agency-backed collateralized
mortgage obligations and trust preferred securities.  The Company does
not invest in any private issuer collateralized mortgage
obligations.  At December 31, 2008, the Company held collateralized
mortgage obligations in the available for sale and held to maturity portfolios
with aggregate fair values of $6,777,632 and $8,767,537,
respectively.  These securities had a net unrealized loss of
$196,418.  The Company also held trust preferred securities in the
available for sale and held to maturity portfolios with aggregate fair values of
$1,281,806 and $346,988, respectively, and a net unrealized loss of $1,808,335
at December 31, 2008.  Several financial institutions have reported
significant write-downs of the value of mortgage-related and trust preferred
securities.  Management has considered the severity and duration of
the unrealized losses within the Company’s collateralized mortgage obligations
and trust preferred securities portfolios, and evaluated recent events specific
to the issuers of these securities and their industries, as well as external
credit ratings and downgrades thereto. Based on these considerations and
evaluations, management does not believe that any of the Company’s
collateralized mortgage obligations or trust preferred securities are
other-than-temporarily impaired as of December 31, 2008. Certain of these types
of securities may also not be marketable except at significant
discounts.  While management of the Company is, as of the date of this
report, unaware of any other-than-temporarily impairment in the Company’s
portfolio of these securities, market, entity or industry conditions could
further deteriorate and result in the recognition of future impairment losses
related to these securities.
 
 Net
Interest Income
  Net
interest income, the Company’s largest and most significant component of
operating income, is the difference between interest and fees earned on loans
and other earning assets, and interest paid on deposits and borrowed
funds.  This component represented 83.2% of the Company’s net revenues
for the year ended December 31, 2008.  Net interest income also
depends upon the relative amount of interest earning assets, interest-bearing
liabilities, and the interest rate earned or paid on them.
 
 The
following tables set forth the Company’s consolidated average balances of assets
and liabilities and shareholders’ equity as well as interest income and expense
on related items, and the Company’s average yield or rate for the years ended
December 31, 2008, 2007 and 2006.  The average rates are derived by
dividing interest income and expense by the average balance of assets and
liabilities, respectively.
  21
  Average
Balance Sheets with Resultant Interest and Rates
  (yields
      on a tax-equivalent basis)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Average
                    
                    
                    
                    
                    
                    Average
                    
                    
                    Average
                    
                    
                    
                    
                    
                    Average
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageBalance
                    
                    
                    Interest
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    RateAssets:Federal
      Funds Sold/Short-Term
                      Investments
                    
                    $
                    4,667,073
                    
                    
                    $
                    112,427
                    
                    
                    
                    2.41
                    %
                    
                    $
                    1,653,896
                    
                    
                    $
                    101,171
                    
                    
                    
                    6.12
                    %
                    
                    $
                    1,457,568
                    
                    
                    $
                    85,012
                    
                    
                    
                    5.14
                    %Investment
      Securities:Taxable
                    
                    
                    84,611,384
                    
                    
                    
                    4,158,923
                    
                    
                    
                    4.92
                    %
                    
                    
                    80,876,181
                    
                    
                    
                    4,278,288
                    
                    
                    
                    5.29
                    %
                    
                    
                    70,048,748
                    
                    
                    
                    3,448,780
                    
                    
                    
                    4.92
                    %Tax-exempt
      (4)
                    
                    
                    14,471,144
                    
                    
                    
                    829,249
                    
                    
                    
                    5.73
                    %
                    
                    
                    22,968,401
                    
                    
                    
                    1,296,032
                    
                    
                    
                    5.64
                    %
                    
                    
                    16,198,497
                    
                    
                    
                    895,172
                    
                    
                    
                    5.53
                    %Total
                    
                    
                    99,082,528
                    
                    
                    
                    4,988,172
                    
                    
                    
                    5.03
                    %
                    
                    
                    103,844,582
                    
                    
                    
                    5,574,320
                    
                    
                    
                    5.37
                    %
                    
                    
                    86,247,245
                    
                    
                    
                    4,343,952
                    
                    
                    
                    5.04
                    %Loan
      Portfolio:Construction
                    
                    
                    115,517,676
                    
                    
                    
                    8,090,444
                    
                    
                    
                    7.00
                    %
                    
                    
                    129,285,776
                    
                    
                    
                    11,486,481
                    
                    
                    
                    8.88
                    %
                    
                    
                    125,022,769
                    
                    
                    
                    11,129,600
                    
                    
                    
                    8.90
                    %Residential
      Real Estate
                    
                    
                    10,376,822
                    
                    
                    
                    652,728
                    
                    
                    
                    6.29
                    %
                    
                    
                    8,878,427
                    
                    
                    
                    657,928
                    
                    
                    
                    7.41
                    %
                    
                    
                    8,072,109
                    
                    
                    
                    517,146
                    
                    
                    
                    6.41
                    %Home
      Equity
                    
                    
                    15,490,320
                    
                    
                    
                    986,117
                    
                    
                    
                    6.37
                    %
                    
                    
                    14,118,025
                    
                    
                    
                    1,063,025
                    
                    
                    
                    7.53
                    %
                    
                    
                    14,604,243
                    
                    
                    
                    1,109,996
                    
                    
                    
                    7.60
                    %Commercial
      and Commercial
                      Real
      Estate
                    
                    
                    127,377,980
                    
                    
                    
                    9,302,815
                    
                    
                    
                    7.30
                    %
                    
                    
                    117,463,693
                    
                    
                    
                    9,140,693
                    
                    
                    
                    7.78
                    %
                    
                    
                    99,521,245
                    
                    
                    
                    7,706,864
                    
                    
                    
                    7.74
                    %Mortgage
      warehouse lines
                    
                    
                    57,477,364
                    
                    
                    
                    2,755,003
                    
                    
                    
                    4.79
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Installment
                    
                    
                    1,204,297
                    
                    
                    
                    96,375
                    
                    
                    
                    8.00
                    %
                    
                    
                    1,542,082
                    
                    
                    
                    129,483
                    
                    
                    
                    8.40
                    %
                    
                    
                    2,013,438
                    
                    
                    
                    167,126
                    
                    
                    
                    8.30
                    %All
      Other Loans
                    
                    
                    26,660,793
                    
                    
                    
                    2,405,176
                    
                    
                    
                    9.02
                    %
                    
                    
                    21,083,348
                    
                    
                    
                    2,635,877
                    
                    
                    
                    12.50
                    %
                    
                    
                    22,506,843
                    
                    
                    
                    2,535,812
                    
                    
                    
                    11.27
                    %Total
      (1)
                    
                    
                    354,105,252
                    
                    
                    
                    24,288,658
                    
                    
                    
                    6.86
                    %
                    
                    
                    292,371,351
                    
                    
                    
                    25,113,487
                    
                    
                    
                    8.59
                    %
                    
                    
                    271,740,647
                    
                    
                    
                    23,166,544
                    
                    
                    
                    8.53
                    %Total
      Interest-Earning Assets
                    
                    
                    457,854,853
                    
                    
                    
                    29,389,257
                    
                    
                    
                    6.42
                    %
                    
                    
                    397,869,829
                    
                    
                    
                    30,788,978
                    
                    
                    
                    7.74
                    %
                    
                    
                    359,445,460
                    
                    
                    
                    27,595,508
                    
                    
                    
                    7.68
                    %Allowance
      for Loan Losses
                    
                    
                    (3,612,156
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,270,810
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,662,370
                    )Cash
      and Due From Banks
                    
                    
                    12,446,849
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,254,911
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,391,415Other
      Assets
                    
                    
                    22,180,579
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    17,648,099
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    15,422,593Total
      Assets
                    
                    $
                    488,870,125
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    425,502,029
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    381,597,098Liabilities
      and Shareholders' Equity:Interest-Bearing
      Liabilities:Money
      Market and NOW Accounts
                    
                    $
                    89,274,785
                    
                    
                    $
                    2,164,369
                    
                    
                    
                    2.42
                    %
                    
                    $
                    83,597,940
                    
                    
                    $
                    1,737,487
                    
                    
                    
                    2.08
                    %
                    
                    $
                    87,135,125
                    
                    
                    $
                    1,455,755
                    
                    
                    
                    1.67
                    %Savings
      Accounts
                    
                    
                    79,864,816
                    
                    
                    
                    1,990,479
                    
                    
                    
                    2.49
                    %
                    
                    
                    64,408,442
                    
                    
                    
                    2,017,580
                    
                    
                    
                    3.13
                    %
                    
                    
                    44,867,384
                    
                    
                    
                    939,324
                    
                    
                    
                    2.09
                    %Certificates
      of Deposit under $100,000
                    
                    
                    76,921,495
                    
                    
                    
                    3,096,986
                    
                    
                    
                    4.03
                    %
                    
                    
                    67,236,813
                    
                    
                    
                    3,170,322
                    
                    
                    
                    4.72
                    %
                    
                    
                    58,183,657
                    
                    
                    
                    2,907,883
                    
                    
                    
                    5.00
                    %Certificates
      of Deposit of
                      $100,000
      and Over
                    
                    
                    70,297,311
                    
                    
                    
                    2,855,024
                    
                    
                    
                    4.06
                    %
                    
                    
                    54,252,087
                    
                    
                    
                    2,711,467
                    
                    
                    
                    5.00
                    %
                    
                    
                    43,870,647
                    
                    
                    
                    1,385,119
                    
                    
                    
                    3.16
                    %Other
      Borrowed Funds
                    
                    
                    37,111,612
                    
                    
                    
                    1,556,238
                    
                    
                    
                    4.19
                    %
                    
                    
                    29,580,685
                    
                    
                    
                    1,514,907
                    
                    
                    
                    5.12
                    %
                    
                    
                    32,539,699
                    
                    
                    
                    1,687,749
                    
                    
                    
                    5.19
                    %Trust
      Preferred Securities
                    
                    
                    18,000,000
                    
                    
                    
                    1,069,351
                    
                    
                    
                    5.94
                    %
                    
                    
                    19,534,247
                    
                    
                    
                    1,438,876
                    
                    
                    
                    7.37
                    %
                    
                    
                    14,863,014
                    
                    
                    
                    1,141,667
                    
                    
                    
                    7.68
                    %Total
      Interest-Bearing Liabilities
                    
                    
                    371,470,019
                    
                    
                    
                    12,732,447
                    
                    
                    
                    3.43
                    %
                    
                    
                    318,610,214
                    
                    
                    
                    12,590,639
                    
                    
                    
                    3.95
                    %
                    
                    
                    281,459,526
                    
                    
                    
                    9,517,497
                    
                    
                    
                    3.38
                    %Net
      Interest Spread (2)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.99
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.79
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.80
                    %Non-interest
      Bearing
                      Demand
      Deposits
                    
                    
                    69,907,048
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    60,892,433
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    63,040,519Other
      Liabilities
                    
                    
                    5,165,108
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,989,809
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,013,813Total
      Liabilities
                    
                    
                    446,542,175
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    384,492,456
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    349,513,858Shareholders'
      Equity
                    
                    
                    42,327,950
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    38,009,573
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32,083,240Total
      Liabilities and Shareholders' Equity
                    
                    $
                    488,870,125
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    422,502,029
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    381,597,098Net
      Interest Margin (3)
                    
                    
                    
                    
                    
                    $
                    16,656,810
                    
                    
                    
                    3.64
                    %
                    
                    
                    
                    
                    
                    $
                    18,198,339
                    
                    
                    
                    4.57
                    %
                    
                    
                    
                    
                    
                    $
                    18,078,001
                    
                    
                    
                    5.03
                    %
  (1)
            Loan
      origination fees are considered an adjustment to interest
      income.  For the purpose of calculating loan yields, average
      loan balances include nonaccrual loans with no related interest
      income.
 (2)
            The
      interest rate spread is the difference between the average yield on
      interest earning assets and the average rate paid on interest bearing
      liabilities.
 (3)
            The
      net interest margin is equal to net interest income divided by average
      interest earning assets.
 (4)
            Tax
      equivalent basis.
 
 Changes
in net interest income and margin result from the interaction between the volume
and composition of interest earning assets, interest bearing liabilities,
related yields, and associated funding costs.  The Rate/Volume Table
demonstrates the impact on net interest income of changes in the volume of
interest earning assets and interest bearing liabilities and changes in interest
rates earned and paid.
 
 The
Company’s net interest income decreased on a tax equivalent basis by $1,541,529,
or 8.5%, to $16,656,810 for the year ended December 31, 2008, from the
$18,198,339 reported for the year ended December 31, 2007.  As
indicated in the Rate/Volume Table, the principal factor contributing to the
decrease in net interest income for the year ended December 31, 2008 was a
decrease in the interest income of $1,399,721, resulting from decreased rates on
the earning assets components.  This was combined with an increase in
interest expense resulting from increases in the balances of the deposit
components.
  22
  The
Company’s net interest income on a tax-equivalent basis increased by $120,328,
or 0.6%, to $18,198,339 for the year ended December 31, 2007, from the
$18,078,001 reported for the year ended December 31, 2006.  As
indicated in the Rate/Volume Table, the principal factor contributing to the
2007 increase in net interest income was an increase in the interest income of
$3,193,470, resulting from increased balances in the earning assets
components.  This was partially offset by an increase in interest
expense resulting from increases in the rates paid on deposit components.
 
 Rate/Volume
      Table
                                                          
                                                          Amount
      of Increase (Decrease)Year
      Ended December 31,
                                                            2008
      versus 2007
                                                          
                                                          
                                                          Year
      Ended December 31,
                                                            2007
      versus 2006Due
      to Change in:
                                                          
                                                          
                                                          Due
      to Change in:(Tax-equivalent
      basis)
                                                          
                                                          Volume
                                                          
                                                          
                                                          Rate
                                                          
                                                          
                                                          Total
                                                          
                                                          
                                                          Volume
                                                          
                                                          
                                                          Rate
                                                          
                                                          
                                                          TotalInterest
      Income:Loans:Construction
                                                          
                                                          $
                                                          (1,094,267
                                                          )
                                                          
                                                          $
                                                          (2,302,233
                                                          )
                                                          
                                                          $
                                                          (3,396,500
                                                          )
                                                          
                                                          $
                                                          382,349
                                                          
                                                          
                                                          $
                                                          (25,005
                                                          )
                                                          
                                                          $
                                                          357,344Residential
      Real Estate
                                                          
                                                          
                                                          94,238
                                                          
                                                          
                                                          
                                                          (99,438
                                                          )
                                                          
                                                          
                                                          (5,200
                                                          )
                                                          
                                                          
                                                          55,873
                                                          
                                                          
                                                          
                                                          84,909
                                                          
                                                          
                                                          
                                                          140,782Home
      Equity
                                                          
                                                          
                                                          95,054
                                                          
                                                          
                                                          
                                                          (172,050
                                                          )
                                                          
                                                          
                                                          (76,996
                                                          )
                                                          
                                                          
                                                          (36,807
                                                          )
                                                          
                                                          
                                                          (10,076
                                                          )
                                                          
                                                          
                                                          (46,883
                                                          )Commercial
      and Commercial Real Estate
                                                          
                                                          
                                                          748,916
                                                          
                                                          
                                                          
                                                          (586,243
                                                          )
                                                          
                                                          
                                                          162,673
                                                          
                                                          
                                                          
                                                          1,393,469
                                                          
                                                          
                                                          
                                                          39,808
                                                          
                                                          
                                                          
                                                          1,433,278Mortgage
      Warehouse Lines
                                                          
                                                          
                                                          2,755,003
                                                          
                                                          
                                                          
                                                          0
                                                          
                                                          
                                                          
                                                          2,755,003
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Installment
                                                          
                                                          
                                                          (26,940
                                                          )
                                                          
                                                          
                                                          (6,168
                                                          )
                                                          
                                                          
                                                          (33,108
                                                          )
                                                          
                                                          
                                                          (39,657
                                                          )
                                                          
                                                          
                                                          2,013
                                                          
                                                          
                                                          
                                                          (37,643
                                                          )All
      Other Loans
                                                          
                                                          
                                                          600,091
                                                          
                                                          
                                                          
                                                          (830,792
                                                          )
                                                          
                                                          
                                                          (230,791
                                                          )
                                                          
                                                          
                                                          (158,402
                                                          )
                                                          
                                                          
                                                          258,466
                                                          
                                                          
                                                          
                                                          100,064Total
      Loans
                                                          
                                                          
                                                          3,172,095
                                                          
                                                          
                                                          
                                                          (3,996,924
                                                          )
                                                          
                                                          
                                                          (824,829
                                                          )
                                                          
                                                          
                                                          1,596,826
                                                          
                                                          
                                                          
                                                          350,117
                                                          
                                                          
                                                          
                                                          1,946,942Investment
      Securities :Taxable
                                                          
                                                          
                                                          188,735
                                                          
                                                          
                                                          
                                                          (308,100
                                                          )
                                                          
                                                          
                                                          (119,365
                                                          )
                                                          
                                                          
                                                          551,519
                                                          
                                                          
                                                          
                                                          277,989
                                                          
                                                          
                                                          
                                                          829,508Tax-exempt
                                                          
                                                          
                                                          (483,349
                                                          )
                                                          
                                                          
                                                          16,566
                                                          
                                                          
                                                          
                                                          (466,783
                                                          )
                                                          
                                                          
                                                          378,709
                                                          
                                                          
                                                          
                                                          22,151
                                                          
                                                          
                                                          
                                                          400,860Total
      Investment Securities
                                                          
                                                          
                                                          (294,614
                                                          )
                                                          
                                                          
                                                          (291,534
                                                          )
                                                          
                                                          
                                                          (586,148
                                                          )
                                                          
                                                          
                                                          930,227
                                                          
                                                          
                                                          
                                                          300,141
                                                          
                                                          
                                                          
                                                          1,230,368Federal
      Funds Sold / Short-Term Investments
                                                          
                                                          
                                                          128,512
                                                          
                                                          
                                                          
                                                          (117,256
                                                          )
                                                          
                                                          
                                                          11,256
                                                          
                                                          
                                                          
                                                          15,721
                                                          
                                                          
                                                          
                                                          438
                                                          
                                                          
                                                          
                                                          16,159Total
      Interest Income
                                                          
                                                          
                                                          3,005,993
                                                          
                                                          
                                                          
                                                          (4,405,714
                                                          )
                                                          
                                                          
                                                          (1,399,721
                                                          )
                                                          
                                                          
                                                          2,542,775
                                                          
                                                          
                                                          
                                                          650,695
                                                          
                                                          
                                                          
                                                          3,193,470Interest
      Expense :Money
      Market and NOW Accounts
                                                          
                                                          
                                                          130,364
                                                          
                                                          
                                                          
                                                          296,518
                                                          
                                                          
                                                          $
                                                          426,882
                                                          
                                                          
                                                          
                                                          (67,296
                                                          )
                                                          
                                                          
                                                          349,028
                                                          
                                                          
                                                          
                                                          281,732Savings
      Accounts
                                                          
                                                          
                                                          434,450
                                                          
                                                          
                                                          
                                                          (461,551
                                                          )
                                                          
                                                          
                                                          (27,101
                                                          )
                                                          
                                                          
                                                          510,021
                                                          
                                                          
                                                          
                                                          568,235
                                                          
                                                          
                                                          
                                                          1,078,256Certificates
      of Deposit under $100,000
                                                          
                                                          
                                                          423,858
                                                          
                                                          
                                                          
                                                          (497,194
                                                          )
                                                          
                                                          
                                                          (73,336
                                                          )
                                                          
                                                          
                                                          439,006
                                                          
                                                          
                                                          
                                                          (176,567
                                                          )
                                                          
                                                          
                                                          262,439Certificates
      of Deposit of $100,000 and Over
                                                          
                                                          
                                                          727,894
                                                          
                                                          
                                                          
                                                          (584,337
                                                          )
                                                          
                                                          
                                                          143,557
                                                          
                                                          
                                                          
                                                          423,591
                                                          
                                                          
                                                          
                                                          902,757
                                                          
                                                          
                                                          
                                                          1,326,347Other
      Borrowed Funds
                                                          
                                                          
                                                          351,007
                                                          
                                                          
                                                          
                                                          (309,676
                                                          )
                                                          
                                                          
                                                          41,331
                                                          
                                                          
                                                          
                                                          (151,819
                                                          )
                                                          
                                                          
                                                          (21,023
                                                          )
                                                          
                                                          
                                                          (172,842
                                                          )Trust
      Preferred Securities
                                                          
                                                          
                                                          (84,797
                                                          )
                                                          
                                                          
                                                          (284,728
                                                          )
                                                          
                                                          
                                                          (369,525
                                                          )
                                                          
                                                          
                                                          364,138
                                                          
                                                          
                                                          
                                                          (66,929
                                                          )
                                                          
                                                          
                                                          297,209Total
      Interest Expense
                                                          
                                                          
                                                          1,982,776
                                                          
                                                          
                                                          
                                                          (1,840,968
                                                          )
                                                          
                                                          
                                                          141,808
                                                          
                                                          
                                                          
                                                          1,517,640
                                                          
                                                          
                                                          
                                                          1,555,501
                                                          
                                                          
                                                          
                                                          3,073,142Net
      Interest Income
                                                          
                                                          $
                                                          1,023,217
                                                          
                                                          
                                                          $
                                                          (2,564,746
                                                          )
                                                          
                                                          $
                                                          (1,541,529
                                                          )
                                                          
                                                          $
                                                          1,025,134
                                                          
                                                          
                                                          $
                                                          (904,806
                                                          )
                                                          
                                                          $
                                                          120,328
  
 Average
interest earning assets increased by $59,985,025, or 15.1%, to $457,854,853 for
the year ended December 31, 2008 from $397,869,829 for the year ended December
31, 2007, consisting primarily of an increase of $61,733,901 in loans for 2008
as compared to 2007.  Led by the mortgage warehouse lines component,
the Bank’s average total loan portfolio grew by 21.1%.  However, due
to the declining level of market interest rates during 2008, loan yields
averaged 6.86% for the year ended December 31, 2008, 173 basis points lower than
for the year ended December 31, 2007.  The Bank’s average investment
securities portfolio decreased 4.6%, and the yield on that portfolio decreased
34 basis points for the year ended December 31, 2008 compared to the year ended
December 31, 2007.  Overall, the yield on interest earning assets
decreased 132 basis points to 6.42% in the 2008 fiscal year from 7.74% in the
2007 fiscal year.
 
 Average
interest earning assets increased by $38,424,369, or 10.7%, to $397,869,829 for
the year ended December 31, 2007 from $359,445,460 for the year ended December
31, 2006, consisting primarily of increases in 2007 of $20,630,704 in loans and
$17,597,337 in investment securities compared to 2006.  Led by the
construction loans component, the Bank’s average total loan portfolio grew by
7.6% and loan yields averaged 8.59% for the year ended December 31, 2007, 6
basis points higher than for the year ended December 31, 2006.  The
Bank’s average investment securities portfolio increased 20.4%, and the yield on
that portfolio increased 33 basis points for the year ended December 31, 2007
compared to the year ended December 31, 2006.  Overall, the yield on
interest earning assets increased 6 basis points to 7.74% in the 2007 fiscal
year from 7.68% in the 2006 fiscal year.
  Interest
expense increased by $141,808, or 1.1%, to $12,732,447 for the year ended
December 31, 2008, from $12,590,639 for the year ended December 31,
2007.  This increase in interest expense is principally attributable
to higher levels of interest-bearing liabilities priced at a lower market
interest rate level.  Certificates of deposit of $100,000 and over
increased on average by $16,045,224 in 2008, or 29.6%, as compared to 2007,
contributing to the funding of loan portfolio growth.  The cost on
these deposits decreased 94 basis points in 2008 as compared to
2007.  Average interest bearing liabilities rose 16.6% in 2008 from
2007.  The cost of total interest-bearing liabilities decreased 52
basis points to 3.43% in 2008 from 3.95% in 2007.
  23
  Interest
expense increased by $3,073,142, or 32.3%, to $12,590,639 for the year ended
December 31, 2007, from $9,517,497 for the year ended December 31,
2006.  This increase in interest expense is principally attributable
to higher levels of interest-bearing liabilities priced at a higher market
interest rate level.  Savings accounts increased on average by
$19,541,058 in 2007, or 43.6%, as compared to 2006, contributing to the funding
of loans and investments portfolio growth.  The cost on these deposits
increased 104 basis points in 2007 as compared to 2006.  Average
interest bearing liabilities rose 13.2% in 2007 from 2006.  The cost
of total interest-bearing liabilities increased 57 basis points to 3.95% in 2007
from 3.38% in 2006.
  Average
non-interest bearing demand deposits increased by $9,014,615, or 14.8%, to
$69,907,048 for the year ended December 31, 2008 from $60,892,433 for the year
ended December 31, 2007.   The primary cause of this increase for
2008 was the requirement for customers of the new Warehouse Line of Credit to
maintain deposit relationships with the Bank that, on average, represent 10% to
15% of the loan balances.
  Non-Interest
Income
  Non-interest
income increased by $743,630, or 29.1%, to $3,301,959 for the year ended
December 31, 2008 from $2,258,329 for the year ended December 31,
2007.
  Service
charges on deposit accounts represent a significant source of non-interest
income.  Service charge revenues increased by $210,056, or 31.2%, to
$883,882 for the year ended December 31, 2008 compared to $673,826 for the year
ended December 31, 2007.  This increase was the result of a higher
volume of uncollected funds and overdraft fees collected on deposit accounts
during 2008 compared to 2007.  This component of non-interest income
represented 26.8% and 26.3% of the total non-interest income for the years ended
December 31, 2008 and 2007, respectively.
  Gains on
sales of loans held for sale increased by $279,912, or 36.8%, to $1,040,916 for
the year ended December 31, 2008, from $761,004 for the year ended December 31,
2007.  The Bank sells both residential mortgage loans and Small
Business Administration (“SBA”) loans in the secondary market.  The
lower interest rate environment that continued into 2008 has positively impacted
the volume of sales transactions in the mortgage loan and SBA loan markets and
the resultant gains from these sales transactions.
  Non-interest
income also includes income from bank-owned life insurance (“BOLI”) which
amounted to $378,852 for the year ended December 31, 2008 compared to $365,601
for the year ended December 31, 2007.  The Bank purchased tax-free
BOLI assets to partially offset the cost of employee benefit plans and reduce
the Company’s overall effective tax rate.
 
 The Bank
also generates non-interest income from a variety of fee-based
services.  These include safe deposit rentals, wire transfer service
fees and Automated Teller Machine fees for non-Bank
customers.  Deposit and service fee charges are reviewed and adjusted
as needed from time to time by management to reflect current costs incurred by
the Bank in offering these products or services and prices charged by competitor
financial institutions amid the Bank’s competitive market.
 
 Non-Interest
Expenses
  Non-interest
expenses increased by $2,949,756, or 24.4%, to $15,051,024 for the year ended
December 31, 2008 from $12,101,268 for the year ended December 31,
2007.  The largest increase in non-interest expenses for 2008 compared
to 2007 was in salaries and employee benefits.  To a lesser extent,
occupancy expense also reflects an increase for the comparable
periods.  The table below presents the major components of
non-interest expenses for the years 2008 and 2007.
 
 In
January 2008, the Bank established a Mortgage Warehouse Unit, which introduced a
revolving line of credit that is available to licensed mortgage banking
companies.  The unit is based in newly leased office space in
Somerset, NJ and consists of five newly hired staff members.  The
Bank’s action to establish this group and commence operations has contributed to
the 2008 increase in most components of non-interest expenses (in particular,
salaries and employee benefits, occupancy expense, equipment expense, and all
other expenses) when compared with 2007 expenses.
  24
  Non-interest
      Expenses2008
                    
                    
                    2007Salaries
      and employee benefits
                    
                    $
                    8,426,729
                    
                    
                    $
                    7,196,552Occupancy
      expense
                    
                    
                    1,802,723
                    
                    
                    
                    1,658,820Data
      processing services
                    
                    
                    896,724
                    
                    
                    
                    829,037Equipment
      expense
                    
                    
                    626,467
                    
                    
                    
                    485,792Marketing
                    
                    
                    246,879
                    
                    
                    
                    106,862Regulatory,
      professional and consulting fees
                    
                    
                    861,006
                    
                    
                    
                    296,667Office
      expense
                    
                    
                    649,461
                    
                    
                    
                    572,293FDIC
      deposit insurance
                    
                    
                    196,072
                    
                    
                    
                    38,422Directors’
      fees
                    
                    
                    108,000
                    
                    
                    
                    100,375Other
      real estate owned expenses
                    
                    
                    136,648
                    
                    
                    
                    11,871All
      other expenses
                    
                    
                    1,100,315
                    
                    
                    
                    804,577Total
                    
                    $
                    15,051,024
                    
                    
                    $
                    12,101,268
 
 Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $1,230,177, or 17.1%, to $8,426,729 for the year ended
December 31, 2008 compared to $7,196,552 for the year ended December 31,
2007.  The 2008 increase was a result of an increase in staffing
levels plus normal salary increases.  Salaries and employee benefits
as a percentage of average assets were 1.72% for 2008 and 1.69% for
2007.
  For the
year ended December 31, 2008, occupancy expense increased by $143,903, or 8.7%,
to $1,802,723 from $1,658,820 for the year ended December 31,
2007.  The 2008 opening of the Mortgage Warehouse Unit’s leased
location was the primary cause for the current year increase in occupancy
expense. The occupancy expense component of total non-interest expense as a
percentage of average assets was 0.37% for the year ended December 31, 2008 and
0.39% for the year ended December 31, 2007.
  Equipment
expense increased by $140,675, or 29.0%, to $626,467 for the year ended December
31, 2008 compared to $485,792 for the year ended December 31, 2007, as the
Company incurred operating costs to bring the new Mortgage Warehouse Unit online
during 2008 as well as upgraded existing systems throughout the
year.
  Marketing
expense increased by $140,017, or 131.0%, to $246,879 for the year ended
December 31, 2008 compared to $106,862 for the year ended December 31, 2007, as
the Company ran broadcast media promotions during 2008 designed to increase
low-cost core deposits, further develop our brand image and continue the Bank’s
support of community activities.
  Regulatory,
professional and consulting fees increased by $564,339, or 190.2% to $861,006
for the year ended December 31, 2008 compared to $296,667 for the year ended
December 31, 2007.  During 2008, the Company incurred increased
accounting and legal fees as a result of the restatement of the Company’s
financial statements for the first three quarters and the year ended December
31, 2006 and the first three quarters of the year ended December 31, 2007, as
described in Item 8 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007, as filed with the SEC on April 15, 2008.  The
Bank also incurred additional professional fees in connection with audits
performed by independent consultants in 2008 to assess the effectiveness of
controls established over internal systems as required by the Sarbanes-Oxley
Act.
  For the
year ended December 31, 2008, the cost of FDIC deposit insurance increased by
$157,650 to $196,072 from $38,422 for the year ended December 31,
2007.  This increase is a result of the combined effects of the FDIC
increasing the assessment to banks for providing this insurance during 2008 plus
the increase during 2008 of deposit balances subject to the assessment for FDIC
deposit insurance.
 
 Other
real estate owned expenses increased by $124,777 to $136,648 for the year ended
December 31, 2008 compared to $11,871 for the year ended December 31, 2007, as
the Company incurred maintenance costs on more properties held as Other Real
Estate Owned than were held during 2007.
  25
  All other
expenses, which are comprised of a variety of operating expenses and fees as
well as expenses associated with lending activities, increased by $295,738, or
36.8% to $1,100,315 for the year ended December 31,  2008 compared to
$804,577 for the year ended December 31, 2007.  The addition of the
Mortgage Warehouse Unit in January 2008, as noted above, contributed
significantly to the current period increase in this category.
 
 The
Bank’s ratio of non-interest expense to average assets has remained consistently
favorable at 3.08% for the year ended December 31, 2008 compared to 2.84% for
the year ended December 31, 2007.
  Financial
Condition
  Cash
and Cash Equivalents
  At
December 31, 2008, cash and cash equivalents totaled $14,333,119 compared to
$7,548,102 at December 31, 2007.  Cash and cash equivalents at
December 31, 2008 consisted of cash and due from banks of $14,321,777 and
federal funds sold/short-term investments of $11,342.  The
corresponding balances at December 31, 2007 were $7,517,158 and $30,944,
respectively.  The increase at December 31, 2008 compared to December
31, 2007 was due primarily to the timing of cash flows related to the Bank’s
business activities.
  Investment
Securities
  The
Bank’s investment securities portfolio amounted to $130,027,600, or 23.8% of
total assets, at December 31, 2008, compared to $98,704,483, or 23.0% of total
assets, at December 31, 2007.  Due to the declining level of market
interest rates during 2008 combined with strong loan and deposit growth, the
cash flows from principal repayments on the investment securities portfolio
accelerated significantly.  These funds were used primarily to fund
the strong loan growth and secondarily to purchase investment securities at a
reduced net interest spread.  On an average balance basis, the
investment securities portfolio represented 21.6% and 26.1%, respectively, of
average interest-earning assets for each of the years ended December 31, 2008
and 2007.  The average yield earned on the portfolio was 5.03% for the
year ended December 31, 2008, a decrease of 34 basis points from 5.37% earned
for the year ended December 31, 2007.
  Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business
purposes.  Activity in this portfolio is undertaken primarily to
manage liquidity and interest rate risk and to take advantage of market
conditions that create economically more attractive returns.  At
December 31, 2008, available-for-sale securities amounted to $93,477,023, an
increase of $18,284,886 from December 31, 2007.
 
 Amortized
cost, gross unrealized gains and losses, and the estimated fair value by
security type are as follows:
 
 Gross
                                      
                                      
                                      GrossAmortized
                                      
                                      
                                      Unrealized
                                      
                                      
                                      Unrealized
                                      
                                      
                                      Fair2008
                                      
                                      Cost
                                      
                                      
                                      Gains
                                      
                                      
                                      Losses
                                      
                                      
                                      ValueAvailable
      for sale-U.
      S. Treasury securities andobligations
      of U.S. Governmentsponsored
      corporations and agencies
                                      
                                      $
                                      22,802,334
                                      
                                      
                                      $
                                      415,626
                                      
                                      
                                      $
                                      0
                                      
                                      
                                      $
                                      23,217,960Collateralized
      mortgage obligations
                                      
                                      
                                      7,014,272
                                      
                                      
                                      
                                      16,792
                                      
                                      
                                      
                                      (253,432
                                      )
                                      
                                      
                                      6,777,632Mortgage
      backed securities
                                      
                                      
                                      54,727,033
                                      
                                      
                                      
                                      1,930,299
                                      
                                      
                                      
                                      (594
                                      )
                                      
                                      
                                      56,656,738Obligations
      of State andPolitical
      subdivisions
                                      
                                      
                                      2,868,049
                                      
                                      
                                      
                                      6,872
                                      
                                      
                                      
                                      (16,234
                                      )
                                      
                                      
                                      2,858,687Corporate
      debt securities
                                      
                                      
                                      2,454,969
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      (1,173,163
                                      )
                                      
                                      
                                      1,281,806Restricted
      Stock
                                      
                                      
                                      2,659,200
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      2,659,200Mutual
      Fund
                                      
                                      
                                      25,000
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      25,000$
                                      92,550,857
                                      
                                      
                                      $
                                      2,369,589
                                      
                                      
                                      $
                                      (1,443,423)
                                      
                                      
                                      $
                                      93,477,023Held
      to maturity-U.
      S. Treasury securities andobligations
      of U.S. Governmentsponsored
      corporations and agencies
                                      
                                      $
                                      10,000,000
                                      
                                      
                                      $
                                      193,800
                                      
                                      
                                      $
                                      0
                                      
                                      
                                      $
                                      10,193,800Collateralized
      mortgage obligations
                                      
                                      
                                      8,727,315
                                      
                                      
                                      
                                      49,897
                                      
                                      
                                      
                                      (9,675
                                      )
                                      
                                      
                                      8,767,537Mortgage
      backed securities
                                      
                                      
                                      3,794,931
                                      
                                      
                                      
                                      33,007
                                      
                                      
                                      
                                      (212
                                      )
                                      
                                      
                                      3,827,726Obligations
      of State andPolitical
      subdivisions
                                      
                                      
                                      10,516,726
                                      
                                      
                                      
                                      75,515
                                      
                                      
                                      
                                      (93,502
                                      )
                                      
                                      
                                      10,498,739Corporate
      debt securities
                                      
                                      
                                      3,511,605
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      (659,028
                                      )
                                      
                                      
                                      2,852,577$
                                      36,550,577
                                      
                                      
                                      $
                                      352,219
                                      
                                      
                                      $
                                      (762,417
                                      )
                                      
                                      $
                                      36,140,379
 
 26
  
 Gross
                            
                            
                            GrossAmortized
                            
                            
                            Unrealized
                            
                            
                            Unrealized
                            
                            
                            Fair2007
                            
                            Cost
                            
                            
                            Gains
                            
                            
                            Losses
                            
                            
                            ValueAvailable
      for sale-U.
      S. Treasury securities andobligations
      of U.S. Governmentsponsored
      corporations and agencies
                            
                            $
                            21,455,563
                            
                            
                            $
                            315,075
                            
                            
                            $
                            (14,043
                            )
                            
                            $
                            21,756,595Collateralized
      mortgage obligations
                            
                            
                            8,106,154
                            
                            
                            
                            2,170
                            
                            
                            
                            (407,560
                            )
                            
                            
                            7,700,764Mortgage
      backed securities
                            
                            
                            37,769,517
                            
                            
                            
                            457,725
                            
                            
                            
                            (57,365
                            )
                            
                            
                            38,169,877Obligations
      of State andPolitical
      subdivisions
                            
                            
                            3,446,517
                            
                            
                            
                            14,778
                            
                            
                            
                            (7,713
                            )
                            
                            
                            3,453,582Corporate
      debt securities
                            
                            
                            2,451,122
                            
                            
                            
                            0
                            
                            
                            
                            (272,504
                            )
                            
                            
                            2,178,618Restricted
      stock
                            
                            
                            1,907,701
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            1,907,701Mutual
      fund
                            
                            
                            25,000
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            25,000$
                            75,161,574
                            
                            
                            $
                            789,748
                            
                            
                            $
                            (759,185
                            )
                            
                            $
                            75,192,137Held
      to maturity-Mortgage
      backed securities
                            
                            $
                            4,502,574
                            
                            
                            $
                            2,132
                            
                            
                            $
                            121,197
                            
                            
                            $
                            4,383,509Obligations
      of State andPolitical
      subdivisions
                            
                            
                            18,013,721
                            
                            
                            
                            142,232
                            
                            
                            
                            4,718
                            
                            
                            
                            18,151,235Corporate
      debt securities
                            
                            
                            996,051
                            
                            
                            
                            0
                            
                            
                            
                            119,526
                            
                            
                            
                            876,525$
                            23,512,346
                            
                            
                            $
                            144,364
                            
                            
                            $
                            245,441
                            
                            
                            $
                            23,411,269
 
 Gross
                                  
                                  
                                  GrossAmortized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  Fair2006
                                  
                                  Cost
                                  
                                  
                                  Gains
                                  
                                  
                                  Losses
                                  
                                  
                                  ValueAvailable
      for sale-U.
      S. Treasury securities andobligations
      of U.S. Governmentsponsored
      corporations and agencies
                                  
                                  $
                                  26,192,204
                                  
                                  
                                  $
                                  122,343
                                  
                                  
                                  $
                                  (227,579
                                  )
                                  
                                  $
                                  26,086,968Collateralized
      mortgage obligations
                                  
                                  
                                  9,432,978
                                  
                                  
                                  
                                  1,801
                                  
                                  
                                  
                                  (466,682
                                  )
                                  
                                  
                                  8,968,097Mortgage
      backed securities
                                  
                                  
                                  28,305,557
                                  
                                  
                                  
                                  113,353
                                  
                                  
                                  
                                  (216,111
                                  )
                                  
                                  
                                  28,202,799Obligations
      of State andPolitical
      subdivisions
                                  
                                  
                                  3,655,197
                                  
                                  
                                  
                                  15,902
                                  
                                  
                                  
                                  (31,749
                                  )
                                  
                                  
                                  3,639,350Corporate
      debt securities
                                  
                                  
                                  2,449,302
                                  
                                  
                                  
                                  304
                                  
                                  
                                  
                                  (30,949
                                  )
                                  
                                  
                                  2,418,658Restricted
      stock
                                  
                                  
                                  1,080,457
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  1,080,457Mutual
      fund
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  25,000$
                                  71,140,695
                                  
                                  
                                  $
                                  253,703
                                  
                                  
                                  $
                                  (973,069
                                  )
                                  
                                  $
                                  70,421,328Held
      to maturity-Mortgage
      backed securities
                                  
                                  $
                                  5,189,016
                                  
                                  
                                  $
                                  2,015
                                  
                                  
                                  $
                                  (175,827
                                  )
                                  
                                  $
                                  5,366,859Obligations
      of State andPolitical
      subdivisions
                                  
                                  
                                  13,617,923
                                  
                                  
                                  
                                  131,955
                                  
                                  
                                  
                                  (47,941
                                  )
                                  
                                  
                                  13,797,820$
                                  19,254,476
                                  
                                  
                                  $
                                  133,970
                                  
                                  
                                  $
                                  (223,768
                                  )
                                  
                                  $
                                  19,164,679
 
 Proceeds
from maturities and prepayments of securities available for sale amounted to
$26,324,998 for the year ended December 31, 2008 and $12,704,423 for the year
ended December 31, 2007.  At December 31, 2008, the portfolio had net
unrealized gains of $926,166, compared to net unrealized gains of $30,563 at
December 31, 2007.  These unrealized gains/losses are reflected net of
tax in shareholders’ equity as a component of accumulated other comprehensive
loss.
  Securities
held to maturity, which are carried at amortized historical cost, are
investments for which there is the positive intent and ability to hold to
maturity.  At December 31, 2008, securities held to maturity were
$36,550,577, an increase of $13,038,231 from $23,512,346 at December 31,
2007.  The fair value of the held-to-maturity portfolio at December
31, 2008 was $36,140,379, resulting in a net unrealized loss of
$410,198.
  27
  
 The
amortized cost, estimated fair value and weighted average yield of investment
securities at December 31, 2008, by contractual maturity, are shown
below.  Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.  Federal Home Loan Bank stock is
included in “Held to maturity - Due in one year or less.”
 
 Amortized
                  Cost
                
                
                Fair
                  Value
                
                
                Weighted
                  Average
                  Yield*Available
      for sale-Due
      in one year or less
                
                $
                6,094,198
                
                
                $
                6,144,721
                
                
                
                3.83
                %Due
      after one year through five years
                
                
                17,656,903
                
                
                
                17,974,754
                
                
                
                4.21
                %Due
      after five years through ten years
                
                
                13,032,530
                
                
                
                13,242,004
                
                
                
                4.96
                %Due
      after ten years
                
                
                55,767,226
                
                
                
                56,115,544
                
                
                
                5.38
                %Total
                
                $
                92,550,857
                
                
                $
                93,477,023
                
                
                
                5.00
                %Held
      to maturity-Due
      in one year or less
                
                $
                10,955,710
                
                
                $
                11,155,504
                
                
                
                3.45
                %Due
      after one year through five years
                
                
                4,535,579
                
                
                
                4,521,258
                
                
                
                4.72
                %Due
      after five years through ten years
                
                
                5,817,643
                
                
                
                5,804,321
                
                
                
                5.66
                %Due
      after ten years
                
                
                15,241,645
                
                
                
                14,659,296
                
                
                
                4.03
                %Total
                
                $
                36,550,577
                
                
                $
                36,140,379
                
                
                
                4.20
                %
 *computed on a tax equivalent
basis.
 
 Loans
 
 The loan
portfolio, which represents the Bank’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 Bank’s primary
lending focus continues to be construction loans (wholesale and retail),
commercial loans, owner-occupied commercial mortgage loans and tenanted
commercial real estate loans.  Total loans averaged $354,105,252 for
the year ended December 31, 2008, an increase of $61,733,901, or 21.1%, compared
to an average of $292,371,351 for the year ended December 31,
2007.  At December 31, 2008, total loans amounted to $377,348,416
compared to $294,760,718 at December 31, 2007, an increase of $82,587,698, or
28.0%.  The primary
cause of this increase is the Mortgage Warehouse Line of Credit introduced by
the Bank in January 2008 and discussed in detail below.The
average yield earned on the loan portfolio was 6.86% for the year ended December
31, 2008 compared to 8.59% for the year ended December 31, 2007, a decrease of
173 basis points.  This decrease is primarily due to the declining
interest rate environment that evolved during the last half of 2006 and
continued throughout 2008.
 
 The
following table represents the components of the loan portfolio for the dates
indicated.
 
 December
      31,2008
                2007
                
                2006
                
                2005
                
                2004Amount
                
                
                %
                Amount
                
                
                %
                
                Amount
                
                
                %
                
                Amount
                
                
                %
                
                Amount
                
                
                %Construction
      loans
                
                $
                94,163,997
                
                
                
                25
                %
                
                $
                132,735,920
                
                
                
                45
                %
                
                $
                125,268,871
                
                
                
                47
                %
                
                $
                109,862,614
                
                
                
                46
                %
                
                $
                88,027,024
                
                
                
                42
                %Residential
      real estate
                  loans
                
                
                11,078,402
                
                
                
                3
                %
                
                
                10,088,515
                
                
                
                3
                %
                
                
                7,670,370
                
                
                
                3
                %
                
                
                8,602,975
                
                
                
                4
                %
                
                
                9,815,366
                
                
                
                5
                %Commercial
      business
                
                
                57,528,879
                
                
                
                15
                %
                
                
                57,232,295
                
                
                
                19
                %
                
                
                48,112,857
                
                
                
                18
                %
                
                
                47,869,396
                
                
                
                19
                %
                
                
                41,198,502
                
                
                
                20
                %Commercial
      real estate
                
                
                90,904,418
                
                
                
                24
                %
                
                
                77,896,347
                
                
                
                27
                %
                
                
                66,784,183
                
                
                
                26
                %
                
                
                56,578,800
                
                
                
                24
                %
                
                
                54,822,575
                
                
                
                26
                %Mortgage
      warehouse
                  lines
                
                
                106,000,231
                
                
                
                28
                %
                
                
                -
                
                
                
                0
                %
                
                
                -
                
                
                
                0
                %
                
                
                -
                
                
                
                0
                %
                
                
                -
                
                
                
                0
                %Loans
      to individuals
                
                
                16,797,194
                
                
                
                5
                %
                
                
                16,324,817
                
                
                
                6
                %
                
                
                16,728,025
                
                
                
                6
                %
                
                
                16,441,994
                
                
                
                7
                %
                
                
                16,002,619
                
                
                
                7
                %Lease
      financing
                
                
                0
                
                
                
                0
                %
                
                
                0
                
                
                
                0
                %
                
                
                0
                
                
                
                0
                %
                
                
                21,073
                
                
                
                0
                %
                
                
                74,543
                
                
                
                0
                %Deferred
      loan fees
                
                
                647,673
                
                
                
                0
                %
                
                
                302,818
                
                
                
                0
                %
                
                
                404,074
                
                
                
                0
                %
                
                
                466,678
                
                
                
                0
                %
                
                
                512,416
                
                
                
                0
                %All
      other loans
                
                
                227,622
                
                
                
                0
                %
                
                
                180,006
                
                
                
                0
                %
                
                
                173,933
                
                
                
                0
                %
                
                
                170,819
                
                
                
                0
                %
                
                
                200,118
                
                
                
                0
                %Total
                
                $
                377,348,416
                
                
                
                100
                %
                
                $
                294,760,718
                
                
                
                100
                %
                
                $
                265,142,313
                
                
                
                100
                %
                
                $
                240,014,349
                
                
                
                100
                %
                
                $
                210,653,163
                
                
                
                100
                %
 
 28
  
 Commercial
and commercial real estate loans averaged $127,377,980 for the year ended
December 31, 2008, an increase of $9,914,287, or 8.4%, compared to $117,463,693
for the year ended December 31, 2007.  Commercial loans consist
primarily of loans to small and middle market businesses and are typically
working capital loans used to finance inventory, receivables or equipment
needs.  These loans are generally secured by business assets of the
commercial borrower.  The average yield on the commercial and
commercial real estate loan portfolio decreased 48 basis points to 7.30% for
2008 from 7.78% for 2007.
 
 Construction
loans averaged $115,517,676 for the year ended December 31, 2008, a decrease of
$13,768,100, or 10.6%, compared to $129,285,776 for the year ended December 31,
2007.  Generally, these loans represent owner-occupied or investment
properties and usually complement a broader commercial relationship between the
bank and the borrower.  Construction loans are structured to provide
for advances only after work is completed and inspected by qualified
professionals.  The current year decrease is a direct result of the
uncertain New Jersey economic conditions and management’s actions to allow the
higher risk construction loan portfolio to run off while simultaneously focusing
efforts to build the balance of the lesser risk mortgage warehouse
lines.  The average yield on the construction loan portfolio decreased
188 basis points to 7.00% for 2008 from 8.88% for 2007.
  In
January 2008, the Bank’s Mortgage Warehouse Unit introduced a revolving line of
credit that is available to licensed mortgage banking companies (the “Warehouse
Line of Credit”) and that has been successful since inception.  The
Warehouse Line of Credit is used by the mortgage banker to originate one-to-four
family residential mortgage loans that are pre-sold to the secondary mortgage
market, which includes state and national banks, national mortgage banking
firms, insurance companies and government-sponsored enterprises, including the
Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage
Corporation (“FHLMC”) and others.  On average, an advance under the
Warehouse Line of Credit remains outstanding for a period of less than 30 days,
with repayment coming directly from the sale of the loan into the secondary
mortgage market.  Interest (the spread between our borrowing cost and
the rate charged to the client) and a transaction fee are collected by the Bank
at the time of repayment.  Additionally, customers of the Warehouse
Lines of Credit are required to maintain deposit relationships with the Bank
that, on average, represent 10% to 15% of the loan balances.  The Bank
had outstanding Warehouse Line of Credit advances of $106,000,231 at December
31, 2008.
 
 Residential
loans averaged $10,376,822 for the year ended December 31, 2008, an increase of
$1,498,395, or 16.9%, compared to $8,878,427 for the year ended December 31,
2007.  These loans consist primarily of residential mortgage loans
secured by residential real estate.  The average yield on this
portfolio decreased 112 basis points to 6.29% for 2008 from 7.41% for
2007.
  The
following table provides information concerning the interest rate sensitivity of
the Bank’s commercial and commercial real estate loans and construction loans at
December 31, 2008.
 
 Maturity RangeType
              
              Within
                One
                Year
              
              
              After
      One But
                Within
                Five
      Years
              
              
              After
                Five
                Years
              
              
              TotalCommercial
      & commercial real estate
              
              $
              24,384,967
              
              
              $
              39,177,582
              
              
              $
              84,870,748
              
              
              $
              148,433,297Construction
              
              
              86,550,387
              
              
              
              6,664,862
              
              
              
              948,748
              
              
              
              94,163,997Total
              
              $
              110,935,354
              
              
              $
              45,842,445
              
              
              $
              85,819,495
              
              
              $
              242,597,294Fixed
      rate loans
              
              $
              4,414,527
              
              
              $
              20,917,181
              
              
              $
              11,655,612
              
              
              $
              36,987,320Floating
      rate loans
              
              
              106,520,827
              
              
              
              24,925,264
              
              
              
              74,163,883
              
              
              
              205,609,974Total
              
              $
              110,935,354
              
              
              $
              45,842,445
              
              
              $
              85,819,495
              
              
              $
              242,597,294
 
 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.
  29
  The
Bank’s policy with regard to non-accrual loans is that generally, loans are
placed on a non-accrual status when they are 90 days past due unless these loans
are well secured and in the process of collection or, regardless of the past due
status of the loan, when management determines that the complete recovery of
principal or interest is in doubt. Consumer loans are generally charged off
after they become 120 days past due. Subsequent payments on loans in non-accrual
status are credited to income only if collection of principal is not in
doubt.
  Non-performing
loans increased by $1,314,919 to $3,351,777 at December 31,2008 from $2,036,858
at December 31, 2007 as the historical disruptions in the financial system
during the past year have negatively affected certain of the Bank’s construction
borrowers.  The major segments of non-accrual loans consist of land
designated for residential development where the required approvals to begin
construction have been received, commercial loans which are in the process of
collection and residential real estate which is either in foreclosure or under
contract to close after December 31, 2008.  The table below sets forth
non-performing assets and risk elements in the Bank’s portfolio for the years
indicated.  As the table demonstrates, non-performing loans to total loans
increased to 0.89% at December 31, 2008 from 0.67% at December 31, 2007. 
Loan quality is still considered to be sound.  This was accomplished
through quality loan underwriting, a proactive approach to loan monitoring and
aggressive workout strategies.
 
 Non-performing
assets increased by $2,650,728 to $7,648,313 at December 31, 2008 from
$4,997,585 at December 31, 2007.  During 2008, the Bank took
possession of five residential properties totaling $1,389,181 after aggregate
loan charge-offs of $53,946.  During 2008, management was successful
in selling a number of these real estate owned properties without incurring any
losses.  The balance of the increase to “other real estate owned” is
the result of the Company continuing to complete an 18-unit condominium project
for which it has commitments from individual buyers to purchase as of December
31, 2008.  Non-performing assets represented 1.40% of total assets at
December 31, 2008 and 1.16% at December 31, 2007.
  The Bank
had no loans classified as restructured loans at December 31, 2008 or
2007.
  At
December 31, 2008 and December 31, 2007, the Bank had no loans that were 90 days
or more past due but still accruing interest income.
  Non-Performing
      Assets and Loans2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Non-Performing
      loans:Loans
      90 days or more past due and still accruing
                
                $
                0
                
                
                $
                0
                
                
                $
                0
                
                
                $
                209
                
                
                $
                63,130Non-accrual
      loans
                
                
                3,351,777
                
                
                
                2,036,858
                
                
                
                4,193,209
                
                
                
                833,150
                
                
                
                1,049,411Total
      non-performing loans
                
                
                3,351,777
                
                
                
                2,036,858
                
                
                
                4,193,209
                
                
                
                833,359
                
                
                
                1,112,541Other
      real estate owned
                
                
                4,296,536
                
                
                
                2,960,727
                
                
                
                0
                
                
                
                0
                
                
                
                0Total
      non-performing assets
                
                $
                7,648,313
                
                
                $
                4,997,585
                
                
                $
                4,193,209
                
                
                $
                833,359
                
                
                $
                1,112,541Non-performing
      loans to total loans
                
                
                0.89
                %
                
                
                0.67
                %
                
                
                1.50
                %
                
                
                0.32
                %
                
                
                0.50
                %Non-performing
      assets to total assets
                
                
                1.40
                %
                
                
                1.16
                %
                
                
                1.07
                %
                
                
                0.22
                %
                
                
                0.33
                %
 
 Management
takes a proactive approach in addressing delinquent loans. The Company’s
President meets weekly with all loan officers to review the status of credits
past-due ten days or more. An action plan is discussed for each of the loans to
determine the steps necessary to induce the borrower to cure the delinquency and
restore the loan to a current status. Also, delinquency notices are system
generated when loans are five days past-due and again at 15 days
past-due.
  In most
cases, the Company’s collateral is real estate and when the collateral is
foreclosed upon, the real estate is carried at the lower of fair market value
less estimated selling costs, or the initially recorded amount.  The
amount, if any, by which the recorded amount of the loan exceeds the fair market
value of the collateral is a loss which is charged to the allowance for loan
losses at the time of foreclosure or repossession. Resolution of a past-due loan
can be delayed if the borrower files a bankruptcy petition because collection
action cannot be continued unless the Company first obtains relief from the
automatic stay provided by the bankruptcy code.
  30
  Allowance
for Loan Losses and Related Provision
  The
allowance for loan losses is maintained at a level sufficient to absorb
estimated credit losses in the loan portfolio as of the date of the financial
statements.  The allowance for loan losses is a valuation reserve
available for losses incurred or inherent in the loan portfolio and other
extensions of credit.  The determination of the adequacy of the
allowance for loan losses is a critical accounting policy of the
Company.
 
 The
Company’s primary lending emphasis is the origination of commercial and
commercial real estate loans.  Based on the composition of the loan
portfolio, the primary risks inherent in it are deteriorating credit quality, a
decline in the economy, and a decline in New Jersey real estate market
values.  Any one or a combination of these events may adversely affect
the loan portfolio and may result in increased delinquencies, loan losses and
increased future provision levels.
  All, or
part, of the principal balance of commercial and commercial real estate loans,
and construction loans are charged off to the allowance as soon as it is
determined that the repayment of all, or part, of the principal balance is
highly unlikely.  Consumer loans are generally charged off no later
than 120 days past due on a contractual basis, earlier in the event of
bankruptcy, or if there is an amount deemed uncollectible.Because all
identified losses are immediately charged off, no portion of the allowance for
loan losses is restricted to any individual loan or groups of loans, and the
entire allowance is available to absorb any and all loan losses.
  Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan losses has been charged against earnings in an
amount necessary to maintain the allowance at a level that is adequate based on
management’s assessment of probable estimated losses.  The Company’s
methodology for assessing the adequacy of the allowance for loan losses consists
of several key elements.  These elements may include a specific
reserve for doubtful or high risk loans, an allocated reserve, and an
unallocated portion.
 
 The
Company consistently applies the following comprehensive
methodology.  During the quarterly review of the allowance for loan
losses, the Company considers a variety of factors that include:
  ·
            General
      economic conditions.
 ·
            Trends
      in charge-offs.
 ·
            Trends
      and levels of delinquent loans.
 ·
            Trends
      and levels of non-performing loans, including loans over 90 days
      delinquent.
 ·
            Trends
      in volume and terms of loans.
 ·
            Levels
      of allowance for specific classified
loans.
 ·
            Credit
      concentrations.
 
 The
specific reserve for high risk loans is established for specific commercial
loans, commercial real estate loans, and construction loans which have been
identified by management as being high risk or impaired loans.  A high
risk or impaired loan is assigned a doubtful risk rating grade because the loan
has not performed according to payment terms and there is reason to believe that
repayment of the loan principal in whole, or in part, is
unlikely.  The specific portion of the allowance is the total amount
of potential unconfirmed losses for such individual doubtful
loans.  To assist in determining the fair value of loan collateral,
the Company often utilizes independent third party qualified appraisal firms
which, in turn, employ their own criteria and assumptions that may include
occupancy rates, rental rates, and property expenses, among others.
 
 The
second category of reserves consists of the allocated portion of the
allowance.  The allocated portion of the allowance is determined by
taking pools of loans outstanding that have similar characteristics and applying
historical loss experience for each pool.  This estimate represents
the potential unconfirmed losses within the portfolio. Individual loan pools are
created for commercial and commercial real estate loans, construction loans, and
the various types of loans to individuals.  The historical estimation
for each loan pool is then adjusted to account for current conditions, current
loan portfolio performance, loan policy or management changes, or any other
factor which may cause future losses to deviate from historical
levels.
  During
the quarterly reviews, the Company may determine that an unallocated allowance
is appropriate.  The unallocated allowance is used to cover any
factors or conditions which may cause a potential loan loss but are not
specifically identifiable.  It is prudent to maintain an unallocated
portion of the allowance because no matter how detailed an analysis of potential
loan losses is performed, these estimates inherently lack
precision.  Management must make estimates using assumptions and
information which is often subjective and changing rapidly.  At
December 31, 2008, management believed that the allowance for loan losses and
non-performing loans was adequate.
  31
  While
management uses the best information available to make such evaluations, future
additions to the allowance may be necessary based on changes in economic
conditions.  In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank’s allowance for
loan losses.  Such agencies may require the Bank to recognize
additions to the allowance based on their judgments of information available to
them at the time of their examination.
 
 The table
below presents, for the years indicated, an analysis of the allowance for loan
losses and other related data.
  Allowance
      for Loan Losses2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Balance,
      beginning of year
              
              $
              3,348,080
              
              
              $
              3,228,360
              
              
              $
              2,361,375
              
              
              $
              2,005,169
              
              
              $
              1,786,632Provision
      charged to operating expenses
              
              
              640,000
              
              
              
              130,000
              
              
              
              893,500
              
              
              
              405,000
              
              
              
              240,000Loans
      charged off:Construction
      loans
              
              
              (53,946
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Residential
      real estate loans
              
              
              (31,865
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and commercial real
                estate
      loans
              
              
              (220,565
              )
              
              
              (88,891
              )
              
              
              (11,154
              )
              
              
              (39,150
              )
              
              
              (17,070
              )Loans
      to individuals
              
              
              -
              
              
              
              (1,614
              )
              
              
              (18,314
              )
              
              
              (13,653
              )
              
              
              (5,203
              )Lease
      financing
              
              
              -
              
              
              
              (478
              )
              
              
              -
              
              
              
              -
              
              
              
              -All
      other loans
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -(306,376
              )
              
              
              (90,983
              )
              
              
              (29,468
              )
              
              
              (52,803
              )
              
              
              (22,273
              )Recoveries:Construction
      loans
              
              
              -
              
              
              
              75,000
              
              
              
              -
              
              
              
              -
              
              
              
              -Residential
      real estate loans
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and commercial real
                estate
      loans
              
              
              3,060
              
              
              
              0
              
              
              
              153
              
              
              
              1,498
              
              
              
              750Loans
      to individuals
              
              
              -
              
              
              
              5,703
              
              
              
              2,800
              
              
              
              2,511
              
              
              
              60Lease
      financing
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -All
      other loans
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -3,060
              
              
              
              80,703
              
              
              
              2,953
              
              
              
              4,009
              
              
              
              810Net
      (charge offs) / recoveries
              
              
              (303,316
              )
              
              
              (10,280
              )
              
              
              (26,515
              )
              
              
              (48,794
              )
              
              
              (21,463
              )Balance,
      end of year
              
              $
              3,684,764
              
              
              $
              3,348,080
              
              
              $
              3,228,360
              
              
              $
              2,361,375
              
              
              $
              2,005,169Loans:At
      year end
              
              $
              377,348,416
              
              
              $
              294,760,718
              
              
              $
              265,142,313
              
              
              $
              240,014,349
              
              
              $
              210,653,051Average
      during the year
              
              
              340,666,744
              
              
              
              281,176,955
              
              
              
              259,397,578
              
              
              
              220,475,472
              
              
              
              186,557,414Net
      (charge offs) recoveries to average
                loans
      outstanding
              
              
              (0.09
              %)
              
              
              0.00
              %
              
              
              (0.01
              %)
              
              
              (0.02
              %)
              
              
              (0.01
              %)Allowance
      for loan losses to:Total
      loans at year end
              
              
              0.98
              %
              
              
              1.14
              %
              
              
              1.22
              %
              
              
              0.98
              %
              
              
              0.95
              %Non-performing
      loans
              
              
              109.93
              %
              
              
              164.37
              %
              
              
              76.99
              %
              
              
              283.36
              %
              
              
              180.23
              %
   Management considers a complete review
of the following specific factors in determining the provisions for loan
losses:  historical losses by loan category, non-accrual loans,
problem loans as identified through internal classifications, collateral values,
and the growth and size of the loan portfolio.  In addition to these
factors, management takes into consideration current economic conditions and
local real estate market conditions.  Using this evaluation process,
the Company’s provision for loan losses was $640,000 for the year ended December
31, 2008 and $130,000 for the year ended December 31, 2007.  While the
risk profile of the loan portfolio was reduced by a change in its composition
via a $38,571,923 reduction in higher risk construction loans and a $106,000,231
increase in lower risk mortgage warehouse lines, the total loan portfolio grew
by 28.0% from December 31, 2007 to December 31, 2008 and necessitated the
increased provision to account for the inherent risk in the portfolio as a
result of this growth.  Also, management replenished the reserves to
compensate for the current period net charge-offs as well as to take into
consideration that the real estate market conditions remained
weak.  Net charge offs/recoveries amounted to a net charge-off of
$303,316 for the year ended December 31, 2008.
  32
 
 At
December 31, 2008, the allowance for loan losses was $3,684,764 compared to
$3,348,080 at December 31, 2007, an increase of $336,684, or
10.1%.  The ratio of the allowance for loan losses to total loans at
December 31, 2008 and 2007 was 0.98% and 1.14%,
respectively.  Excluding the lower risk mortgage warehouse lines, a
new product in 2008, the ratio of the allowance for loan losses to total loans
would have been 1.18% at December 31, 2008.  The allowance for loan
losses as a percentage of non-performing loans was 109.93% at December 31, 2008,
compared to 164.37% at December 31, 2007. Management believes the quality of the
loan portfolio remains sound and that the allowance for loan losses is adequate
in relation to credit risk exposure levels.
 
 The
following table describes the allocation of the allowance for loan losses among
the various categories of loans and certain other information as of the dates
indicated.  The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may
occur.  The total allowance is available to absorb losses from any
segment of loans.
 
 Allocation of the Allowance for
      Loan LossesDecember
      31, 2008
              
              December
      31, 2007
              
              December
      31, 2006
              
              December
      31, 2005
              
              December
      31, 2004Amount
              
              
              % of
                loans
      in
                each
                category
                to
      total
                loans
              
              Amount
              
              
              % of
                loans
      in
                each
      category
                to
      total
                loans
              
              Amount
              
              
              % of
                loans
      in
                each
                category
                to
      total
                loans
              
              Amount
              
              
              % of
                loans
      in
                each
                category
                to
      total
                loans
              
              Amount
              
              
              % of
                loans
      in
                each
                category
                to
      total
                loansBalance
      at end of period applicable to:Domestic:Commercial
      and commercial
                real
      estate loans
              
              $
              1,477,550
              
              
              
              39
              %
              
              $
              1,671,059
              
              
              
              46
              %
              
              $
              1,131,266
              
              
              
              44
              %
              
              $
              1,393,210
              
              
              
              43
              %
              
              $
              1,183,050
              
              
              
              46
              %Construction
      loans
              
              
              1,478,520
              
              
              
              25
              %
              
              
              1,308,651
              
              
              
              45
              %
              
              
              1,696,175
              
              
              
              47
              %
              
              
              578,537
              
              
              
              46
              %
              
              
              491,266
              
              
              
              42
              %Mortgage
      warehouse lines
              
              
              477,001
              
              
              
              28
              %
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              0
              %Residential
      real estate loans
              
              
              71,087
              
              
              
              3
              %
              
              
              104,326
              
              
              
              3
              %
              
              
              61,634
              
              
              
              3
              %
              
              
              141,683
              
              
              
              4
              %
              
              
              120,310
              
              
              
              5
              %Loans
      to individuals
              
              
              149,386
              
              
              
              5
              %
              
              
              154,437
              
              
              
              6
              %
              
              
              139,055
              
              
              
              6
              %
              
              
              236,138
              
              
              
              7
              %
              
              
              200,517
              
              
              
              7
              %Lease
      financing
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              0
              %
              
              
              4,723
              
              
              
              0
              %
              
              
              4,010
              
              
              
              0
              %Unallocated
              
              
              31,220
              
              
              
              
              
              
              
              109,607
              
              
              
              
              
              
              200,230
              
              
              
              
              
              
              7,084
              
              
              
              
              
              
              6,016$
              3,684,764
              
              
              
              100
              %
              
              $
              3,348,080
              
              
              
              100
              %
              
              $
              3,228,360
              
              
              
              100
              %
              
              $
              2,361,375
              
              
              
              100
              %
              
              $
              2,005,169
              
              
              
              100
              %
 
 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 Bank offers a variety of products designed to attract
and retain customers, with the Bank’s primary focus being on the building and
expanding of long-term relationships.  Deposits in the year ended
December 31, 2008 averaged $386,265,455, an increase of $55,877,740, or 16.9%,
compared to $330,387,715 in the year ended December 31, 2007.  At
December 31, 2008, total deposits were $414,684,731, an increase of $85,352,363,
or 25.9%, from $329,332,368 at December 31, 2007.  The primary cause of this increase for
2008 was the requirement for customers of the new Warehouse Line of Credit to
maintain deposit relationships with the Bank that, on average, represent 10% to
15% of the loan balances.The average rate paid on the Bank’s
interest-bearing deposit balances for 2008 was 3.20%, decreasing from the 3.58%
average rate for 2007.  Average interest bearing deposits increased by
$46,863,125, or 17.4%, to $316,358,407 for 2008 from $269,495,282 for
2007.
  The
significant contributors to the increased level of deposit growth in the year
ended December 31, 2008 were an increase in average certificates of deposit of
$100,000 or more, followed by increases in savings deposits and other time
deposits.
  Time
deposits consist primarily of retail certificates of deposit and certificates of
deposit of $100,000 or more.  Time deposits at December 31, 2008 were
$176,659,427, an increase of $54,645,738, or 44.8%, from $122,013,689 at
December 31, 2007.  The retail certificates of deposit component of
time deposits increased by $9,684,682, or 14.4%, to an average of $76,921,495
for 2008 from an average of $67,236,813 for 2007.  The average cost of
these deposits decreased by 69 basis points to 4.03% for 2008 from 4.72% for
2007.  Certificates of deposit of $100,000 or more increased by
$16,045,224 to an average of $70,297,311 for 2008 from an average of $54,252,087
for 2007.  Certificates of deposit of $100,000 or more are a less
stable funding source and are used primarily as an alternative to other sources
of borrowed funds.
  33
  Average
non-interest bearing demand deposits increased by $9,014,615, or 14.8%, to
$69,907,048 for the year ended December 31, 2008 from $60,892,433 for the year
ended December 31, 2007.  At December 31, 2008, non-interest bearing
demand deposits totaled $71,772,486, an increase of 21.5% compared to
$59,055,803 at December 31, 2007.  Non-interest bearing demand
deposits made up 17.3% and 17.9% of total deposits at December 31, 2008 and 2007
and represent a stable, interest-free source of funds.
  
 Savings
accounts increased by $21,315,973, or 34.3%, to $83,410,405 at December 31, 2008
from $62,094,432 at December 31, 2007.  The average balance of savings
accounts for 2008 increased by $15,456,374 to $79,864,816 compared to an average
balance of $64,408,442 for 2007.
 
 Interest
bearing demand deposits, which include interest-bearing checking, money market
and the Bank’s premier money market product, 1st Choice account, increased by
$5,676,845, or 6.8%, to an average of $89,274,785 for 2008 from an average of
$83,597,940 in 2007.  The average cost of interest bearing demand
deposits increased 34 basis points to 2.42% for 2008 compared to 2.08% for
2007.
  The
following table illustrates the components of average total deposits for the
dates indicated.
  Average
      Deposit Balances2008
                
                
                2007
                
                
                2006Average
                  Balance
                
                
                Percentage
                  of
      Total
                
                
                Average
                  Balance
                
                
                Percentage
                  of
      Total
                
                
                Average
                  Balance
                
                
                Percentage
                  of
      TotalNon-interest
      bearing demand
                  Deposits
                
                $
                69,907,048
                
                
                
                18
                %
                
                $
                60,892,433
                
                
                
                18
                %
                
                $
                63,040,519
                
                
                
                21
                %Interest
      bearing demand deposits
                
                
                89,274,785
                
                
                
                23
                %
                
                
                83,597,940
                
                
                
                25
                %
                
                
                87,135,125
                
                
                
                29
                %Savings
      deposits
                
                
                79,864,816
                
                
                
                21
                %
                
                
                64,408,442
                
                
                
                19
                %
                
                
                44,867,384
                
                
                
                15
                %Certificates
      of deposit of $100,000
                  or
      more
                
                
                70,297,311
                
                
                
                18
                %
                
                
                54,252,087
                
                
                
                16
                %
                
                
                43,870,647
                
                
                
                15
                %Other
      certificates of deposit
                
                
                76,921,495
                
                
                
                20
                %
                
                
                67,236,813
                
                
                
                20
                %
                
                
                58,183,657
                
                
                
                20
                %Total
                
                $
                386,265,455
                
                
                
                100
                %
                
                $
                330,387,715
                
                
                
                100
                %
                
                $
                297,097,332
                
                
                
                100
                %
 
 Borrowings
  Borrowings
are mainly comprised of Federal Home Loan Bank (“FHLB”) borrowings and overnight
funds purchased.  These borrowings are primarily used to fund asset
growth not supported by deposit generation.  The average balance of
other borrowed funds increased by $7,530,927, or 25.5%, to $37,111,612 for the
year ended December 31, 2008 from the average balance of $29,580,685 for the
year ended December 31, 2007.  This increase is primarily due to the
fact that loan growth exceeded deposit growth.  The average cost of
other borrowed funds decreased 93 basis points to 4.19% for 2008 compared to
5.12% for 2007.
  The
balance of other borrowings was $51,500,000 at December 31, 2008, consisting of
long-term FHLB borrowings of $30,500,000 and overnight funds purchased of
$21,000,000.  The balance of other borrowings at December 31,
2007 was $35,600,000 and consisted of FHLB borrowings of $30,500,000 and
overnight funds purchased of $5,100,000.
  The Bank
has five ten-year fixed rate convertible advances from the FHLB that total
$30,500,000 in the aggregate.  These advances, in the amounts of
$3,000,000, $2,500,000, $5,000,000, $5,000,000 and $10,000,000 bear interest at
the rates of 5.82%, 5.50%, 5.34%, 5.06%, and 4.08%,
respectively.  The Bank has one two-year advance in the amount of
$5,000,000 that bears interest at a 3.833% rate.  These advances may
be called by the FHLB quarterly at the option of the FHLB if rates rise and the
rate earned by the FHLB is no longer a “market” rate.  These advances
are fully secured by marketable securities.
  34
  Shareholders’
Equity and Dividends
  Shareholders’
equity increased by $14,646,335, or 35.7%, to $55,619,652 at December 31, 2008,
from $40,973,317 at December 31, 2007.  Book value per common share
increased by $0.78, or 8.0%, to $10.54 at December 31, 2008 from $9.77 at
December 31, 2007.  The ratio of shareholders’ equity to total assets
was 10.18% and 9.55% at December 31, 2008 and 2007, respectively.  The
increase in shareholders’ equity was primarily the result of net income of
$2,759,458 and $12,000,000 in capital raised by the sale of Preferred Stock
Series B and common stock warrants to the Treasury in December
2008.
  
 On
December 23, 2008, pursuant to the TARP CPP under the EESA, the
Company entered into a Letter Agreement, including the Securities Purchase
Agreement – Standard Terms, with the Treasury pursuant to which the Company
issued and sold, and the Treasury purchased (i) 12,000 shares of the Company’s
Preferred Stock Series B and (ii) a ten-year warrant to purchase up to 200,222
shares of the Company’s common stock, no par value, at an initial exercise price
of $8.99 per share, for aggregate cash consideration of
$12,000,000.  As a result of the 5% stock dividend paid on February 2,
2009 to holders of record as of the close of business on January 20, 2009, the
shares of common stock initially underlying the warrant were adjusted to 210,233
shares and the initial exercise price was adjusted to $8.562 per
share.
 
 The
Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per
year for the first five years and thereafter at a rate of 9% per year and has a
liquidation preference of $1,000 per share. The warrant provides for the
adjustment of the exercise price and the number of shares of the Company’s
common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other
assets to holders of the Company’s common stock, and upon certain issuances of
the Company’s common stock at or below a specified price relative to the initial
exercise price. The warrant is immediately exercisable and expires ten years
from the issuance date. If, on or prior to December 31, 2009, the Company
receives aggregate gross cash proceeds of not less than $12,000,000 from
qualified equity offerings announced after October 13, 2008, the number of
shares of common stock issuable pursuant to the Treasury’s exercise of the
warrant will be reduced by one-half of the original number of shares. In
addition, the Treasury has agreed not to exercise voting power with respect to
any shares of common stock issued upon exercise of the warrant.
 
 The
Company is subject to restrictions contained in the agreement between the
Treasury and the Company related to the sale of the Preferred Stock Series B
which among other things restricts the payment of cash dividends or making other
distributions by the Company on its common stock or the repurchase of its shares
of common stock or other capital stock or other equity securities of any kind of
the Company or any of its or its affiliates’ trust preferred securities until
the third anniversary of the purchase of the Preferred Stock Series B by the
Treasury with certain exceptions without approval of the Treasury and the
Company is prohibited by the terms of the Preferred Stock Series B from paying
dividends on the common stock of the Company or redeeming or otherwise acquiring
its common stock or certain other of its equity securities unless all dividends
on the Preferred Stock Series B have been declared and either paid in full or
set aside with certain limited exceptions.
 
 In
addition, EESA and guidance issued by the Treasury limit executive compensation
and require the reporting of information to the Treasury and others and limit
the deductibility for Federal income tax purposes of compensation paid to
certain executives in excess of $500,000 per year and the payment of certain
severance  and change in control payments to certain
executives.  The Stimulus Package Act contains further limitations on
the payment of compensation to certain executives of the Company or the Bank,
the claw back of certain compensation paid to certain executives of the Company
or the Bank and imposes new corporate governance requirements on the Company,
including the inclusion of a non-binding “say to pay” proposal in the Company’s
annual proxy statement.
 
 The Board
of Governors of the Federal Reserve System has issued a supervisory letter to
bank holding companies that contains guidance on when the board of directors of
a bank  holding company should eliminate or defer or severely limit
dividends including for example when net income available for shareholders for
the past four quarters net of previously paid dividends paid during that period
is not sufficient to fully fund the dividends. The letter also contains guidance
on the redemption of stock by bank holding companies which urges bank holding
companies to advise the Federal Reserve of any such redemption or repurchase of
common stock for cash or other value which results in the net reduction of a
bank holding company’s capital at the beginning of the quarter below the capital
outstanding at the end of the quarter.
 
 In lieu
of cash dividends, the Company (and its predecessor the Bank) has declared a
stock dividend every year since 1992 and has paid such dividends every year
since 1993.  A 5% stock dividend was declared in 2008 and paid in
2009.  A 6% stock dividend was declared in 2007 and 2006 and paid in
2008 and 2007, respectively.
  35
  The
Company’s common stock is quoted on the Nasdaq Global Market under the symbol
“FCCY”.
 
 The
Company and the Bank are subject to various regulatory capital requirements
administered by the Federal Reserve Board and the Federal Deposit Insurance
Corporation.  For information on regulatory capital, see Note 20
of the Notes to Consolidated Financial Statements.
  Off-Balance
Sheet Arrangements
  The
following table shows the amounts and expected maturities of significant
commitments as of December 31, 2008.  Further discussion of these
commitments is included in Note 17 to the Consolidated Financial
Statements.
  One
      Year
                  or
      Less
                
                
                One
      to
                  Three
      Years
                
                
                Three
      to
                  Five
      Years
                
                
                Over
      Five
                  Years
                
                
                TotalStandby
      letters of credit
                
                $
                3,946,649
                
                
                $
                0
                
                
                $
                0
                
                
                $
                0
                
                
                $
                3,946,649Commitments
      to extend credit
                
                $
                180,965,000
                
                
                $
                0
                
                
                $
                0
                
                
                $
                0
                
                
                $
                180,965,000Commitments
      to sell residential loans
                
                $
                5,702,082
                
                
                $
                0
                
                
                $
                0
                
                
                $
                0
                
                
                $
                5,702,082
 
 Liquidity
  At
December 31, 2008, the amount of liquid assets remained at a level management
deemed adequate to ensure that contractual liabilities, depositors’ withdrawal
requirements, and other operational and customer credit needs could be
satisfied.
  Liquidity
management refers to the Company’s ability to support asset growth while
satisfying the borrowing needs and deposit withdrawal requirements of
customers.  In addition to maintaining liquid assets, factors such as
capital position, profitability, asset quality and availability of funding
affect a bank’s ability to meet its liquidity needs.  On the asset
side, liquid funds are maintained in the form of cash and cash equivalents,
Federal funds sold, investment securities held to maturity maturing within one
year, securities available for sale and loans held for
sale.  Additional asset-based liquidity is derived from scheduled loan
repayments as well as investment repayments of principal and interest from
mortgage-backed securities.  On the liability side, the primary source
of liquidity is the ability to generate core deposits.  Short-term
borrowings are used as supplemental funding sources when growth in the core
deposit base does not keep pace with that of earnings assets.
  The Bank
has established a borrowing relationship with the FHLB and a correspondent bank
which further supports and enhances liquidity. At December 31, 2008, the Bank
maintained an Overnight Line of Credit at the FHLB in the amount of $47,534,500
plus a One-Month Overnight Repricing Line of Credit of $47,534,500. Advances
issued under these programs are subject to FHLB stock level and collateral
requirements. Pricing of these advances may fluctuate based on existing market
conditions. The Bank also maintains an unsecured federal funds line of
$20,000,000 with a correspondent bank.
  The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities.  At December 31, 2008,
the balance of cash and cash equivalents was $14,333,119.
  Net cash
provided by operating activities totaled $8,368,584 for the year ended December
31, 2008 compared to net cash provided by operations of $9,389,262 for the year
ended December 31, 2007.  The primary source of funds is net income
from operations adjusted for activity related to loans originated for sale,
provision for loan losses, depreciation expenses, and net amortization of
premiums on securities.
  Net cash
used in investing activities increased by $92,384,175 to $114,946,312 for the
year ended December 31, 2008 from $22,562,137 for the year ended December 31,
2007.  The increase in cash usage for 2008 compared to 2007 resulted
from increased lending activity during 2008 plus increased volume of securities
purchased during 2008.
  Net cash
provided by financing activities increased by $103,003,580 to $113,362,745 for
the year ended December 31, 2008 from $10,359,165 for the year ended December
31, 2007.  The cash provided in 2008 resulted primarily from an
increase in demand, savings and time deposits combined with increased borrowings
and the proceeds from issuance of the Preferred Stock Series B.
  The
securities portfolios are also a source of liquidity, providing cash flows from
maturities and periodic repayments of principal.  For the year ended
December 31, 2008, prepayments and maturities of investment securities totaled
$34,693,790.  Another source of liquidity is the loan portfolio, which
provides a flow of payments and maturities.
  36
  Interest
Rate Sensitivity Analysis
  The
largest component of the Bank’s total income is net interest income, and the
majority of the Bank’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
following tables set forth certain information relating to the Bank’s financial
instruments that are sensitive to changes in interest rates, categorized by
expected maturity or repricing and the fair value of such instruments at
December 31, 2008.
  Interest
      Rate Sensitivity Analysis at December 31, 2008Total
                        Within
                        One
      Year
                      One
      Year
                        to
                        Five
      Years( $
      in thousands )
                      Interest
      Sensitivity Period
                      Over
                        Five
      Years
                      Non-interest
                        Sensitive30
      Day
                      90
      Day
                      180
      Day
                      365
      Day
                      TotalAssets
      :Cash
      and due from banks
                      -
                      -
                      -
                      -
                      0
                      -
                      -
                      $14,322
                      $14,322Federal
      funds sold
                      11
                      -
                      -
                      -
                      11
                      -
                      -
                      -
                      11Investment
      securities
                      13,094
                      6,944
                      13,912
                      21,517
                      55,467
                      20,128
                      54,433
                      -
                      130,028Loans
      held for sale
                      5,702
                      -
                      -
                      -
                      5,702
                      -
                      -
                      -
                      5,702Loans,
      net of allowance for loan losses
                      262,431
                      5,356
                      5,452
                      10,786
                      284,025
                      28,483
                      64,840
                      (3,685)
                      373,663Other
      assets
                      -
                      -
                      -
                      -
                      -
                      -
                      -
                      22,561
                      22,561281,238
                      12,300
                      19,364
                      32,303
                      345,205
                      48,611
                      119,273
                      33,198
                      546,287Sources
      of Funds :Demand
      deposits - noninterest bearing
                      -
                      -
                      -
                      -
                      -
                      -
                      -
                      71,772
                      71,772Demand
      deposits - interest bearing
                      42,191
                      -
                      -
                      -
                      42,191
                      34,578
                      6,074
                      -
                      82,843Savings
      deposits
                      56,905
                      -
                      -
                      33
                      56,938
                      10,691
                      15,781
                      -
                      83,410Time
      deposits
                      24,914
                      60,874
                      36,589
                      43,293
                      165,670
                      10,990
                      -
                      -
                      176,660Borrowings
                      21,000
                      -
                      -
                      3,000
                      24,000
                      17,500
                      10,000
                      -
                      51,500Redeemable
      subordinated debentures
                      -
                      -
                      -
                      -
                      -
                      18,557
                      -
                      -
                      18,557Non-interest-bearing
      sources
                      -
                      -
                      -
                      -
                      -
                      -
                      -
                      61,545
                      61,545145,010
                      60,874
                      36,589
                      46,326
                      288,799
                      92,316
                      31,855
                      133,317
                      546,287Asset
      (Liability) Sensitivity Gap :Period
      Gap
                      $136,228
                      ($48,574)
                      ($17,225)
                      ($14,023)
                      $56,406
                      ($43,705)
                      $87,418
                      ($100,119)
                      -Cumulative
      Gap
                      $136,228
                      $87,654
                      $70,429
                      $56,406
                      $56,406
                      $12,701
                      $100,119
                      -
                      -Cumulative
      Gap to Total Assets
                      24.9%
                      16.0%
                      12.9%
                      10.3%
                      10.3%
                      2.3%
                      -
                      -
                      -
 
 
 The Bank
continually evaluates interest rate risk management opportunities, including the
use of derivative financial instruments. Management believes that hedging
instruments currently available are not cost-effective, and therefore has
focused its efforts on increasing the Bank’s spread by attracting lower-cost
retail deposits.
  In
addition to utilizing the gap ratio for interest rate risk assessment,
management utilizes simulation analysis whereby the model estimates the variance
in net income with a change in interest rates of plus or minus 200 basis points
over 12 and 24 month periods.  Given recent simulations, net interest
income would be within policy guidelines regardless of the direction of market
rates.
  37
  Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk.
  Not
required.
  Item
8. Financial Statements and Supplementary Data.
  Reference
is made to Item 15(a)(1) and (2) on page F-1 for a list of financial
statements and supplementary data required to be filed pursuant to this Item
8.  The information required by this Item 8 is provided beginning on
page F-1 hereof.
 
 Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
  None.
 
 Item
9A.  Controls and Procedures.
  The
Company has established disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms and is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
 
 The
Company’s principal executive officer and principal financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this annual
report.  Based upon such evaluation, the Company’s principal executive
officer and principal financial officer have concluded that the Company’s
disclosure controls and procedures are effective as of the end of the period
covered by this annual report.
 
 The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended December 31, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
  Management’s
Report on Internal Control over Financial Reporting
  Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.
  The
Company’s internal control over financial reporting includes those policies and
procedures that:
  ·
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
 
 ·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that the receipts and expenditures of the
      Company are being made only in accordance with authorizations of its
      management and directors; and
 
 ·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on its financial
  statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness of internal control over financial reporting to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may
deteriorate.
  38
  A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. A significant
deficiency is a control deficiency, or a combination of control deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of the company’s financial reporting.
  The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. In making this
assessment, management used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”).  Based on their assessment using
those criteria, management concluded that, as of December 31, 2008, the
Company’s internal control over financial reporting was effective.
  Attestation
Report
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management's report in this annual
report.
  Item
9B.  Other Information.
  None.
  PART
III
  Item
10.  Directors, Executive Officers and Corporate
Governance.
  The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2009 Annual Meeting of Shareholders under the captions
“Directors and Executive Officers” and “Corporate Governance”.
  Item
11.  Executive Compensation.
  The
information required by this item is incorporated by reference to the Company’s
Proxy Statement for its 2009 Annual Meeting of Shareholders under the caption
“Executive Compensation.”
  39
  Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters.
  Equity
Compensation Plan Information
  The
following table provides information about the Company’s common stock that may
be issued upon the exercise of options, warrants and rights under all of the
Company’s equity compensation plans as of December 31, 2008.  The
information in the table has been adjusted for the 5% stock dividend declared
December 18, 2008 and paid February 2, 2009 to shareholders of record on January
20, 2009.
  Plan
      category
              
              Number
      of securities to
                be
      issued upon exercise
                of
      outstanding options,
                warrants
      and rights
                (a)
              
              Weighted-average
      exercise
                price
      of outstanding options,
                warrants
      and rights
                (b)
              
              Number
      of securities
                remaining
      available for
                future
      issuance under equity
                compensation
      plans
                (excluding
      securities
                reflected
      in column (a))
                (c)Equity
      compensation plans approved by security holders (1)
              
              
              96,781
              
              
              $
              12.76
              
              
              
              349,236Equity
      compensation plans not approved by security holders (2)
              
              
              67,260
              
              
              $
              5.83
              
              
              
              -Total
              
              
              164,041
              
              
              $
              9.92
              
              
              
              349,236
 
 (1)
            Includes
      the Company’s 1990 Employee Stock Option Plan for Key Employees, 1996
      Employee Stock Option Plan, 2000 Employee Stock Option and Restricted
      Stock Plan, 2005 Equity Incentive Plan and 2006 Directors Stock
      Plan.
              
              The
      1990 Employee Stock Option Plan for Key Employees was adopted by the Board
      of the Bank and approved by the shareholders of the Bank in March 1990.
      The 1996 Employee Stock Option Plan was adopted by the Board of the Bank
      and approved by shareholders of the Bank in March 1997. In 1999, as part
      of the formation of the Company as a holding company for the Bank, these
      plans were each amended so that no further grants may be made thereunder,
      and each option to purchase one share of Bank common stock was converted
      into an option to purchase one share of Company common stock.
                
                The
      Company’s 2000 Employee Stock Option and Restricted Stock Plan was adopted
      by the Board of the Company and approved by the shareholders in April
      2000, the Company’s 2005 Equity Incentive Plan was adopted by the Board of
      the Company on February 17, 2005 and approved by the shareholders in May
      2005 and the Company’s 2006 Directors Stock Plan was adopted by the Board
      of the Company on March 23, 2006 and approved by the shareholders in May
      2006.
  (2)
            Directors
      Stock Option and Restricted Stock Plan.
              
              The
      Company’s Directors Stock Option and Restricted Stock Plan was adopted by
      the Board, and became effective, on April 22, 1999, prior to the listing
      of the Company’s common stock on the Nasdaq National Market System. The
      plan provides for grants of non-qualified stock options and restricted
      stock awards to directors of the Company and its subsidiaries.
      Participants in the plan may be granted non-qualified stock options or
      restricted stock. All stock option grants have an exercise price per share
      of no less than the fair market value per share of common stock on the
      grant date and may have a term of no longer than 10 years after the grant
      date.
  The
additional information required by this item is incorporated by reference from
the Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders under
the caption “Stock Ownership of Management and Principal
Shareholders.”
  40
  Item
13.  Certain Relationships and Related Transactions, and Director
Independence.
  This
information required by this item is incorporated by reference from the
Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders under the
captions “Certain Transactions With Management” and “Director
Independence”.
  Item
14.  Principal Accounting Fees and Services.
  The
information regarding principal accounting fees and services and the Company’s
pre-approval policies and procedures for audit and non-audit services provided
by the Company’s independent accountants is incorporated by reference to the
Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders under the
caption “Principal Accounting Fees and Services.”
 
 PART
IV
  Item
15.  Exhibits, Financial Statement Schedules.
 
 (a)Financial
Statements and Financial Statement Schedules
 
 The
following documents are filed as part of this report:
 
 1.            
Financial Statements of 1st Constitution Bancorp.
 
 Consolidated
Balance Sheets – December 31, 2008 and 2007.
 
 Consolidated
Statements of Income – For the Years Ended December 31, 2008 and
2007.
 
 Consolidated
Statements of Changes in Shareholders’ Equity – For the Years Ended December 31,
2008 and 2007.
 
 Consolidated
Statements of Cash Flows – For the Years Ended December 31, 2008 and
2007.
 
 Notes to
Consolidated Financial Statements
 
 Reports
of Independent Registered Public Accounting Firm
 
 These
statements are incorporated by reference to the Company’s Annual Report to
Shareholders for the year ended December 31, 2008.
 
 2.            
All schedules are omitted because either they are inapplicable or not required,
or because the information required therein is included in the Consolidated
Financial Statements and Notes thereto.
 
 3.            
Exhibits
 
 Exhibit No.
                            
                            Description3
                            (i)(A)
                            *
                            Certificate
      of Incorporation of the Company (conformed copy)3
                            (i)(B)
                            
                            Certificate
      of Amendment to the Certificate of Incorporation increasing the number of
      shares designated as Series A Junior Participating Preferred Stock
      (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed
      with the SEC on December 23, 2008)3
                            (i)(C)
                            
                            Certificate
      of Amendment to the Certificate of Incorporation establishing the terms of
      the Fixed Rate Cumulative Perpetual Preferred Stock, Series B
      (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K
      filed with the SEC on December 23, 2008)3
                            (ii)(A)
                            
                            Bylaws
      of the Company (conformed copy) (incorporated by reference to Exhibit
      3(ii)(A) to the Company’s Form 8-K filed with the SEC on October 22,
      2007)3
                            (ii)(B)
                            
                            Amendment
      No. 2 to By-laws of the Company (incorporated by reference to Exhibit
      3(ii)(B) to the Company’s Form 8-K filed with the SEC on October 22,
      2007)4.1
                            
                            
                            Specimen
      Share of Common Stock (incorporated by reference to the Company’s Form
      10-KSB filed with the SEC on March 22, 2002)4.2
                            
                            
                            Amended
      and Restated Declaration of Trust of 1st Constitution Capital Trust I
      dated as of April 10, 2002 among the Registrant, as sponsor, Wilmington
      Trust Company, as Delaware and institutional trustee, and the
      Administrators named therein (incorporated by reference to the Company’s
      Form 10-QSB filed with the SEC on May 8, 2002)4.3
                            
                            
                            Indenture
      dated as of April 10, 2002 between the Registrant, as issuer, and
      Wilmington Trust Company, as trustee, relating to the Floating Rate Junior
      Subordinated Debt Securities due 2032 (incorporated by reference to the
      Company’s Form 10-QSB filed with the SEC on May 8,
  2002)
  41
  Exhibit No.
                          
                          Description4.4
                          
                          
                          Guarantee
      Agreement dated as of April 10, 2002 between the Registrant and the
      Wilmington Trust Company, as guarantee trustee (incorporated by reference
      to the Company’s Form 10-QSB filed with the SEC on May 8,
      2002)4.5
                          
                          
                          Rights
      Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp
      and Registrar and Transfer Company, as Rights Agent, including the form of
      Certificate of Amendment to the Company’s Certificate of Incorporation as
      Exhibit A thereto, the form of Rights Certificates as Exhibit B thereto,
      and the Summary of Rights as Exhibit C thereto. Pursuant to the Rights
      Agreement, printed Rights Certificates will not be mailed until after the
      Distribution Date (as such term is defined in the Rights Agreement)
      (incorporated by reference to the Company’s Form 8-A12G filed with the SEC
      on March 18, 2004)4.6
                          
                          
                          Warrant,
      dated December 23, 2008, to purchase shares of 1st Constitution Bancorp
      common stock (incorporated by reference to Exhibit 3.3 to the
      Company’s Form 8-K filed with the SEC on December 23,
  2008)10.1
                          
                          #
                          1st
      Constitution Bancorp Supplemental Executive Retirement Plan, dated as of
      October 1, 2002 (Incorporated by reference to the Company’s Form 10-QSB
      filed with the SEC on November 13, 2002)10.2
                          
                          #
                          Amended
      and Restated 1st Constitution Bancorp Directors’ Insurance Plan, effective
      as of June 16, 2005 (incorporated by reference to Exhibit No. 10 to the
      Company’s Form 8-K filed with the SEC on March 24,
2006)10.3
                          
                          #
                          1st
      Constitution Bancorp Form of Executive Life Insurance Agreement
      (Incorporated by reference to the Company’s Form 10-QSB filed with the SEC
      on November 13, 2002)10.4
                          
                          #
                          Amended
      and Restated 1990 Stock Option Plan for Key Employees, as amended
      (incorporated by reference to Exhibit No. 10.1 to the Company’s Form
      10-QSB filed with the SEC on August 9, 2002)10.5
                          
                          #
                          1996
      Employee Stock Option Plan, as amended (incorporated by reference to
      Exhibit No. 10.2 to the Company’s Form 10-QSB filed with the SEC on August
      9, 2002)10.6
                          
                          #
                          2000
      Employee Stock Option and Restricted Stock Plan (incorporated by reference
      to Exhibit No. 6.3 to the Company’s Form 10-SB filed with the SEC on June
      15, 2001)10.7
                          
                          #
                          Directors
      Stock Option and Restricted Stock Plan (incorporated by reference to
      Exhibit No. 6.4 to the Company’s Form 10-SB filed with the SEC on June 15,
      2001)10.8
                          
                          #
                          Employment
      Agreement between the Company and Robert F. Mangano dated April 22, 1999
      (incorporated by reference to Exhibit No. 6.5 to the Company’s Form 10-SB
      filed with the SEC on June 15, 2001)10.9
                          
                          #
                          Amendment
      No. 1 to 1st Constitution Bancorp Supplemental Executive Retirement Plan,
      effective January 1, 2004 (incorporated by reference to Exhibit 10.12 to
      the Company’s Form 10-Q filed with the SEC on August 11,
    2004)10.10
                          
                          #
                          Change
      of Control Agreement, effective as of April 1, 2004, by and between the
      Company and Joseph M. Reardon (incorporated by reference to Exhibit 10.13
      to the Company’s Form 10-Q filed with the SEC on August 11,
      2004)
  42
  Exhibit No.
                          
                          Description10.11
                          
                          #
                          Form
      of Stock Option Agreement under the 1st Constitution
      Bancorp  Employee Stock Option and Restricted Stock Plan
      (incorporated by reference to Exhibit 10.14 to the Company’s Form 8-K
      filed with the SEC on December 22, 2004)10.12
                          
                          #
                          Form
      of Restricted Stock Agreement under the 1st Constitution
      Bancorp  Employee Stock Option and Restricted Stock Plan
      (incorporated by reference to Exhibit 10.15 to the Company’s Form 8-K
      filed with the SEC on December 22, 2004)10.13
                          
                          #
                          Employment
      Agreement between the Company and Robert F. Mangano dated February 22,
      2005 (incorporated by reference to Exhibit No. 10.16 to the Company’s Form
      8-K filed with the SEC on February 24, 2005)10.14
                          
                          #
                          The
      1st Constitution Bancorp 2005 Equity Incentive Plan (incorporated by
      reference to Appendix A of the Company's proxy statement filed on April
      15, 2005)10.15
                          
                          #
                          Form
      of Restricted Stock Agreement under the 1st Constitution Bancorp 2005
      Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the
      Company’s Form 10-Q filed with the SEC on August 8,
  2005)10.16
                          
                          #
                          Form
      of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp
      2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to
      the Company’s Form 10-Q filed with the SEC on August 8,
    2005)10.17
                          
                          #
                          Form
      of Incentive Stock Option Agreement under the 1st Constitution Bancorp
      2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to
      the Company’s Form 10-Q filed with the SEC on August 8,
    2005)10.18
                          
                          #
                          1st
      Constitution Bancorp 2006 Directors Stock Plan (incorporated by reference
      to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on May 19,
      2006)10.19
                          
                          #
                          Form
      of Nonqualified Stock Option Agreement under the 1st Constitution Bancorp
      2006 Directors Stock Plan (incorporated by reference to Exhibit 10.2 to
      the Company’s Form 8-K filed with the SEC on May 19,
  2006)10.20
                          
                          #
                          Form
      of Restricted Stock Agreement under the 1st Constitution Bancorp 2006
      Directors Stock Plan (incorporated by reference to Exhibit 10.3 to the
      Company’s Form 8-K filed with the SEC on May 19, 2006)10.21
                          
                          
                          Amended
      and Restated Declaration of Trust of 1st Constitution Capital Trust II,
      dated as of June 15, 2006, among 1st Constitution Bancorp, as sponsor, the
      Delaware and institutional trustee named therein, and the administrators
      named therein (incorporated by reference to Exhibit 10.1 to the Company’s
      Form 8-K filed with the SEC on June 16, 2006)10.22
                          
                          
                          Indenture,
      dated as of June 15, 2006, between 1st Constitution Bancorp, as issuer,
      and the trustee named therein, relating to the Floating Rate Junior
      Subordinated Debt Securities due 2036 (incorporated by reference to
      Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on June 16,
      2006)10.23
                          
                          
                          Guarantee
      Agreement, dated as of June 15, 2006, between 1st Constitution Bancorp and
      the guarantee trustee named therein (incorporated by reference to Exhibit
      10.3 to the Company’s Form 8-K filed with the SEC on June 16,
      2006)
  43
  Exhibit No.
                          Description10.24
                          
                          #
                          Amendment
      No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement
      Plan, effective as of December 31, 2004 (incorporated by reference to
      Exhibit 10.24 to the Company’s Form 10-K filed with the SEC on April 15,
      2008)10.25
                          
                          #
                          1st
      Constitution Bancorp 2005 Supplemental Executive Retirement Plan,
      effective as of January 1, 2005 (incorporated by reference to Exhibit 10.1
      to the Company’s Form 8-K filed with the SEC on December 28,
      2006)10.26
                          
                          
                          Branch
      Purchase and Assumption Agreement, dated as of November 6, 2006, by and
      between 1st Constitution Bank and Sun National Bank (incorporated by
      reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on
      November 13, 2006)10.27
                          
                          
                          Letter
      Agreement, dated December 23, 2008, including Securities Purchase
      Agreement – Standard Terms incorporated by reference therein, between 1st
      Constitution Bancorp and the U.S. Department of the Treasury (incorporated
      by reference to Exhibit 10 to the Company’s Form S-3 filed with the SEC on
      January 29, 2009)10.28
                          
                          #
                          Form
      of Waiver, executed by each of Messrs. Robert Mangano and Joseph M.
      Reardon (incorporated by reference to Exhibit 10.2 to the Company’s
      Form 8-K filed with the SEC on December 23, 2008)10.29
                          
                          #
                          Form
      of Senior Executive Officer Agreement, executed by each of Messrs. Robert
      Mangano and Joseph M. Reardon (incorporated by reference to Exhibit
      10.3 to the Company’s Form 8-K filed with the SEC on December 23,
      2008)14
                          
                          
                          Code
      of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to
      the Company’s Form 10-K filed with the SEC on March 25,
    2004)16
                          
                          
                          Letter
      from Grant Thornton LLP to the SEC dated April 23, 2008 (incorporated by
      reference to Exhibit 16.1 to the Company’s Form 8-K filed with the
      SEC on April 23, 2008)21
                          
                          
                          Subsidiaries
      of the Company (incorporated by reference to Exhibit 21 to the Company’s
      Form 10-K filed with the SEC on April 15, 2008)23.1
                          
                          *
                          Consent
      of Independent Registered Public Accounting Firm23.2
                          
                          *
                          Consent
      of Independent Registered Public Accounting Firm31.1
                          
                          *
                          Certification
      of the principal executive officer of the Company, pursuant to Securities
      Exchange Act Rule 13a-14(a)31.2
                          
                          *
                          Certification
      of the principal financial officer of the Company, pursuant to Securities
      Exchange Act Rule 13a-14(a)32
                          
                          *
                          Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      The Sarbanes-Oxley Act of 2002, signed by the principal executive officer
      and the principal financial officer of the
  Company
 ___________________________
 *      Filed
herewith.
 #      Management
contract or compensatory plan or arrangement.
 
 (b)           Exhibits.
 
 Exhibits
required by Section 601 of Regulation S-K (see (a) above)
 
 (c)           Financial Statement
Schedules
 
 See the
notes to the Consolidated Financial Statements included in this
report.
  44
  1st
CONSTITUTION BANCORP
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
    PageReport
      of Independent Registered Public Accounting
      Firm
              F-2Report
      of Independent Registered Public Accounting
      Firm
              F-3Consolidated
      Balance Sheets – December 31, 2008 and
      2007
              F-4Consolidated
      Statements of Income – For the Years Ended December 31, 2008 and
      2007
              F-5Consolidated
      Statements of Changes in Shareholders’ Equity - For the Years
                Ended
      December 31, 2008 and 2007
              F-6Consolidated
      Statements of Cash Flows - For the Years Ended December 31, 2008 and
      2007
              F-7Notes
      to Consolidated Financial
      Statements
              F-8
  F-1
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 
 Board of
Directors and Shareholders
 1st
Constitution Bancorp:
 
 
 We have
audited the accompanying consolidated balance sheet of 1st Constitution Bancorp
(the “Company”) and subsidiaries as of December 31, 2008, and the related
consolidated statements of income, changes in shareholders’ equity and cash
flows for the year then ended.  The Company’s management is
responsible for these consolidated financial statements.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of the
Company as of December 31, 2007, and for the year then ended, were audited by
other auditors whose report, dated April 14, 2008, expressed an unqualified
opinion on those consolidated statements.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of 1st Constitution Bancorp and
subsidiaries as of December 31, 2008, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
    /s/ Beard
      Miller Company LLP
  Beard Miller Company
LLP
 Clark,
New Jersey
 March 17,
2009
  F-2
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 
 
 
 Board of
Directors and Shareholders
 1st
Constitution Bancorp:
 
 
 We have
audited the accompanying consolidated balance sheets of 1st Constitution Bancorp
(a New Jersey Corporation) and subsidiaries as of December 31, 2007, and the
related consolidated statements of income, changes in shareholders’ equity and
cash flows for the year then ended.  These financial statements are
the responsibility of the Company’s management.  Our responsibility is
to express an opinion on these financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of 1st Constitution
Bancorp and subsidiaries as of December 31, 2007, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of
America.
 
 
 
 /s/ GRANT
THORNTON LLP
  GRANT THORNTON
LLP
 Philadelphia,
Pennsylvania
 April 14,
2008
  F-3
  1st
CONSTITUTION BANCORP
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2008 and 2007
 2008
                  
                  
                  2007ASSETSCASH AND
      DUE FROM BANKS
                  
                  $
                  14,321,777
                  
                  
                  $
                  7,517,158FEDERAL
      FUNDS SOLD / SHORT TERM INVESTMENTS
                  
                  
                  11,342
                  
                  
                  
                  30,944Total
      cash and cash equivalents
                  
                  
                  14,333,119
                  
                  
                  
                  7,548,102INVESTMENT
      SECURITIESAvailable
      for sale, at fair value
                  
                  
                  93,477,023
                  
                  
                  
                  75,192,137Held
      to maturity (fair value of $36,140,379 and $23,411,269
                    in
      2008 and 2007, respectively)
                  
                  
                  36,550,577
                  
                  
                  
                  23,512,346Total
      securities
                  
                  
                  130,027,600
                  
                  
                  
                  98,704,483LOANS
      HELD FOR SALE
                  
                  
                  5,702,082
                  
                  
                  
                  10,322,005LOANS
                  
                  
                  377,348,416
                  
                  
                  
                  294,760,718Less-
      Allowance for loan losses
                  
                  
                  (3,684,764
                  )
                  
                  
                  (3,348,080
                  )Net
      loans
                  
                  
                  373,663,652
                  
                  
                  
                  291,412,638PREMISES
      AND EQUIPMENT, net
                  
                  
                  2,302,489
                  
                  
                  
                  2,760,203ACCRUED
      INTEREST RECEIVABLE
                  
                  
                  2,192,601
                  
                  
                  
                  2,495,732BANK-OWNED
      LIFE INSURANCE
                  
                  
                  9,929,204
                  
                  
                  
                  9,545,009OTHER
      REAL ESTATE OWNED
                  
                  
                  4,296,536
                  
                  
                  
                  2,960,727OTHER
      ASSETS
                  
                  
                  3,839,246
                  
                  
                  
                  3,402,640Total
      assets
                  
                  $
                  546,286,529
                  
                  
                  $
                  429,151,539LIABILITIESANDSHAREHOLDERS’
      EQUITYLIABILITIES:DepositsNon-interest
      bearing
                  
                  $
                  71,772,486
                  
                  
                  $
                  59,055,803Interest bearing
                  
                  
                  342,912,245
                  
                  
                  
                  270,276,565Total
      deposits
                  
                  
                  414,684,731
                  
                  
                  
                  329,332,368BORROWINGS
                  
                  
                  51,500,000
                  
                  
                  
                  35,600,000REDEEMABLE
      SUBORDINATED DEBENTURES
                  
                  
                  18,557,000
                  
                  
                  
                  18,557,000ACCRUED
      INTEREST PAYABLE
                  
                  
                  1,984,102
                  
                  
                  
                  1,992,187ACCRUED
      EXPENSES AND OTHER LIABILITIES
                  
                  
                  3,941,044
                  
                  
                  
                  2,696,667Total
      liabilities
                  
                  
                  490,666,877
                  
                  
                  
                  388,178,222COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS’
      EQUITYPreferred
      Stock, no par value; 5,000,000 shares authorized, of which 12,000 and
      0 shares of
                    Series
      B, $1,000 liquidation preference, 5% cumulative increasing to 9%
      cumulative on
                    February
      15, 2014, were issued  and outstanding as of December 31, 2008 and
      2007, respectively
                  
                  
                  11,387,828
                  
                  
                  
                  -Common
      stock, no par value; 30,000,000 shares authorized; 4,204,202 and
      3,993,905 shares
                    issued 
      and 4,198,871 and 3,992,715  shares outstanding as of December
      31, 2008 and 2007, respectively
                  
                  
                  35,180,433
                  
                  
                  
                  32,514,936Retained
      earnings
                  
                  
                  9,653,923
                  
                  
                  
                  9,009,955Treasury
      Stock, at cost, 5,331 shares and 1,190 shares
                    at
      December 31, 2008 and 2007, respectively
                  
                  
                  (53,331
                  )
                  
                  
                  (18,388
                  )Accumulated
      other comprehensive loss
                  
                  
                  (549,201
                  )
                  
                  
                  (533,186
                  )Total
      shareholders’ equity
                  
                  
                  55,619,652
                  
                  
                  
                  40,973,317Total
      liabilities and shareholders’ equity
                  
                  $
                  546,286,529
                  
                  
                  $
                  429,151,539
 The
accompanying notes are an integral part of these financial
statements
  F-4
  1st
CONSTITUTION BANCORP
 CONSOLIDATED
STATEMENTS OF INCOME
 For
the Years Ended December 31, 2008 and 2007
  2008
                      
                      
                      2007INTEREST
      INCOME:Loans,
      including fees
                      
                      $
                      24,288,658
                      
                      
                      $
                      25,113,488Securities:Taxable
                      
                      
                      4,158,923
                      
                      
                      
                      4,278,288Tax-exempt
                      
                      
                      560,303
                      
                      
                      
                      875,697Federal
      funds sold andshort-term
      investments
                      
                      
                      112,427
                      
                      
                      
                      101,171Total
      interest income
                      
                      
                      29,120,311
                      
                      
                      
                      30,368,644INTEREST
      EXPENSE:Deposits
                      
                      
                      10,106,856
                      
                      
                      
                      9,636,856Borrowings
                      
                      
                      1,556,240
                      
                      
                      
                      1,514,907Redeemable
      subordinated debentures
                      
                      
                      1,069,351
                      
                      
                      
                      1,438,876Total
      interest expense
                      
                      
                      12,732,447
                      
                      
                      
                      12,590,639Net
      interest income
                      
                      
                      16,387,864
                      
                      
                      
                      17,778,005PROVISION
      FOR LOAN LOSSES
                      
                      
                      640,000
                      
                      
                      
                      130,000Net
      interest income after provisionfor
      loan losses
                      
                      
                      15,747,864
                      
                      
                      
                      17,648,005NON-INTEREST
      INCOME:Service
      charges on deposit accounts
                      
                      
                      883,882
                      
                      
                      
                      673,826Gain
      on sales of loans
                      
                      
                      1,040,916
                      
                      
                      
                      761,004Income
      on Bank-owned life insurance
                      
                      
                      378,852
                      
                      
                      
                      365,601Other
      income
                      
                      
                      998,309
                      
                      
                      
                      757,898Total
      other income
                      
                      
                      3,301,959
                      
                      
                      
                      2,558,329NON-INTEREST
      EXPENSES:Salaries
      and employee benefits
                      
                      
                      8,426,729
                      
                      
                      
                      7,196,552Occupancy
      expense
                      
                      
                      1,802,723
                      
                      
                      
                      1,658,820Data
      processing expenses
                      
                      
                      896,724
                      
                      
                      
                      829,037Other
      operating expenses
                      
                      
                      3,924,848
                      
                      
                      
                      2,416,859Total
      other expenses
                      
                      
                      15,051,024
                      
                      
                      
                      12,101,268Income
      before income taxes
                      
                      
                      3,998,799
                      
                      
                      
                      8,105,066INCOME
      TAXES
                      
                      
                      1,239,341
                      
                      
                      
                      2,662,284Net
      income
                      
                      $
                      2,759,458
                      
                      
                      $
                      5,442,782NET
      INCOME PER SHAREBasic
                      
                      $
                      0.66
                      
                      
                      $
                      1.31Diluted
                      
                      $
                      0.65
                      
                      
                      $
                      1.29WEIGHTED
      AVERAGE SHARESOUTSTANDINGBasic
                      
                      
                      4,192,731
                      
                      
                      
                      4,168,440Diluted
                      
                      
                      4,215,003
                      
                      
                      
                      4,226,700
 The
accompanying notes are an integral part of these financial
statements
  F-5
  1st
CONSTITUTION BANCORP
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 For
the Years Ended December 31, 2008 and 2007
 
 AccumulatedOther
                                                              
                                                              
                                                              TotalPreferred
                                                              
                                                              
                                                              Common
                                                              
                                                              
                                                              Retained
                                                              
                                                              
                                                              Treasury
                                                              
                                                              
                                                              Comprehensive
                                                              
                                                              
                                                              Shareholders'Stock
                                                              
                                                              
                                                              Stock
                                                              
                                                              
                                                              Earnings
                                                              
                                                              
                                                              Stock
                                                              
                                                              
                                                              Loss
                                                              
                                                              
                                                              EquityBALANCE,
      January 1, 2007
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              28,886,105
                                                              
                                                              
                                                              $
                                                              7,010,211
                                                              
                                                              
                                                              $
                                                              (3,545
                                                              )
                                                              
                                                              $
                                                              (945,726
                                                              )
                                                              
                                                              $
                                                              34,947,045Exercise
      of stock options, net and issuance of vestedshares
      under employee benefit programs
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              78,773
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              232,060
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              310,833FAS
      123R share-based compensation
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              107,020
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              107,020Treasury
      Stock purchased (13,548 shares)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (246,903
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (246,903
                                                              )6%
      stock dividend declared December 2007
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              3,443,038
                                                              
                                                              
                                                              
                                                              (3,443,038
                                                              )Comprehensive
      Income:Net
      Income  - 2007
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              5,442,782
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              5,442,782Pension
      liabilitynet
      of tax benefit of $24,758
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (37,231
                                                              )
                                                              
                                                              
                                                              (37,231
                                                              )Unrealized
      loss on interest rate swap contractnet
      of tax benefit of $39,842
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (59,912
                                                              )
                                                              
                                                              
                                                              (59,912
                                                              )Unrealized
      gain on securities available for salenet
      of tax of $240,247
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              509,683
                                                              
                                                              
                                                              
                                                              509,683Comprehensive
      Income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              5,855,322BALANCE,
      December 31, 2007
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              32,514,936
                                                              
                                                              
                                                              
                                                              9,009,955
                                                              
                                                              
                                                              
                                                              (18,388
                                                              )
                                                              
                                                              
                                                              (533,186
                                                              )
                                                              
                                                              
                                                              40,973,317Adjustment
      to initially apply EITF 06-4
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (329,706
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (329,706
                                                              )Proceeds
      from issuance of preferred
                                                                stock
      and warrants, net
                                                              
                                                              
                                                              11,387,828
                                                              
                                                              
                                                              
                                                              562,172
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              11,950,000Exercise
      of stock options, net and issuance of vestedshares
      under employee benefit programs
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              195,325
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              35,584
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              230,909FAS
      123R share-based compensation
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              122,216
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              122,216Treasury
      Stock purchased (6,111 shares)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (70,527
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (70,527
                                                              )5%
      stock dividend declared December 2008
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              1,785,784
                                                              
                                                              
                                                              
                                                              (1,785,784
                                                              )
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              -Comprehensive
      Income:Net
      Income  - 2008
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              2,759,458
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              2,759,458Pension
      liabilitynet
      of tax of $23,267
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              33,637
                                                              
                                                              
                                                              
                                                              33,637Unrealized
      loss on interest rate swap contractnet
      of tax benefit of $423,906
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (635,496
                                                              )
                                                              
                                                              
                                                              (635,496
                                                              )Unrealized
      gain on securities available for salenet
      of tax of $309,759
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              585,844
                                                              
                                                              
                                                              
                                                              585,844Comprehensive
      Income
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              2,743,443BALANCE,
      December 31, 2008
                                                              
                                                              $
                                                              11,387,828
                                                              
                                                              
                                                              $
                                                              35,180,433
                                                              
                                                              
                                                              $
                                                              9,653,923
                                                              
                                                              
                                                              $
                                                              (53,331
                                                              )
                                                              
                                                              $
                                                              (549,201
                                                              )
                                                              
                                                              $
                                                              55,619,652
 
 The
accompanying notes are an integral part of these financial
statements
  F-6
  1st
CONSTITUTION BANCORP
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Years Ended December 31, 2008 and 2007
 
 2008
                                  
                                  
                                  2007OPERATING
      ACTIVITIES:Net
      income
                                  
                                  $
                                  2,759,458
                                  
                                  
                                  $
                                  5,442,782Adjustments
      to reconcile net incometo
      net cash provided by operating activities-Provision
      for loan losses
                                  
                                  
                                  640,000
                                  
                                  
                                  
                                  130,000Depreciation
      and amortization
                                  
                                  
                                  698,807
                                  
                                  
                                  
                                  747,647Net
      amortization of premiums on securities
                                  
                                  
                                  87,594
                                  
                                  
                                  
                                  14,188Gains
      on sales of loans held for sale
                                  
                                  
                                  (1,040,916
                                  )
                                  
                                  
                                  (761,004
                                  )Originations
      of loans held for sale
                                  
                                  
                                  (81,465,974
                                  )
                                  
                                  
                                  (67,164,044
                                  )Proceeds
      from sales of loans held for sale
                                  
                                  
                                  87,126,813
                                  
                                  
                                  
                                  71,211,985Gain
      on sale of equipment
                                  
                                  
                                  (17,301
                                  )
                                  
                                  
                                  -Gain
      on sales of other real estate owned
                                  
                                  
                                  (14,961
                                  )
                                  
                                  
                                  -Income
      on Bank-owned life insurance
                                  
                                  
                                  (378,852
                                  )
                                  
                                  
                                  (365,601
                                  )Share-based
      compensation expense
                                  
                                  
                                  334,316
                                  
                                  
                                  
                                  354,366Deferred
      tax benefit
                                  
                                  
                                  (364,651
                                  )
                                  
                                  
                                  (204,967
                                  )(Increase)
      decrease in accrued interest receivable
                                  
                                  
                                  303,131
                                  
                                  
                                  
                                  (260,061
                                  )(Increase) decrease
      in other assets
                                  
                                  
                                  (23,130
                                  )
                                  
                                  
                                  211,689Increase
      (decrease) in accrued interest payable
                                  
                                  
                                  (8,085
                                  )
                                  
                                  
                                  34,613(Decrease)
      in accrued expenses and other liabilities
                                  
                                  
                                  (299,927
                                  )
                                  
                                  
                                  (2,331
                                  )Net
      cash provided by operating activities
                                  
                                  
                                  8,336,322
                                  
                                  
                                  
                                  9,389,262INVESTING
      ACTIVITIES:Purchases
      of securities -Available
      for sale
                                  
                                  
                                  (43,765,333
                                  )
                                  
                                  
                                  (16,707,027
                                  )Held
      to maturity
                                  
                                  
                                  (21,443,565
                                  )
                                  
                                  
                                  (7,677,917
                                  )Proceeds
      from maturities and repaymentsof
      securities -Available
      for sale
                                  
                                  
                                  26,324,998
                                  
                                  
                                  
                                  12,704,423Held
      to maturity
                                  
                                  
                                  8,368,792
                                  
                                  
                                  
                                  3,387,585Net
      Increase in loans
                                  
                                  
                                  (84,280,195
                                  )
                                  
                                  
                                  (32,589,412
                                  )Proceeds
      from sale of equipment
                                  
                                  
                                  32,049
                                  
                                  
                                  
                                  -Capital
      expenditures
                                  
                                  
                                  (219,129
                                  )
                                  
                                  
                                  (446,698
                                  )Additional
      investment in other real estate owned
                                  
                                  
                                  (2,104,284
                                  )
                                  
                                  
                                  -Proceeds
      from sales of other real estate owned
                                  
                                  
                                  2,172,617
                                  
                                  
                                  
                                  -Cash
      consideration paid to acquire branch
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (747,330
                                  )Cash
      and cash equivalents acquired from branch
                                  
                                  
                                  -
                                  
                                  
                                  
                                  19,514,239Net
      cash used in investing activities
                                  
                                  
                                  (114,914,050
                                  )
                                  
                                  
                                  (22,562,137
                                  )FINANCING
      ACTIVITIES:Stock
      compensation tax benefit
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (43,472
                                  )Exercise
      of stock options and issuance of Treasury Stock
                                  
                                  
                                  230,909
                                  
                                  
                                  
                                  310,833Purchase
      of Treasury Stock
                                  
                                  
                                  (70,527
                                  )
                                  
                                  
                                  (246,903
                                  )Net
      increase (decrease) in demand, savings and time deposits
                                  
                                  
                                  85,352,363
                                  
                                  
                                  
                                  (2,906,293
                                  )Net
      increase in short-term borrowings
                                  
                                  
                                  15,900,000
                                  
                                  
                                  
                                  18,400,000Proceeds
      from issuance of preferred stock
                                  
                                  
                                  11,950,000
                                  
                                  
                                  
                                  -Repayment
      of redeemable subordinated debentures
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (5,155,000
                                  )Net
      cash provided by financing activities
                                  
                                  
                                  113,362,745
                                  
                                  
                                  
                                  10,359,165Increase
      (decrease) in cash and cash equivalents
                                  
                                  
                                  6,785,017
                                  
                                  
                                  
                                  (2,813,710
                                  )CASH AND CASH
      EQUIVALENTSAT
      BEGINNING OF YEAR
                                  
                                  
                                  7,548,102
                                  
                                  
                                  
                                  10,361,812CASH AND CASH
      EQUIVALENTSAT
      END OF YEAR
                                  
                                  $
                                  14,333,119
                                  
                                  
                                  $
                                  7,548,102SUPPLEMENTAL
      DISCLOSURESOF
      CASH FLOW INFORMATION:Cash
      paid during the year for -Interest
                                  
                                  $
                                  12,740,532
                                  
                                  
                                  $
                                  12,052,481Income
      taxes
                                  
                                  
                                  2,380,200
                                  
                                  
                                  
                                  2,421,600Non-cash
      investing activitiesReal
      estate acquired in full satisfaction of loansin
      foreclosure
                                  
                                  $
                                  1,389,181
                                  
                                  
                                  $
                                  2,960,727
 
 The
accompanying notes are an integral part of these financial
statements
  F-7
  1st
CONSTITUTION BANCORP
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2008 and 2007
 
 1.           Summary
of Significant Accounting Policies
 
 1st
Constitution Bancorp (the “Company”) is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended, and was organized under the
laws of the State of New Jersey.  The Company is parent to 1st
Constitution Bank (the “Bank”), a state chartered commercial
bank.  The Bank provides community banking services to a broad range
of customers, including corporations, individuals, partnerships and other
community organizations in the central New Jersey area.  The Bank
conducts its operations through its main office located in Cranbury, New Jersey,
and operates ten additional branch offices in downtown Cranbury, Fort Lee,
Hamilton Square, Hightstown, Jamesburg, Montgomery, Perth Amboy, Plainsboro,
West Windsor, and Princeton, New Jersey.
 
 Basis
of Presentation
 
 The
accounting and reporting policies of the Company conform to accounting
principals generally accepted in the United States of America and to the
accepted practices within the banking industry.  The following is a
description of the more significant of these policies and
practices.
  Principles
of Consolidation
  The
accompanying consolidated financial statements include the Company and its
wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, 1st
Constitution Investment Company of Delaware, Inc., FCB Assets Holdings, Inc. and
1st Constitution Title Agency, LLC.  1st Constitution Capital Trust
II, a subsidiary of the Company (“Trust II”), and 1st Constitution Capital Trust
I, which was a subsidiary of the Company until April 2007 (“Trust I”), are not
included in the Company’s consolidated financial statements as they are variable
interest entities and the Company is not the primary beneficiary.  All
significant intercompany accounts and transactions have been eliminated in
consolidation and certain prior period amounts have been reclassified to conform
to current year presentation. The accounting and reporting policies of the
Company and its subsidiaries conform with accounting principles generally
accepted in the United States and general practices within the financial
services industry.
 
 Use
of Estimates in the Preparation of Financial Statements
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 Concentration
of Credit Risk
 
 Financial
instruments which potentially subject the Company and its subsidiaries to
concentrations of credit risk primarily consist of investment securities and
loans.  At December 31, 2008, over 82% of our investment securities
consisted of U.S. Government and Agency issues, mortgage-backed securities and
municipal bonds.  In addition, another 8% of our portfolio consisted
of highly rated collateralized mortgage obligations.  The remaining 8%
of our investment securities consisted primarily of corporate debt issues and
restricted stock of the Federal Home Loan Bank of New York.  The
Bank’s lending activity is primarily concentrated in loans collateralized by
real estate located in the State of New Jersey.  As a result, credit
risk is broadly dependent on the real estate market and general economic
conditions in that state.
 
 Interest
Rate Risk
 
 The Bank
is principally engaged in the business of attracting deposits from the general
public and using these deposits, together with other funds, to purchase
securities and to make loans secured by real estate.  The potential
for interest-rate risk exists as a result of the generally shorter duration of
interest-sensitive assets compared to the generally longer duration of
interest-sensitive liabilities.  In a volatile rate environment,
assets will re-price faster than liabilities, thereby affecting net interest
income.  For this reason, management regularly monitors the maturity
structure of the Bank’s assets and liabilities in order to measure its level of
interest-rate risk and to plan for future volatility.
  F-8
  Investment
Securities
 
 Investment
Securities which the Company has the intent and ability to hold until maturity
are classified as held to maturity and are recorded at cost, adjusted for
amortization of premiums and accretion of discounts using the interest
method.
 
 Investment
Securities which are held for indefinite periods of time, which management
intends to use as part of its asset/liability management strategy, or that may
be sold in response to changes in interest rates, changes in prepayment risk,
increased capital requirements or other similar factors, are classified as
available for sale and are carried at estimated market value, except for
restricted stock of the Federal Home Loan Bank of New York and Atlantic Central
Banker Bank, which are carried at cost.  Unrealized gains and losses
on such securities are recorded as a separate component of shareholders’
equity.  Realized gains and losses, which are computed using the
specific identification method, are recognized on a trade date
basis.
 
 Individual
securities are considered impaired when fair value is less than amortized
cost.  Management evaluates on a quarterly basis whether any
securities are other-than-temporarily impaired.  In making this
determination, we consider the extent and duration for the impairment, the
nature and financial health of the issuer, other factors relevant to specific
securities, and our ability and intent to hold securities for a period of time
sufficient to allow for any anticipated recovery in market value.  If
a security is determined to be other-than-temporarily impaired, an impairment
loss is charged to operations. At December 31, 2008 and 2007, the Company had no
unrecognized losses as a result of impairment of investment securities that were
considered other-than-temporary.
 
 Federal
law requires a member institution of the Federal Home Loan Bank system to hold
restricted stock of its district Federal Home Loan Bank according to a
predetermined formula.  The Bank’s investment in the restricted stock
of the Federal Home Loan Bank of New York, while included in investment
securities available for sale, is carried at cost.
  Management evaluates the FHLB
restricted stock for impairment in accordance with Statement of Position (SOP)
01-6, Accounting by Certain
Entities (Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others.  Management’s determination of whether
these investments are impaired is based on their assessment of the ultimate
recoverability of their cost rather than by recognizing temporary declines in
value.  The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as (1) the
significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and
the level of such payments in relation to the operating performance of the FHLB,
and (3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB. Management believes no impairment
charge is necessary related to the FHLB stock as of December 31,
2008.
 
 Bank-Owned
Life Insurance
 
 The
Company invests in bank-owned life insurance (BOLI).  BOLI involves
the purchasing of life insurance by the Company on a chosen group of
employees.  The Company is the owner and beneficiary of the
policies.  This pool of insurance, due to the advantages of the Bank,
is profitable to the Company.  This profitability is used to offset a
portion of future benefit cost increases.  The Bank’s deposits fund
BOLI and the earnings from BOLI are recognized as non-interest
income.
  F-9
 Loans
And Loans Held For Sale
 
 Loans
that management intends to hold to maturity are stated at the principal amount
outstanding, net of unearned income.  Unearned income is recognized
over the lives of the respective loans, principally using the effective interest
method.  Interest income is generally not accrued on loans, including
impaired loans, where interest or principal is 90 days or more past due, unless
the loans are adequately secured and in the process of collection, or on loans
where management has determined that the borrowers may be unable to meet
contractual principal and/or interest obligations.  When it is
probable that, based upon current information, the Bank will not collect all
amounts due under the contractual terms of the loan, the loan is reported as
impaired.  Smaller balance homogenous type loans, such as residential
loans and loans to individuals, which are collectively evaluated, are excluded
from consideration for impairment.  Loan impairment is measured based
upon the present value of the expected future cash flows discounted at the
loan’s effective interest rate or the underlying fair value of collateral for
collateral dependent loans.  When a loan, including an impaired loan,
is placed on non-accrual, interest accruals cease and uncollected accrued
interest is reversed and charged against current income.  Non-accrual
loans are generally not returned to accruing status until principal and interest
payments have been brought current and full collectibility is reasonably
assured.  Cash receipts on non-accrual and impaired loans are applied
to principal, unless the loan is deemed fully collectible.  Loans held
for sale are carried at the aggregate lower of cost or market
value.  Realized gains and losses on loans held for sale are
recognized at settlement date and are determined based on the cost, including
deferred net loan origination fees and the costs of the specific loans
sold.
 The Bank
accounts for its transfers and servicing of financial assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.”  The Bank originates mortgages under a definitive plan
to sell those loans with servicing generally released.
 
 Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower aggregate cost or estimated fair value.  Gains and losses on
sales are also accounted for in accordance with SFAS No. 134, “Accounting
for Mortgage Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise”.  This statement requires
that an entity engaged in mortgage banking activities classify the retained
mortgage-backed security or other interest, which resulted from the
securitizations of a mortgage loan held for sale, based upon its ability and
intent to sell or hold these investments.
 
 The Bank
enters into commitments to originate loans whereby the interest rate on the loan
is determined prior to funding (rate lock commitments).  Rate lock
commitments on mortgage loans that are intended to be sold are considered to be
derivatives.  Time elapsing between the issuance of a loan commitment
and closing and sale of the loan generally ranges from 30 to 120
days.  The Bank protects itself from changes in interest rates through
the use of best efforts forward delivery contracts, whereby the Bank commits to
sell a loan at the time the borrower commits to an interest rate with the intent
that the buyer has assumed interest rate risk on the loan.  As a
result, the Bank is not exposed to losses nor will it realize significant gains
related to its rate lock commitments due to changes in interest
rates.
 
 The
market value of rate lock commitments and best efforts contracts is not readily
ascertainable with precision because rate lock commitments and best efforts
contracts are not actively traded in stand-alone markets.  The Bank
determines the fair value of rate lock commitments and best efforts contracts by
measuring the change in the value of the underlying asset while taking into
consideration the probability that the rate lock commitments will
close.  Due to high correlation between rate lock commitments and best
efforts contracts, no gain or loss occurs on the rate lock
commitments.
 
 The Bank
adopted FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others” (“FIN 45”), on January 1, 2003.  FIN 45
requires a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the fair
value of the obligation undertaken in issuing the guarantee.
 
 Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the financial performance of a customer to a third party.  Those
guarantees are primarily issued to support contracts entered into by
customers.  Most guarantees extend for one year.  The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.  The Bank defines
the fair value of these letters of credit as the fees paid by the customer or
similar fees collected on similar instruments.  The Bank amortizes the
fees collected over the life of the instrument.  The Bank generally
obtains collateral, such as real estate or liens on customer assets for these
types of commitments.  The Bank’s potential liability would be reduced
by any proceeds obtained in liquidation of the collateral held.  The
Bank had standby letters of credit for customers aggregating $3,946,649 and
$5,546,723 at December 31, 2008 and 2007, respectively.  These letters
of credit are primarily related to our real estate lending and the approximate
value of underlying collateral upon liquidation is expected to be sufficient to
cover this maximum potential exposure at December 31, 2008.  The
current amount of the liability related to guarantees under standby letters of
credit issued was not material as of December 31, 2008 and 2007.
  F-10
  Allowance
for Loan Losses
 
 The
allowance for loan losses is a valuation reserve available for losses or
expected losses on extensions of credit.  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 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.
 
 The
methodology includes the segregation of the loan portfolio into loan types with
a further segregation into risk rating categories, such as special mention,
substandard, doubtful, and loss. This allows for an allocation of the allowance
for loan losses by loan type; however, the allowance is available to absorb any
loan loss without restriction.  Larger balance, non-homogeneous loans
representing significant individual credit exposures are evaluated individually
through the internal loan review process.  It is this process that
produces the watch list. The borrower’s overall financial condition, repayment
sources, guarantors and value of collateral, if appropriate, are
evaluated.  Based on these reviews, an estimate of probable losses for
the individual larger-balance loans are determined, whenever possible, and used
to establish loan loss reserves.  In general, for non-homogeneous
loans not individually assessed, and for homogeneous groups, such as residential
mortgages and consumer credits, the loans are collectively evaluated based on
delinquency status, loan type, and industry historical losses. These loan groups
are then internally risk rated.
 
 The watch
list includes loans that are assigned a rating of special mention, substandard,
doubtful and loss.  Loans criticized special mention have potential
weaknesses that deserve management’s close attention.  If uncorrected,
the potential weaknesses may result in deterioration of the repayment
prospects.  Loans classified substandard have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt.  They
include loans that are inadequately protected by the current sound net worth and
paying capacity of the obligor or of the collateral pledged, if
any.  Loans classified doubtful have all the weaknesses inherent in
loans classified substandard with the added characteristic that collection or
liquidation in full, on the basis of current conditions and facts, is highly
improbable.  Loans rated as doubtful in whole, or in part, are placed
in nonaccrual status.  Loans classified as a loss are considered
uncollectible and are charged to the allowance for loan losses.
 
 The
Company also maintains an unallocated allowance.  The unallocated
allowance is used to cover any factors or conditions which may cause a potential
loan loss but are not specifically identifiable.  It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed, these estimates by definition
lack precision.  Management must make estimates using assumptions and
information that is often subjective and changing rapidly.
 
 Loans are
placed in a nonaccrual status when the ultimate collectibility of principal or
interest in whole, or part, is in doubt.  Past-due loans contractually
past-due 90 days or more for either principal or interest are also placed in
nonaccrual status unless they are both well secured and in the process of
collection.  Impaired loans, in accordance with SFAS 114, are
evaluated individually.
 
 All, or
part, of the principal balance of commercial and commercial real estate loans,
and construction loans are charged off to the allowance as soon as it is
determined that the repayment of all, or part, of the principal balance is
highly unlikely.  Consumer loans are generally charged off no later
than 120 days past due on a contractual basis, earlier in the event of
bankruptcy, or if there is an amount deemed uncollectible.
 
 Premises
and Equipment
 
 Premises
and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation is computed primarily on the straight-line
method over the estimated useful lives of the related assets for financial
reporting purposes and using the mandated methods by asset type for income tax
purposes.  Building, furniture and fixtures, equipment and leasehold
improvements are depreciated or amortized over the estimated useful lives of the
assets or lease terms, as applicable.  Estimated useful lives of
building is forty years, furniture and fixtures and equipment are three to
fifteen years, and three to ten years for leasehold
improvements.  Expenditures for maintenance and repairs are charged to
expense as incurred.
  F-11
  The Bank
accounts for impairment of long lived assets in accordance with SFAS No. 144,
“Accounting for the Impairment of Disposal of Long-Lived Assets”.  The
standard requires recognition and measurement for the impairment of long lived
assets to be held and used or to be disposed of by sale.  The Bank had
no impaired long lived assets at December 31, 2008 and 2007.
 
 Derivative
Contracts
 
 Derivative
contracts are carried at fair value with unrealized gains and losses excluded
from earnings and reported in a separate component of stockholders’ equity, net
of related income tax effects.  Gains and losses on derivative
contracts are recognized upon realization utilizing the specific identification
method.
 
 The
Company follows SFAS No. 133, which was amended by SFAS No. 138, “Accounting for
Certain Derivative Instruments and Certain Hedging Activities”, SFAS No. 149,
“Amendment of Statement on Derivative Instruments and Hedging Activities”, and
SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity”, (collectively SFAS No. 133).  SFAS
No. 133, as amended, requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value.
 
 Income
Taxes
 There are
two components of income tax expense: current and deferred.  Current
income tax expense approximates cash to be paid or refunded for taxes for the
applicable period.  Deferred tax assets and liabilities are recognized
due to differences between the basis of assets and liabilities as measured by
tax laws and their basis as reported in the financial
statements.  Deferred tax assets are subject to management’s judgment
based upon available evidence that future realizations are likely.  If
management determines that the Company may not be able to realize some or all of
the net deferred tax asset in the future, a charge to income tax expense may be
required to reduce the value of the net deferred tax asset to the expected
realizable value.  Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.  The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment
date.  Deferred tax expense or benefit is recognized for the change in
deferred tax liabilities.
 
 Other
Real Estate Owned
 
 Other
real estate owned is carried at the lower of fair value of the related property,
as determined by current appraisals less estimated costs to sell, or the
recorded investment in the property.  Write-downs on these properties,
which occur after the initial transfer from the loan portfolio, are recorded as
operating expenses.  Costs of holding such properties are charged to
expense in the current period.  Gains, to the extent allowable, and
losses on the disposition of these properties are reflected in current
operations.
 
 Goodwill
and Other Intangible Assets
 
 Goodwill
represents the excess of the cost of an acquired entity over the fair value of
the identifiable net assets acquired in accordance with the purchase method of
accounting.  Goodwill is not amortized but is reviewed for potential
impairment on an annual basis, or more often if events or circumstances
indicated that there may be impairment, in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets.”  Goodwill is tested for
impairment at the reporting unit level and an impairment loss is recorded to the
extend that the carrying amount of goodwill exceeds its implied fair value. Core
deposit intangibles are a measure of the value of checking and savings deposits
acquired in business combinations accounted for under the purchase
method.  Core deposit intangibles are amortized on a straight-line
basis over their estimated lives (ranging from five to ten years) and
identifiable intangible assets are evaluated for impairment if events and
circumstances indicate a possible impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company
employs general industry practices in evaluating the fair value of its goodwill
and other intangible assets.  The Company calculates the fair value
using a combination of the following valuation methods:  dividend
discount analysis under the income approach, which calculates the present value
of all excess cash flows plus the present value of a terminal value and
price/earnings multiple under the market approach.  Any impairment
loss related to goodwill and other intangible assets is reflected as other
non-interest expense in the statement of operations in the period in which the
impairment was determines.  No assurance can be given that future
impairment tests will not result in a charge to earnings.  See Note 2
– Acquisition and Note 9 – Goodwill and Other Intangibles for additional
information.
  F-12
  Share-Based
Compensation
 
 The
Company recognizes compensation expense for stock options in accordance with
SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123R) adopted at January 1,
2006 under the modified prospective application method of
transition.  The expense of the option is generally measured at fair
value at the grant date with compensation expense recognized over the service
period, which is usually the vesting period.  The Company utilizes the
Black-Scholes option-pricing model (as used under SFAS 123) to estimate the fair
value of each option on the date of grant.  The Black-Scholes model
takes into consideration the exercise price and expected life of the options,
the current price of the underlying stock and its expected volatility, the
expected dividends on the stock and the current risk-free interest rate for the
expected life of the option.  The Company’s estimate of the fair value
of a stock option is based on expectations derived from historical experience
and may not necessarily equate to its market value when fully
vested.  In accordance with SFAS 123R, the Company estimates the
number of options for which the requisite service is expected to be
rendered.  Prior to January, 2006, the Company followed SFAS 123 and
Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to
Employees,” with pro forma disclosures of net income and earnings per share, as
if the fair value-based method of accounting defined in SFAS 123 had been
applied.  See Note 16 – Stock-Based compensation for additional
information.
 
 In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110, “Certain
Assumptions Used in Valuation Methods.” SAB 110 expresses the views of the staff
regarding the use of a “simplified” method as discussed in SAB No. 107,
“Share-Based Payment,” in developing an estimate of expected term of “plain
vanilla” share options in accordance with FAS 123R.  The staff stated
in SAB 107 that it would not expect a company to use the simplified method for
share option grants after December 31, 2007.  Under SAB 110, the SEC
staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007 to help public companies, mostly
small firms, that lack historical data on the exercising of options by
employees.  SAB 110 is not expected to have any material impact on the
Company’s financial statements.
 
 Benefit
Plans
 
 The
Company provides certain retirement benefits to employees under a 401(k)
plan.  The Company’s contributions to the 401(k) plan are expensed as
incurred.
 
 The
Company also provides retirement benefits to certain employees under a
supplemental executive retirement plan.  The plan is unfunded and the
Company accrues actuarial determined benefit costs over the estimated service
period of the employees in the plan.  The Company follows SFAS No.
132, as revised in December 2003, “Employers’ Disclosures about Pensions and
Other Post-retirement Benefits” and SFAS No. 158, “Employers Accounting for
Defined Benefit Pension and Other Post-retirement Plans-an amendment of FASB
Statements No. 87, 88, 106 and 132(R). SFAS No. 132 revised employers’
disclosures about pension and other post-retirement benefit plans. It requires
additional information about changes in the benefit obligation and the fair
values of plan assets. It also standardized the requirements for pensions and
other postretirement benefit plans to the extent possible, and illustrates
combined formats for the presentation of pension plan and other post-retirement
benefit plan disclosures. SFAS 158 requires an employer to recognize the over
funded or under funded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income.
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) Emerging
Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-dollar Life Insurance
Arrangements(“EITF 06-04”).  EITF 06-4 requires that a
liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants’ employment or
retirement.  The required accrued liability is based on either the
post-retirement benefit cost for the continuing life insurance or based on the
future death benefit depending on the contractual terms of the underlying
agreement.  The Company adopted EITF 06-4 on January 1, 2008, and
recorded a cumulative effect adjustment of $329,706 as a reduction of retained
earnings effective January 1, 2008.  Total compensation expense for
2008 was increased by $16,120 as a result of the adoption of EITF
06-4.
 
 Cash
And Cash Equivalents
 
 Cash and
cash equivalents includes cash on hand, interest and non-interest bearing
amounts due from banks, Federal funds sold and short-term
investments.  Generally, Federal funds are sold and short-term
investments are made for a one or two-day period.
  F-13
  Reclassifications
 
 Certain
reclassifications have been made to the prior period amounts to conform with the
current period presentation.
 
 Advertising
Costs
 
 It is the
Company’s policy to expense advertising costs in the period in which they are
incurred.
 
 Earnings
Per Share
 
 Basic net
income per common share is calculated by dividing net income, less Preferred
Stock Series B dividends, by the weighted average number of shares outstanding
during each period.
 
 Diluted
net income per common share is calculated by dividing net income by the weighted
average number of shares outstanding, as adjusted for the assumed exercise of
potential common stock options and unvested restricted stock awards, using the
treasury stock method.  All share information has been restated for
the effect of a 5% stock dividend declared on December 18, 2008 and paid on
February 2, 2009 to shareholders of record on January 20, 2009.For 2008, dividends
on the Preferred Stock Series B were immaterial and were not included in income
available for common shareholders or basic and diluted net income per common
share.
 
 The
following tables illustrate the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS)
calculations:
  Year
      Ended December 31, 2008Income
                    
                    
                    Weighted-
                      average
                      shares
                    
                    
                    Per
      share
                      AmountBasic
      EPSNet
      income available to common shareholders
                    
                    $
                    2,759,458
                    
                    
                    
                    4,192,731
                    
                    
                    $
                    0.66Effect
      of dilutive securitiesOptions,
      Grants and Warrants
                    
                    
                    -
                    
                    
                    
                    22,272
                    
                    
                    
                    (0.01
                    )Diluted
      EPSNet
      income available to common shareholders plus assumed
      conversion
                    
                    $
                    2,759,458
                    
                    
                    
                    4,215,003
                    
                    
                    $
                    0.65For
      the year ended December 31, 2008, 89,719 options were anti-dilutive and
      were not included in the computation of diluted earnings per
      share.
 
 Year
      Ended December 31, 2007Income
                  
                  
                  Weighted-
                    average
                    shares
                  
                  
                  Per
      share
                    AmountBasic
      EPSNet
      income available to common stockholders
                  
                  $
                  5,442,782
                  
                  
                  
                  4,168,440
                  
                  
                  $
                  1.31Effect
      of dilutive securitiesOptions
      and Grants
                  
                  
                  -
                  
                  
                  
                  58,260
                  
                  
                  
                  (0.02
                  )Diluted
      EPSNet
      income available to common stockholders plus assumed
      conversion
                  
                  $
                  5,442,782
                  
                  
                  
                  4,226,700
                  
                  
                  $
                  1.29
  F-14
  Comprehensive
Income
 
 The
Company follows SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130
established standards to provide prominent disclosure of comprehensive income
items.  Comprehensive income is the charge in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources.
 
 Variable
Interest Entities
 
 Management
has determined that Trust I and Trust II (the "Trusts") qualify as variable
interest entities under FASB Interpretation 46 (“FIN 46”). The Trusts issued
mandatorily redeemable preferred stock to investors and loaned the proceeds to
the Company. Trust II holds, as its sole asset, subordinated debentures
issued by the Company.  Trust I held, as its sole asset, subordinated
debentures issued by the Company until such debentures were redeemed by the
Company, and Trust I was terminated, in April 2007. Subsequent to the issuance
of FIN 46 and the establishment of Trust I, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which were required to be applied
to certain variable interest entities, including Trust I, by March 31, 2004, at
which time Trust I was deconsolidated. Because Trust II was formed in 2006,
subsequent to the adoption of FIN 46(R), its Balance Sheet and Statement of
Operations have never been consolidated with those of the Company.
  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 included all of
its $18.0 million in trust preferred securities in Tier 1 capital at December
31, 2008 and 2007.
 
 Segment
Information
 
 SFAS No.
131, “Segment Reporting”, establishes standards for public business enterprises
to report information about operating segments in their annual financial
statements and requires that those enterprises report selected information about
operating segments in subsequent interim financial reports issued to
shareholders.  It also established standards for related disclosure
about products and services, geographic areas, and major
customers.  Operating segments are components of an enterprise, which
are evaluated regularly by the chief operating decision-maker in deciding how to
allocate and assess resources and performance.  The Company’s chief
operating decision-maker is the President and Chief Executive
Officer.  The Company has applied the aggregation criteria set forth
in SFAS No. 131 for its operating segments to create one reportable segment,
“Community Banking.”
  The
Company’s Community Banking segment consists of construction, commercial, retail
and mortgage banking.  The Community Banking segment is managed as a
single strategic unit, which generates revenue from a variety of products and
services provided by the Company.  For example, construction and
commercial lending is dependent upon the ability of the Company to fund itself
with retail deposits and other borrowings and to manage interest rate and credit
risk.  This situation is also similar for consumer and residential
real estate lending.
 
 Recent
Accounting Pronouncements
  In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS
No. 161”), “Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133.” SFAS No. 161 requires entities that
utilize derivative instruments to provide qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of, and gains and losses on, derivative contracts, and details of
credit-risk-related contingent features in their hedged
positions.  SFAS No. 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS No. 133 have been
applied, and the impact that hedges have on an entity’s financial position,
financial performance, and cash flows.   SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged, but not
required.  The Company is currently assessing the impact of the
adoption of SFAS No. 161 on its financial statements and
disclosures.
  F-15
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R) (“SFAS No. 141(R)”), “Business Combinations (revised
2007).”  SFAS No. 141(R) significantly changes how entities apply the
acquisition method to business combinations. The new standard requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS No. 141(R) is
broader than its predecessor, SFAS No. 141, which only applied to business
combinations in which control was obtained by transferring
consideration.  SFAS No. 141(R) applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more
businesses, including combinations achieved without the transfer of
consideration.  SFAS No. 141(R) requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the Statement. This replaces SFAS No. 141’s
cost allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed, based on
their estimated fair values.  SFAS No. 141 required the acquirer to
include the costs incurred to effect the acquisition (acquisition-related costs)
in the cost of the acquisition that was allocated to the assets acquired and the
liabilities assumed.  SFAS No. 141(R) requires those costs to be
recognized separately from the acquisition. In accordance with SFAS No. 141,
restructuring costs that the acquirer expected, but was not obligated to incur,
were recognized as if they were a liability assumed at the acquisition
date.  SFAS No. 141(R) requires the acquirer to recognize those
restructuring costs that do not meet the criteria in Statement of Financial
Accounting Standards No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities” as an expense as incurred.  Acquisition related
transaction costs will be expensed as incurred. SFAS No. 141(R) requires an
acquirer to recognize assets or liabilities arising from all other contingencies
(contractual contingencies) as of the acquisition date, measured at their
acquisition-date fair values only if it is more likely than not that they meet
the definition of an asset or a liability on the acquisition date. Under SFAS
No. 141(R), changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income tax expense. Additionally, under SFAS No. 141(R), the
allowance for loan losses of an acquiree will not be permitted to be recognized
by the acquirer.  SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008.  This new pronouncement will impact
the Company’s accounting for business combinations beginning January 1,
2009.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160 (“SFAS No. 160”), “Noncontrolling Interest in Consolidated Financial
Statements–an amendment of Accounting Research Bulletin No. 51 (Consolidated
Financial Statements).”  SFAS No. 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements.  Its intention is to eliminate the
diversity in practice regarding the accounting for transactions between an
entity and noncontrolling interests.  SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company is currently
assessing the impact of the adoption of SFAS No. 160 on its financial
statements.
  In
November 2007, the SEC issued Staff Accounting Bulletin No. 109 (“SAB 109”),
“Written Loan Commitments Recorded at Fair Value through
Earnings.”  SAB 109 revises and rescinds portions of Staff Accounting
Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan
Commitments.” The SEC staff’s current view is that the expected net future cash
flows related to the associated servicing of a loan should be included in the
measurement of derivative and other written loan commitments that are accounted
for at fair value through earnings. That view is consistent with the guidance in
Statement of Financial Accounting Standards No. 156, “Accounting for Servicing
of Financial Assets—an amendment of FASB
Statement No. 140” and Statement of Financial Accounting Standards No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—including an
amendment of FASB Statement No. 115.”  SAB 109 retains the view
expressed in SAB 105 that internally developed intangible assets should not be
recorded as part of the fair value of a derivative loan commitment. The guidance
in SAB 109 is effective for derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007.  The adoption of
SAB 109 did not have a material impact on the Company’s financial
statements.
  In June
2008, the FASB issued FASB Staff Position, (“FSP”) EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,FSP EITF 03-6-1 changes the way earnings per share is calculated for
share-based payments that have not vested.  FSP EITF 03-6-1 is
effective for fiscal years beginning on or after December 15, 2008 and for
interim periods within those fiscal years.  The Company is currently
assessing the impact of this standard on its financial statements.
  F-16
  In
December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (FIN)
46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities” (FSP SFAS 140-4
and FIN 46(R)-8). FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”, to require public entities to provide additional disclosures
about transfers of financial assets. It also amends FIN 46(R), “Consolidation of
Variable Interest Entities”, to require public enterprises, including sponsors
that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities.
Additionally, this FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE)
that holds a variable interest in the qualifying SPE but was not the transferor
of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the
transferor of financial assets to the qualifying SPE. The disclosures required
by FSP SFAS 140-4 and FIN 46(R)-8 are intended to provide greater transparency
to financial statement users about a transferor’s continuing involvement with
transferred financial assets and an enterprise’s involvement with variable
interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) is effective
for reporting periods (annual or interim) ending after December 15,
2008.  The adoption of this pronouncement did not have a material
impact on the Company’s financial statements.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment of
Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF 99-20-1 amends
the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income
and Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”, and other related guidance. FSP EITF 99-20-1 is effective
for interim and annual reporting periods ending after December 15, 2008, and
shall be applied prospectively. Retrospective application to a prior interim or
annual reporting period is not permitted.   The adoption of this
pronouncement did not have a material impact on the Company’s financial
statements.
  F-17
  2.           Acquisition
of Unaffiliated Branch
  On
February 27, 2007, the Company, through the Bank, completed its acquisition of
the Hightstown, New Jersey branch of another financial institution for a
purchase price of $747,330.
  As a
result of the acquisition, the Hightstown branch became a branch of the
Bank.  Included in the acquisition of the branch were deposit
liabilities of $19.5 million, mostly in certificates of deposit, cash of
approximately $18.8 million, net of assets acquired, cash on hand of
approximately $137,000, fixed and other assets of approximately $91,000 and the
assumption of the lease of the branch premises.  The cash received in
the transaction was utilized to repay short term borrowings used to purchase
investment securities prior to, and in contemplation of, the completion of the
acquisition.
  In
addition, the Bank recorded goodwill of $472,726 and a deposit intangible asset
of $274,604.
  3.           Investment
Securities
  Amortized
cost, gross unrealized gains and losses, and the estimated fair value by
security type are as follows:
  Gross
                                              
                                              
                                              GrossAmortized
                                              
                                              
                                              Unrealized
                                              
                                              
                                              Unrealized
                                              
                                              
                                              Fair2008
                                              
                                              
                                              Cost
                                              
                                              
                                              Gains
                                              
                                              
                                              Losses
                                              
                                              
                                              ValueAvailable
      for sale-U.
      S. Treasury securities andobligations
      of U.S. Governmentsponsored
      corporations and agencies
                                              
                                              $
                                              22,802,334
                                              
                                              
                                              $
                                              415,626
                                              
                                              
                                              $
                                              0
                                              
                                              
                                              $
                                              23,217,960Collateralized
      mortgage obligations
                                              
                                              
                                              7,014,272
                                              
                                              
                                              
                                              16,792
                                              
                                              
                                              
                                              (253,432
                                              )
                                              
                                              
                                              6,777,632Mortgage
      backed securities
                                              
                                              
                                              54,727,033
                                              
                                              
                                              
                                              1,930,299
                                              
                                              
                                              
                                              (594
                                              )
                                              
                                              
                                              56,656,738Obligations
      of State andPolitical
      subdivisions
                                              
                                              
                                              2,868,049
                                              
                                              
                                              
                                              6,872
                                              
                                              
                                              
                                              (16,234
                                              )
                                              
                                              
                                              2,858,687Corporate
      debt securities
                                              
                                              
                                              2,454,969
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              (1,173,163
                                              )
                                              
                                              
                                              1,281,806Restricted
      stock
                                              
                                              
                                              2,659,200
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              2,659,200Mutual
      fund
                                              
                                              
                                              25,000
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              25,000$
                                              92,550,857
                                              
                                              
                                              $
                                              2,369,589
                                              
                                              
                                              $
                                              (1,443,423
                                              )
                                              
                                              $
                                              93,477,023Held
      to maturity-U.
      S. Treasury securities andobligations
      of U.S. Government sponsored corporations and agencies
                                              
                                              $
                                              10,000,000
                                              
                                              
                                              $
                                              193,800
                                              
                                              
                                              $
                                              0
                                              
                                              
                                              $
                                              10,193,800Collateralized
      mortgage obligations
                                              
                                              
                                              8,727,315
                                              
                                              
                                              
                                              49,897
                                              
                                              
                                              
                                              (9,675
                                              )
                                              
                                              
                                              8,767,537Mortgage
      backed securities
                                              
                                              
                                              3,794,931
                                              
                                              
                                              
                                              33,007
                                              
                                              
                                              
                                              (212
                                              )
                                              
                                              
                                              3,827,726Obligations
      of State andPolitical
      subdivisions
                                              
                                              
                                              10,516,726
                                              
                                              
                                              
                                              75,515
                                              
                                              
                                              
                                              (93,502
                                              )
                                              
                                              
                                              10,498,739Corporate
      debt securities
                                              
                                              
                                              3,511,605
                                              
                                              
                                              
                                              0
                                              
                                              
                                              
                                              (659,028
                                              )
                                              
                                              
                                              2,852,577$
                                              36,550,577
                                              
                                              
                                              $
                                              352,219
                                              
                                              
                                              $
                                              (762,417
                                              )
                                              
                                              $
                                              36,140,379
 
 F-18
 
 Gross
                                  
                                  
                                  GrossAmortized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  Fair2007
                                  
                                  Cost
                                  
                                  
                                  Gains
                                  
                                  
                                  Losses
                                  
                                  
                                  ValueAvailable
      for sale-U.
      S. Treasury securities andobligations
      of U.S. Governmentsponsored
      corporations and agencies
                                  
                                  $
                                  21,455,563
                                  
                                  
                                  $
                                  315,075
                                  
                                  
                                  $
                                  (14,043
                                  )
                                  
                                  $
                                  21,756,595Collateralized
      mortgage obligations
                                  
                                  
                                  8,106,154
                                  
                                  
                                  
                                  2,170
                                  
                                  
                                  
                                  (407,560
                                  )
                                  
                                  
                                  7,700,764Mortgage
      backed securities
                                  
                                  
                                  37,769,517
                                  
                                  
                                  
                                  457,725
                                  
                                  
                                  
                                  (57,365
                                  )
                                  
                                  
                                  38,169,877Obligations
      of State andPolitical
      subdivisions
                                  
                                  
                                  3,446,517
                                  
                                  
                                  
                                  14,778
                                  
                                  
                                  
                                  (7,713
                                  )
                                  
                                  
                                  3,453,582Corporate
      debt securities
                                  
                                  
                                  2,451,122
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  (272,504
                                  )
                                  
                                  
                                  2,178,618Restricted
      stock
                                  
                                  
                                  1,907,701
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  1,907,701Mutual
      fund
                                  
                                  
                                  25,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  25,000$
                                  75,161,574
                                  
                                  
                                  $
                                  789,748
                                  
                                  
                                  $
                                  (759,185
                                  )
                                  
                                  $
                                  75,192,137Held
      to maturity-Mortgage
      backed securities
                                  
                                  $
                                  4,502,574
                                  
                                  
                                  $
                                  2,132
                                  
                                  
                                  $
                                  (121,197
                                  )
                                  
                                  $
                                  4,383,509Obligations
      of State andPolitical
      subdivisions
                                  
                                  
                                  18,013,721
                                  
                                  
                                  
                                  142,232
                                  
                                  
                                  
                                  (4,718
                                  )
                                  
                                  
                                  18,151,235Corporate
      debt securities
                                  
                                  
                                  996,051
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  (119,526
                                  )
                                  
                                  
                                  876,525$
                                  23,512,346
                                  
                                  
                                  $
                                  144,364
                                  
                                  
                                  $
                                  (245,441
                                  )
                                  
                                  $
                                  23,411,269
 
 Restricted
stock at December 31, 2008 consists of $2,644,200 of Federal Home Loan Bank of
New York stock and $15,000 of Atlantic Central Bankers Bank stock.
 
 The
amortized cost, estimated fair value and weighted average yield of investment
securities at December 31, 2008, by contractual maturity, are shown
below.  Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.  Restricted stock is included in
“Available for sale - Due in one year or less.”
  Amortized
                          Cost
                        
                        
                        Fair
                          Value
                        
                        
                        Weighted
                          Average
                          Yield*Available
      for sale-Due
      in one year or less
                        
                        $
                        6,094,198
                        
                        
                        $
                        6,144,721
                        
                        
                        
                        3.83
                        %Due
      after one year through five years
                        
                        
                        17,656,903
                        
                        
                        
                        17,974,754
                        
                        
                        
                        4.21
                        %Due
      after five years through ten years
                        
                        
                        13,032,530
                        
                        
                        
                        13,242,004
                        
                        
                        
                        4.96
                        %Due
      after ten years
                        
                        
                        55,767,226
                        
                        
                        
                        56,115,544
                        
                        
                        
                        5.38
                        %Total
                        
                        $
                        92,550,857
                        
                        
                        $
                        93,477,023
                        
                        
                        
                        5.00
                        %Held
      to maturity-Due
      in one year or less
                        
                        $
                        10,955,710
                        
                        
                        $
                        11,155,504
                        
                        
                        
                        3.45
                        %Due
      after one year through five years
                        
                        
                        4,535,579
                        
                        
                        
                        4,521,258
                        
                        
                        
                        4.72
                        %Due
      after five years through ten years
                        
                        
                        5,817,643
                        
                        
                        
                        5,804,321
                        
                        
                        
                        5.66
                        %Due
      after ten years
                        
                        
                        15,241,645
                        
                        
                        
                        14,659,296
                        
                        
                        
                        4.03
                        %Total
                        
                        $
                        36,550,577
                        
                        
                        $
                        36,140,379
                        
                        
                        
                        4.20
                        %
 *computed on a tax equivalent
basis.
 
 F-19
 
 Gross
unrealized losses on securities and the estimated fair value of the related
securities aggregated by security category and length of time that individual
securities have been in a continuous unrealized loss position at December 31,
2008 and 2007 are as follows:
 
 2008
              
              Less
      than 12 months
              12
      months or longer
              TotalNumber
      of
                Securities
              Fair
      Value
              Unrealized
      Losses
              Fair
      Value
              Unrealized
      Losses
              Fair
      Value
              Unrealized
      LossesCollateralized
      mortgage obligations
              18
              $3,283,040
              ($15,797)
              $5,245,569
              ($247,310)
              $8,528,609
              ($263,107)Mortgage
      backed securities
              3
              283,264
              (806)
              0
              0
              283,264
              (806)Obligations
      of State and Political Subdivisions
              16
              5,551,850
              (109,736)
              0
              0
              5,551,850
              (109,736)Corporate
      debt securities
              8
              2,001,805
              (23,856)
              1,628,794
              (1,808,335)
              3,630,599
              (1,832,191)Total
      temporarily impaired securities
              45
              $11,119,959
              ($150,195)
              $6,874,363
              ($2,055,645)
              $17,994,322
              ($2,205,840)
 
 2007
                  
                  Less
      than 12 months
                  12
      months or longer
                  TotalNumber
      of
                    Securities
                  Fair
      Value
                  Unrealized
      Losses
                  Fair
      Value
                  Unrealized
      Losses
                  Fair Value
                  Unrealized
      LossesCollateralized
      mortgage obligations
                  25
                  $1,491,803
                  ($33,117)
                  $9,418,035
                  ($388,486)
                  $10,909,838
                  ($421,603)Mortgage
      backed securities
                  15
                  4,278,329
                  (121,197)
                  5,230,207
                  (57,365)
                  9,508,536
                  (178,562)Obligations
      of State and Political Subdivisions
                  16
                  0
                  0
                  3,260,125
                  (12,431)
                  3,260,125
                  (12,431)Corporate
      debt securities
                  5
                  2,596,788
                  (354,198)
                  458,355
                  (37,832)
                  3,055,143
                  (392,030)Total
      temporarily impaired securities
                  61
                  $8,366,920
                  ($508,512)
                  $18,366,722
                  ($496,114)
                  $26,733,642
                  ($1,004,626)
 
 Collateralized mortgage
obligations:  The unrealized losses on investments in these
securities were caused by interest rate increases.  The contractual
terms of these investments do not permit the issuer to settle the securities at
a price less than the amortized cost of the investment.  Because the
Company has the ability and intent to hold these investments until a market
price recovery or maturity, these investments are not considered other-than
temporarily impaired.
 
 Mortgage-backed
securities:  The unrealized losses on investments in
mortgage-backed securities were caused by interest rate
increases.  The contractual cash flows of these securities are
guaranteed by the issuer, primarily government or government sponsored
agencies.  It is expected that the securities would not be settled at
a price less than the amortized cost of the investment.  Because the
decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired.
 
 Obligations of State and Political
Subdivisions:  The unrealized losses or investments in these
securities were caused by interest rate increases.  It is expected
that the securities would not be settled at a price less than the amortized cost
of the investment.  Because the decline in fair value is attributable
to changes in interest rates and not credit quality, and because the Company has
the ability and intent to hold these investments until a market price recovery
or maturity, these investments are not considered other-than-temporarily
impaired.
 
 Corporate debtsecurities:  The
investments in these securities with unrealized losses are comprised of
corporate trust preferred securities that mature in 2027, all but one of which
were single-issuer securities.   The contractual terms of the
trust preferred securities do not allow the issuer to settle the securities at a
price less than the face value of the trust preferred securities, which is
greater than the amortized cost of the trust preferred
securities.  None of the corporate issuers have defaulted on interest
payments.  Because the decline in fair value is attributable to
changes in interest rates and the lack of an active trading market for these
securities and to a lesser degree market concerns on the issuers’ credit
quality, and because the Company has the intent and ability to hold these
investments until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired.
  F-20
  The
Company recorded no gains or losses on sales of securities available for sale in
2008 and 2007.
  As of
December 31, 2008 and 2007, securities having a book value of $31,844,825 and
$50,917,850, respectively, were pledged to secure public deposits, other
borrowings and for other purposes required by law.
  4.           Loans
and Loans Held for Sale
 
 Loans are
as follows:
  2008
                
                
                2007Commercial
      business
                
                $
                57,528,879
                
                
                $
                57,232,295Commercial
      real estate
                
                
                90,904,418
                
                
                
                77,896,347Mortgage
      warehouse lines
                
                
                106,000,231
                
                
                
                -Construction
      loans
                
                
                94,163,997
                
                
                
                132,735,920Residential
      real estate loans
                
                
                11,078,402
                
                
                
                10,088,515Loans
      to individuals
                
                
                16,797,194
                
                
                
                16,324,817Deferred
      loan fees
                
                
                647,673
                
                
                
                302,818All
      other loans
                
                
                227,622
                
                
                
                180,006$
                377,348,416
                
                
                $
                294,760,718
  The
Bank’s business is concentrated in New Jersey, particularly Middlesex, Mercer
and Somerset counties.  A significant portion of the total loan
portfolio is secured by real estate or other collateral located in these
areas.
 
 The Bank
had residential mortgage loans held for sale of $5,702,082 at December 31, 2008
and $10,322,005 at December 31, 2007.  The Bank sells residential
mortgage loans in the secondary market on a non-recourse basis.  The
related loan servicing rights are generally released to the
purchaser.  Loans held for sale at December 31, 2008 and 2007 are
residential mortgage loans that the Bank intends to sell under forward contracts
providing for delivery to purchasers generally within a two month
period.  Changes in fair value of the forward sales contracts, and the
related loan origination commitments and closed loans, were not significant at
December 31, 2008 and 2007.
 
 5.           Allowance
for Loan Losses
 
 A summary
of the allowance for loan losses is as follows:
 
 2008
                
                
                2007Balance,
      beginning of year
                
                $
                3,348,080
                
                
                $
                3,228,360Provision
      charged to operations
                
                
                640,000
                
                
                
                130,000Loans
      charged off
                
                
                (303,376)
                
                
                
                (90,983
                )Recoveries
      of loans charged off
                
                
                3,060
                
                
                
                80,703Balance,
      end of year
                
                $
                3,684,764
                
                
                $
                3,348,080
 
 The
amount of loans which were not accruing interest amounted to $3,351,777 and
$2,036,858 at December 31, 2008 and 2007, respectively.  Impaired
loans totaled $3,351,777 and $3,304,510 at December 31, 2008 and 2007,
respectively.  There were specific valuation allowances of
$485,339 on $1,913,012 of impaired loans at December 31, 2008 and $400,876 of
specific valuation allowances on $2,211,103 of impaired loans at December 31,
2007.  There were no loans 90 days or more past due and still accruing
interest at December 31, 2008 or December 31, 2007.
  Additional
income before taxes amounting to $314,675 and $129,967 would have been
recognized in 2008 and 2007, respectively, if interest on all loans had been
recorded based upon original contract terms.  No interest was
recognized on non-accrual loans in 2008 or 2007.  The average recorded
investment in impaired loans for the years ended December 31, 2008 and 2007 was
approximately $2,231,205 and $899,014, respectively.
  F-21
 
 6.           Loans
to Related Parties
 
 Activity
related to loans to directors, executive officers and their affiliated interests
during 2008 and 2007 is as follows:
  2008
                    
                    
                    2007Balance,
      beginning of year
                    
                    $
                    3,856,430
                    
                    
                    $
                    5,124,060Loans
      granted
                    
                    
                    1,996,042
                    
                    
                    
                    140,000Repayments
      of loans
                    
                    
                    (1,479,459
                    )
                    
                    
                    (1,407,630
                    )Balance,
      end of year
                    
                    $
                    4,373,013
                    
                    
                    $
                    3,856,430
 
 All such
loans were made under customary terms and conditions and were current as to
principal and interest payments as of December 31, 2008 and 2007.
 
 7.           Premises
and Equipment
 
 Premises
and equipment consist of the following:
 
 Estimated
                      Useful
      Lives
                    
                    2008
                    
                    
                    2007Land
                    
                    
                    $
                    241,784
                    
                    
                    $
                    241,784Building
                    40
      Years
                    
                    
                    735,579
                    
                    
                    
                    735,579Leasehold
      improvements
                    10
      Years
                    
                    
                    2,225,660
                    
                    
                    
                    2,187,879Furniture
      and equipment
                    3 –
      15 Years
                    
                    
                    2,709,525
                    
                    
                    
                    2,634,3615,912,548
                    
                    
                    
                    5,799,603Less
      Accumulated depreciation
                    
                    
                    
                    (3,610,059
                    )
                    
                    
                    (3,039,400
                    )$
                    2,302,489
                    
                    
                    $
                    2,760,203
  Depreciation
expense was $662,095 and $720,113 for the years ended December 31, 2008 and
2007, respectively.
 
 8.           Other
Real Estate Owned (“OREO”)
 
 The Bank
held three properties valued at $4,296,536 at December 31, 2008 and one property
valued at $2,960,727 at December 31, 2007.  The Company did not incur
any write downs on OREO properties during the years ended December 31, 2008 and
2007.  There was no impairment on these properties at December 31,
2008 or 2007, respectively.  Further declines in real estate values
may result in increased foreclosed real estate expense in the
future.  Routine holding costs are charged to expense as incurred and
improvements to real estate owned that enhance the value of the real estate are
capitalized.  OREO expenses amounted to $136,648 and $11,871 for the
years ended December 31, 2008 and 2007, respectively.
 
 9.           Goodwill
and Intangible Assets
 
 Goodwill
and intangible assets are summarized as follows:
 
 2008
                    
                    
                    2007Goodwill
                    
                    $
                    472,726
                    
                    
                    $
                    472,726Core
      deposits intangible
                    
                    
                    210,358
                    
                    
                    
                    247,070Total
                    
                    $
                    683,084
                    
                    
                    $
                    719,796
  Amortization
expense of intangible assets was $36,712 and $27,534 for the year ended
December 31, 2008 and 2007, respectively.
 
 F-22
  Scheduled
amortization of the core deposits intangible for each of the next five years and
thereafter is as follows:
 
 2009
                    
                    $
                    36,7122010
                    
                    
                    36,7122011
                    
                    
                    36,7122012
                    
                    
                    36,7122013
                    
                    
                    36,712Thereafter
                    
                    
                    26,798
 
 10.           Deposits
 
 Deposits
consist of the following:
 
 2008
                      
                      
                      2007DemandNon-interest
      bearing
                      
                      $
                      71,772,486
                      
                      
                      $
                      59,055,803Interest
      bearing
                      
                      
                      82,842,413
                      
                      
                      
                      86,168,444Savings
                      
                      
                      83,410,405
                      
                      
                      
                      62,094,432Time
                      
                      
                      176,659,427
                      
                      
                      
                      122,013,689$
                      414,684,731
                      
                      
                      $
                      329,332,368
  At
December 31, 2008, time deposits have contractual maturities as
follows:
 
 Year
                
                Amount2009
                
                $165,671,3702010
                
                5,864,4982011
                
                3,056,0832012
                
                1,388,6412013
                
                678,835$176,659,427
 
 Individual
time deposits $100,000 or greater amounted to $97,752,068 and $53,855,542 at
December 31, 2008 and 2007, respectively.  As of December 31, 2008,
time certificates of deposit in amounts of $100,000 or more have remaining
maturity time as follows:
 
 Maturity Range
                  
                  AmountThree
      months or less
                  
                  $
                  54,745,731Over
      three months through six months
                  
                  
                  14,886,374Over
      six months through twelve months
                  
                  
                  23,174,101Over
      twelve months
                  
                  
                  4,945,862$
                  97,752,068
 
 11.           Borrowings
 
 The
balance of borrowings was $51,500,000 at December 31, 2008, consisting of
long-term FHLB borrowings of $30,500,000 and overnight funds purchased of
$21,000,000.  The balance of borrowings was $35,600,000 at December
31, 2007 and consisted of FHLB borrowings of $30,500,000 and overnight
funds purchased of $5,100,000.
  At
December 31, 2008, the Bank maintained an Overnight Line of Credit at the FHLB
in the amount of $47,534,500 and a One Month Overnight Repricing Line of Credit
of $47,534,000.  Each of these established credit lines were effective
on August 1, 2008 and expire on July 31, 2009 at which time they will be subject
to review and renewal.  Advances issued under these programs are
subject to FHLB stock level and collateral requirements.  Pricing of
these advances may fluctuate based on existing market conditions.  The
Bank also maintains an unsecured federal funds line of $20,000,000 with a
correspondent bank that will expire on June 30, 2009 at which time it will be
subject to review and renewal.
  F-23
  The Bank
has five ten-year fixed rate convertible advances from the FHLB that total
$25,500,000 in the aggregate.  These advances, in the amounts of
$3,000,000, $2,500,000, $5,000,000, $5,000,000 and $10,000,000 bear interest at
the rates of 5.82%, 5.50%, 5.34%, 5.06% and 4.08%, respectively.  The
Bank has one two-year advance in the amount of $5,000,000 that bears interest at
a 3.833% rate.  These advances are convertible quarterly at the option
of the FHLB.  These advances are fully secured by marketable
securities.
 
 The FHLB
advances mature as follows:
  20082009
                    
                    $
                    8,000,0002010
                    
                    
                    12,500,0002011
                    
                    
                    -2012
                    
                    
                    -2013
                    
                    
                    -Thereafter
                    
                    
                    10,000,000$
                    30,500,000
 
 These
callable advances have original maturity dates of ten years and call dates of
one year to five years.  After the original call period expires, the
borrowings are callable quarterly.  Due to the call provisions,
expected maturities could differ from contractual maturities.
 
 
 12.           Redeemable
Subordinated Debentures
 
 On April
10, 2002, 1st Constitution Capital Trust I (“Trust I”), a statutory business
trust and a wholly-owned subsidiary of the Company, issued $5.0 million of
variable rate trust preferred securities (the “Trust Preferred Securities”) in a
pooled institutional placement transaction maturing April 22,
2032.  Trust I utilized the $5.0 million proceeds along with $155,000
invested in Trust I by the Company to purchase $5,155,000 of floating rate
subordinated debentures issued by the Company and due to mature on April 22,
2032 (the “Subordinated Debentures”).  The Subordinated Debentures
constituted the sole assets of Trust I, had terms that mirrored the Trust
Preferred Securities and were redeemable in whole or part prior to maturity
after April 22, 2007. Trust I was obligated to distribute all proceeds of a
redemption of the Subordinated Debentures, whether voluntary or upon maturity,
to holders of the Trust Preferred Securities. The Company’s obligation with
respect to the Trust Preferred Securities and the Subordinated Debentures, when
taken together, provided a full and unconditional guarantee on a subordinated
basis by the Company of the obligations of Trust I to pay amounts when due on
the Trust Preferred Securities. On February 23, 2007, the Company notified
Wilmington Trust Company, as Indenture Trustee, of the Company’s intention to
redeem the Subordinated Debentures on April 22, 2007, and the Company redeemed
the Subordinated Debentures on that date, as discussed below.
  On May
30, 2006, the Company established 1st Constitution Capital Trust II, a Delaware
business trust and wholly owned subsidiary of the Company (“Trust II”), for the
sole purpose of issuing $18 million of trust preferred securities (the “Capital
Securities”).  Trust II utilized the $18 million proceeds along with
$557,000 invested in Trust II by the Company to purchase $18,557,000 of floating
rate junior subordinated debentures issued by the Company and due to mature on
June 15, 2036.  The Capital Securities were issued in connection with
a pooled offering involving approximately 50 other financial institution holding
companies.  All of the Capital Securities were sold to a single
pooling vehicle.   The floating rate junior subordinated
debentures are the only asset of Trust II and have terms that mirrored the
Capital Securities.   These debentures are redeemable in
whole or in part prior to maturity after June 15, 2011.  Trust
II is obligated to distribute all proceeds of a redemption of these
debentures, whether voluntary or upon maturity, to holders of the Capital
Securities.  The Company’s obligation with respect to the Capital
Securities and the debentures, when taken together, provided a full and
unconditional guarantee on a subordinated basis by the Company of the
obligations of Trust II to pay amounts when due on the Capital
Securities.  Interest payments on the floating rate junior
subordinated debentures flow through Trust II to the pooling
vehicle.
  F-24
  Effective
April 22, 2007, the Company redeemed of all of the Trust I Subordinated
Debentures.  The redemption price was 100% of the aggregate $5,155,000
principal amount of the Subordinated Debentures, plus approximately $236,882 of
accrued interest thereon through the redemption date.  As a result of
the redemption of the Subordinated Debentures, a like amount of capital
securities issued by 1st Constitution Capital Trust I will also be redeemed
under the same terms and conditions.  This redemption does not impact
the Capital Securities issued by the Company’s wholly-owned subsidiary 1st
Constitution Capital Trust II on May 30, 2006.
 
 
 13.           Income
Taxes
 
 The
components of income tax expense (benefit) are summarized as
follows:
  2008
                      
                      
                      2007Federal-Current
                      
                      $
                      1,322,618
                      
                      
                      $
                      2,464,723Deferred
                      
                      
                      (282,481
                      )
                      
                      
                      (192,456
                      )1,040,137
                      
                      
                      
                      2,272,267State-Current
                      
                      
                      281,374
                      
                      
                      
                      446,000Deferred
                      
                      
                      (82,170
                      )
                      
                      
                      (55,983
                      )199,204
                      
                      
                      
                      390,017$
                      1,239,341
                      
                      
                      $
                      2,662,284
  A
comparison of income tax expense at the Federal statutory rate in 2008 and 2007
to the Company’s provision for income taxes is as follows:
  2008
                          
                          
                          2007Federal
      income tax
                          $
                          1,359,592
                          
                          
                          $
                          2,755,722Add
      (deduct) effect of:State income taxes net of federal income tax
      effect
                          
                          131,475
                          
                          
                          
                          256,015Tax-exempt interest income
                          
                          (190,503
                          )
                          
                          
                          (297,737
                          )Bank-owned life insurance
                          
                          (128,809
                          )
                          
                          
                          (124,304
                          )Other items, net
                          
                          67,586
                          
                          
                          
                          72,588Provision
      for income taxes
                          $
                          1,239,341
                          
                          
                          $
                          2,662,284
 
 The tax
effects of existing temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as
follows:
 
 
 2008
                    
                    
                    2007Deferred
      tax assets (liabilities):Allowance for loan losses
                    
                    $
                    1,471,694
                    
                    
                    $
                    1,337,223Employee benefits
                    
                    
                    95,861
                    
                    
                    
                    85,670Unrealized gain on securities available for
      sale
                    
                    
                    (322,639
                    )
                    
                    
                    (12,880
                    )SERP Liability
                    
                    
                    1,216,250
                    
                    
                    
                    1,018,988Unrealized loss on interest rate swap
                    
                    
                    463,748
                    
                    
                    
                    39,842Other
                    
                    
                    (94,414
                    )
                    
                    
                    (94,415
                    )Net
      deferred tax assets
                    
                    $
                    2,830,500
                    
                    
                    $
                    2,374,428
 
 Based
upon the current facts, management has determined that it is more likely than
not that there will be sufficient taxable income in future years to realize the
deferred tax assets.  However, there can be no assurances about the
level of future earnings.
  F-25
  14.           Comprehensive
Income and Accumulated Other Comprehensive Income
 
 The components of accumulated other
comprehensive loss and their related income tax effects are as
follows:
 
 December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Unrealized
      holding gains on securities available for sale
                    
                    $
                    926,166
                    
                    
                    $
                    30,563Related
      income tax effect
                    
                    
                    (322,639
                    )
                    
                    
                    (12,880
                    )603,527
                    
                    
                    
                    17,683Unrealized
      holding loss interest rate swap contract
                    
                    
                    (1,159,156
                    )
                    
                    
                    (99,754
                    )Related
      income tax effect
                    
                    
                    463,748
                    
                    
                    
                    39,842(695,408
                    )
                    
                    
                    (59,912
                    )Pension
      Liability
                    
                    
                    (761,439
                    )
                    
                    
                    (818,343
                    )Related
      income tax effect
                    
                    
                    304,119
                    
                    
                    
                    327,386(457,320
                    )
                    
                    
                    (490,957
                    )Accumulated
      other comprehensive loss
                    
                    $
                    (549,201
                    )
                    
                    $
                    (533,186
                    )
 
 The components of other accumulated
comprehensive income (loss), net of tax, which is a component of shareholders
equity were as follows:
 
 Net
      Unrealized
                Gains
      (Losses)
                On
      Available for
                Sale
      Securities
              
              Net
      Change in
                Fair
      Value of
                Interest
      Rate
                Swap
      Contract
              
              Net
      Change
                Related
      to
                Defined
      Benefit
                Pension
      Plans
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)Balance,
      December 31, 2006
              
              ($492,000)
              
              $              -
              
              ($453,726)
              
              ($945,726)Net
      Change
              
              509,683
              
              (59,912)
              
              (37,231)
              
              412,540Balance,
      December 31, 2007
              
              17,683
              
              (59,912)
              
              (490,957)
              
              (533,186)Net
      Change
              
              585,844
              
              (635,496)
              
              33,637
              
              (16,015)Balance,
      December 31, 2008
              
              $603,527
              
              ($695,408)
              
              ($457,320)
              
              ($549,201)
 
 15.           Benefit
Plans
 
 Retirement
Savings Plan
 
 The Bank
has a 401(K) plan which covers substantially all employees with six months or
more of service.  The plan permits all eligible employees to make
basic contributions to the plan up to 12% of base compensation.  Under
the plan, the Bank provided a matching contribution of 50% in 2008 and 2007 up
to 6% of base compensation.  Employer contributions to the plan
amounted to $124,396 in 2008, and $105,621 in 2007.
 
 Benefit
Plans
 
 The
Company also provides retirement benefits to certain employees under a
supplemental executive retirement plan.  The plan is unfunded and the
Company accrues actuarial determined benefit costs over the estimated service
period of the employees in the plan.  The present value of the
benefits accrued under these plans as of December 31, 2008 and 2007 is
approximately $3,045,192 and $2,551,295, respectively, and is included in other
liabilities and accumulated other comprehensive income in the accompanying
consolidated balance sheet.  Compensation expense of $550,800 and
$483,019 is included in the accompanying consolidated statement of income for
the years ended December 31, 2008 and 2007, respectively.
 
 In
connection with the benefit plans, the Bank purchased $6.0 million in life
insurance policies on the lives of its executives, directors and divisional
officers.  The Bank is the owner and beneficiary of the
policies.  The cash surrender values of the policies total
approximately $9.9 million and $9.5 million as of December 31, 2008 and 2007,
respectively.
  F-26
  The
following table sets forth the changes in benefit obligations of the Company’s
supplemental executive retirement plan.
 
 2008
                  
                  
                  2007Change
      in Benefit ObligationLiability
      for pension, beginning
                  
                  $
                  2,551,295
                  
                  
                  $
                  2,006,288Service
      cost
                  
                  
                  230,546
                  
                  
                  
                  227,165Interest
      cost
                  
                  
                  159,320
                  
                  
                  
                  131,555Actuarial
      loss
                  
                  
                  104,032
                  
                  
                  
                  186,288Liability
      for pension, ending
                  
                  $
                  3,045,192
                  
                  
                  $
                  2,551,295Amount
      Recognized in Consolidated Balance SheetsLiability
      for pension
                  
                  $
                  (3,045,192
                  )
                  
                  $
                  (2,551,295
                  )Net
      actuarial loss included in accumulated other comprehensive
      income
                  
                  
                  355,265
                  
                  
                  
                  312,736Prior
      service cost included in accumulated other comprehensive
      income
                  
                  
                  406,174
                  
                  
                  
                  505,607Net
      recognized pension expense
                  
                  $
                  (2,283,753
                  )
                  
                  $
                  (1,732,952
                  )Information
      for pension plans with an accumulated
                    benefit
      obligation in excess of plan assetsProjected
      benefit obligation
                  
                  $
                  3,045,192
                  
                  
                  $
                  2,551,295Accumulated
      benefit obligation
                  
                  
                  2,754,427
                  
                  
                  
                  2,221,495Components
      of Net Periodic Benefit Cost
                  
                  2008
                  
                  
                  2007Service
      cost
                  
                  $
                  230,546
                  
                  
                  $
                  227,165Interest
      cost
                  
                  
                  159,320
                  
                  
                  
                  131,555Amortization
      of prior service cost
                  
                  
                  99,432
                  
                  
                  
                  99,432Recognized
      net actuarial gain
                  
                  
                  61,502
                  
                  
                  
                  24,867Net
      periodic benefit expense
                  
                  $
                  550,800
                  
                  
                  $
                  483,019
 
 The net
periodic benefit cost for the year ended December 31, 2009 is projected to be
$649,987.
 
 During
the year ended December 31, 2009, actuarial losses and prior service cost of
$87,000 and $99,000, respectively, are expected to be removed from accumulated
other comprehensive income and recognized as a component of net periodic benefit
expense.
 
 Weighted-Average
      Assumptions, December 31
                    
                    2008
                    
                    
                    2007Discount
      Rate
                    
                    
                    6.00
                    %
                    
                    
                    6.00
                    %Salary
      Scale
                    
                    
                    4.00
                    %
                    
                    
                    4.00
                    %
 
 Projected
      Annual Benefit Payments2009
                    
                    $
                    38,3502010
                    
                    $
                    297,1232011
                    
                    $
                    297,1232012
                    
                    $
                    297,1232013
                    
                    $
                    355,5222014-2018
                    
                    $
                    1,907,844
 
 16.           Share
Based Compensation
 
 Share-based
compensation is accounted for in accordance with SFAS No. 123 (revised 2004)
(“SFAS No. 123R”), Share-Based
Payment.  The Company adopted SFAS No. 123R on January 1, 2006
using the modified prospective approach.  The Company establishes fair
value for its equity awards to determine its cost and recognized the related
expense for stock options over the vesting period using the straight-line
method.  The grant date fair value for stock options is calculated
using the Black-Scholes option valuation model.  Prior to January 1,
2006, the Company accounted for stock-based compensation in accordance with SFAS
No. 123, Accounting for
Stock-Based Compensation, as adopted prospectively on January 1, 2003 and
in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock
Issued to
Employees.
  F-27
  The
Company’s Stock Plans authorize the issuance of an aggregate of 1,119,022 shares
of common stock pursuant to awards that may be granted in the form of stock
options to purchase common stock (“options”) and awards of shares of common
stock (“stock awards”).  The purpose of the Company’s stock-based
incentive plans is to attract and retain personnel for positions of substantial
responsibility and to provide additional incentive to certain officers,
directors, employees and other persons to promote the success of the
Company.  Under the Company’s Stock Plans, options expire ten years
after the date of grant.  Options are granted at the then fair market
value of the Company’s stock.  The grant date fair value is calculated
using the Black-Scholes option valuation model. As of December 31, 2008, there
were 349,236 shares of common stock (as adjusted for the 5% stock dividend
declared December 18, 2008 and paid February 2, 2009 to shareholders of record
on January 20, 2009) issuable upon exercise of options or available for stock
awards that remain available for future grants under the Company’s Stock
Plans.
  Stock-based
compensation expense related to stock options was $122,216 and $107,020 for the
years ended December 31, 2008 and 2007, respectively.
  Transactions
under the Company’s stock option plans during the years ended December 31,
2008 and 2007 (as adjusted to reflect the 5% stock dividend declared in
December 2008) are summarized as follows:
 StockOptions
                                                                                                                                                                                                        
                                                                                                                                                                                                        Shares
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        Weighted
                                                                                                                                                                                                          Average
                                                                                                                                                                                                          Exercise
      Price
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        Weighted
                                                                                                                                                                                                          Average
                                                                                                                                                                                                          Remaining
                                                                                                                                                                                                          Contractual
                                                                                                                                                                                                          Term
      (years)
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        Aggregate
                                                                                                                                                                                                          Intrinsic
                                                                                                                                                                                                          ValueOutstanding
      at January 1, 2007
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        147,863
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        $
                                                                                                                                                                                                        9.50Granted
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        17,808
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        13.35Exercised
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        (991
                                                                                                                                                                                                        )
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        2.96Forfeited
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -Expired
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -Outstanding
      at December 31, 2007
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        164,680
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        9.92
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        5.3
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        $
                                                                                                                                                                                                        876,204Granted
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -Exercised
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        (639
                                                                                                                                                                                                        )
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        3.24Forfeited
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -Expired
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        -Outstanding
      at December 31, 2008
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        164,041
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        $
                                                                                                                                                                                                        9.92
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        4.3
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        $
                                                                                                                                                                                                        342,658Exercisable
      at December 31, 2008
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        141,955
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        $
                                                                                                                                                                                                        9.16
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        3.7
                                                                                                                                                                                                        
                                                                                                                                                                                                        
                                                                                                                                                                                                        $
                                                                                                                                                                                                        342,658
 
 The total
intrinsic value (market value on date of exercise less grant price) of options
exercised during the years ended December 31, 2008 and 2007 was $2,955 and
$13,357, respectively.
  The
following table summarizes stock options outstanding and exercisable at December
31, 2008:
 
 
 Outstanding
      Options
                                      
                                      
                                      Exercisable
      OptionsExercisePriceRange
                                      
                                      
                                      Number
                                      
                                      
                                      Average
                                        Life
      in
                                        Years
                                      
                                      
                                      Average
                                        Exercise
                                        Price
                                      
                                      
                                      Number
                                      
                                      
                                      Average
                                        Life
      in
                                        Years
                                      
                                      
                                      Average
                                        Exercise
                                        Price$3.33
      to $6.91
                                      
                                      
                                      
                                      74,322
                                      
                                      
                                      
                                      1.2
                                      
                                      
                                      $
                                      5.01
                                      
                                      
                                      
                                      74,322
                                      
                                      
                                      
                                      1.2
                                      
                                      
                                      $
                                      5.01$9.67
      to $10.76
                                      
                                      
                                      
                                      18,682
                                      
                                      
                                      
                                      4.5
                                      
                                      
                                      $
                                      10.24
                                      
                                      
                                      
                                      18,682
                                      
                                      
                                      
                                      4.5
                                      
                                      
                                      $
                                      10.24$13.05
      to $16.74
                                      
                                      
                                      
                                      71,037
                                      
                                      
                                      
                                      7.4
                                      
                                      
                                      $
                                      14.97
                                      
                                      
                                      
                                      48,951
                                      
                                      
                                      
                                      7.1
                                      
                                      
                                      $
                                      15.06164,041
                                      
                                      
                                      
                                      4.3
                                      
                                      
                                      $
                                      9.92
                                      
                                      
                                      
                                      141,955
                                      
                                      
                                      
                                      3.7
                                      
                                      
                                      $
                                      9.16
  F-28
  The fair value of each option and the
significant weighted average assumptions used to calculate the fair value of the
options granted for the year ended December 31, 2007 are as
follows:
 
 Fair
      value of options granted
                          $5.71Risk-free
      rate of return
                          3.69%Expected
      option life in years
                          7Expected
      volatility
                          26.60%Expected
      dividends (1)
                          -(1)  To
      date, the Company has not paid cash dividends on its common
    stock.
  As of
December 31, 2008, there was approximately $133,792 of unrecognized compensation
cost related to non-vested stock option-based compensation arrangements granted
under the Company’s stock incentive plans.  That cost is expected to
be recognized over the next three years.
 
 The
following table summarizes nonvested restricted shares for the years ended
December 31, 2008 and 2007 (as adjusted to reflect the 5% stock dividend
declared in December 2008):
 
 Nonvested
      Shares
                  
                  Number
      of
                    Shares
                  
                  
                  Average
                    Grant-Date
                    Fair
      ValueNonvested
      at January 1, 2007
                  
                  
                  47,613
                  
                  
                  $
                  14.41Granted
                  
                  
                  20,980
                  
                  
                  
                  14.01Vested
                  
                  
                  (18,200
                  )
                  
                  
                  13.70Forfeited
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at December 31, 2007
                  
                  
                  50,393
                  
                  
                  
                  14.62Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (19,923
                  )
                  
                  
                  14.35Forfeited
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at December 31, 2008
                  
                  
                  30,470
                  
                  
                  $
                  14.80
  The value
of restricted shares is based upon the closing price of the common stock on the
date of grant.  The shares vest over a four year service period with
compensation expense recognized on a straight-line respectively.
  Stock
based compensation expense related to stock grants was $212,100 and $247,346 for
the year ended December 31, 2008 and 2007.
  As of
December 31, 2008, there was approximately $340,835 of unrecognized compensation
cost related to non-vested stock grants that will be recognized over the next
three years.
  17.           Commitments
and Contingencies
  As of
December 31, 2008, future minimum rental payments under non-cancelable operating
leases are as follows:
  2009
                  
                  $
                  899,1002010
                  
                  
                  933,5992011
                  
                  
                  763,7102012
                  
                  
                  789,6602013
                  
                  
                  790,418Thereafter
                  
                  
                  2,284,354$
                  6,460,841
 
 Rent
expense aggregated $846,166, and $772,439 for the years ended December 31, 2008
and 2007, respectively.
  F-29
  Commitments
With Off-Balance Sheet Risk
 
 The
consolidated balance sheet does not reflect various commitments relating to
financial instruments which are used in the normal course of
business.  Management does not anticipate that the settlement of those
financial instruments will have a material adverse effect on the Company’s
financial position.  These instruments include commitments to extend
credit and letters of credit.  These financial instruments carry
various degrees of credit risk, which is defined as the possibility that a loss
may occur from the failure of another party to perform according to the terms of
the contract.  As these off-balance sheet financial instruments have
essentially the same credit risk involved in extending loans, the Bank generally
uses the same credit and collateral policies in making these commitments and
conditional obligations as it does for on-balance sheet investments.
Additionally, as some commitments and conditional obligations are expected to
expire without being drawn or returned, the contractual amounts do not
necessarily represent future cash requirements.
  Commitments
to extend credit are legally binding loan commitments with set expiration
dates.  They are intended to be disbursed, subject to certain
conditions, upon request of the borrower.  The Bank receives a fee for
providing a commitment.  The Bank was committed to advance
$180,965,000 and $114,175,000 to its borrowers as of December 31, 2008 and
December 31, 2007, respectively.
 
 The Bank
issues financial standby letters of credit that are within the scope of FASB
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others”.  These are irrevocable undertakings by the Bank to guarantee
payment of a specified financial obligation.  Most of the Bank’s
financial standby letters of credit arise in connection with lending
relationships and have terms of one year or less.  The maximum
potential future payments the Bank could be required to make under these standby
letters of credit amounted to $3,946,649 at December 31, 2008 and $5,546,723 at
December 31, 2007.
  The Bank
also enters into forward contracts to sell residential mortgage loans it has
closed (loans held for sale) or that it expects to close (commitments to
originate loans held for sale).  These contracts are used to reduce
the Bank’s market price risk during the period from the commitment date to the
sale date.  The notional amount of the Bank’s forward sales contracts
was approximately $5.7 million at December 31, 2008 and $10.3 million at
December 31, 2007.  Changes in fair value of the forward sales
contracts, and the related loan origination commitments and closed loans, were
not significant at December 31, 2008 and 2007.
 
 Litigation
  The
Company may, in the ordinary course of business, become a party to litigation
involving collection matters, contract claims and other legal proceedings
relating to the conduct of its business.  The Company may also have
various commitments and contingent liabilities which are not reflected in the
accompanying consolidated statement of condition.  Management is not
aware of any present legal proceedings or contingent liabilities and commitments
that would have a material impact on the Company’s financial position or results
of operations.
 
 18.           Other
Operating Expenses
  The
components of other operating expenses for the years ended December 31, 2008 and
2007 are as follows:
 
 
 2008
                  
                  
                  2007Equipment
      expense
                  
                  $
                  626,467
                  
                  
                  $
                  485,792Marketing
                  
                  
                  246,879
                  
                  
                  
                  106,822Regulatory,
      professional and other
                    consulting
      fees
                  
                  
                  861,006
                  
                  
                  
                  296,667Office
      expense
                  
                  
                  649,461
                  
                  
                  
                  572,293FDIC
      deposit insurance
                  
                  
                  196,072
                  
                  
                  
                  38,422Directors’
      fees
                  
                  
                  108,000
                  
                  
                  
                  100,375Other
      real estate owned expenses
                  
                  
                  136,648
                  
                  
                  
                  11,871All
      other expenses
                  
                  
                  1,100,315
                  
                  
                  
                  804,577$
                  3,924,848
                  
                  
                  $
                  2,416,859
  F-30
  19.           Regulatory
Requirements
  The
Company and the  Bank are subject to various regulatory capital
requirements administered by the Federal and state banking
agencies.  Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Bank’s and the
Company’s financial statements.  Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of the
Company’s and the Bank’s assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices.  The
Company’s and the Bank’s capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
  Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital to average assets (as defined).  As of December
31, 2008, the Company and the Bank met all capital adequacy requirements to
which they are subject.
  To be
categorized as adequately capitalized, the Company and the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table.  As of December 31, 2008, the most recent
notification from the Bank’s primary regulator categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action.  There are no conditions or events since that notification
that management believes have changed the Bank’s category. Certain bank
regulatory limitations exist on the availability of Bank assets available for
the payment of dividends without prior approval of bank regulatory
authorities.
 
 Actual
capital amounts and ratios for the Company and the Bank as of December 31, 2008
and 2007 are as follows:
 
 To
      Be Well CapitalizedUnder
      PromptFor
      Capital
                  
                  
                  CorrectiveActual
                  
                  
                  Adequacy
      Purposes
                  
                  
                  Action
      ProvisionsAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioAs ofDecember 31, 2008-CompanyTotal Capital (to Risk Weighted Assets)
                  
                  $
                  76,475,124
                  
                  
                  
                  17.90
                  %
                  
                  $
                  34,184,717
                  
                  
                  
                  >8
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ATier I Capital (to Risk Weighted Assets)
                  
                  
                  72,790,360
                  
                  
                  
                  17.03
                  %
                  
                  
                  17,092,359
                  
                  
                  
                  >4
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ATier I Capital (to Average Assets)
                  
                  
                  72,790,360
                  
                  
                  
                  14.05
                  %
                  
                  
                  20,715,932
                  
                  
                  
                  >4
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABankTotal Capital (to Risk Weighted Assets)
                  
                  $
                  75,316,536
                  
                  
                  
                  17.67
                  %
                  
                  $
                  34,096,080
                  
                  
                  
                  >8
                  %
                  
                  $
                  42,620,100
                  
                  
                  
                  >10
                  %Tier I Capital (to Risk Weighted Assets)
                  
                  
                  71,631,772
                  
                  
                  
                  16.81
                  %
                  
                  
                  17,048,040
                  
                  
                  
                  >4
                  %
                  
                  
                  25,572,060
                  
                  
                  
                  >6
                  %Tier I Capital (to Average Assets)
                  
                  
                  71,631,772
                  
                  
                  
                  13.88
                  %
                  
                  
                  20,636,440
                  
                  
                  
                  >4
                  %
                  
                  
                  25,795,550
                  
                  
                  
                  >5
                  %As
      of December 31, 2007CompanyTotal Capital (to Risk Weighted Assets)
                  
                  $
                  62,006,573
                  
                  
                  
                  17.75
                  %
                  
                  $
                  27,949,600
                  
                  
                  
                  >8
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ATier I Capital (to Risk Weighted Assets)
                  
                  
                  54,437,463
                  
                  
                  
                  15.58
                  %
                  
                  
                  13,974,800
                  
                  
                  
                  >4
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ATier I Capital (to Average Assets)
                  
                  
                  54,437,463
                  
                  
                  
                  12.66
                  %
                  
                  
                  17,196,222
                  
                  
                  
                  >4
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABankTotal Capital (to Risk Weighted Assets)
                  
                  $
                  59,961,320
                  
                  
                  
                  17.16
                  %
                  
                  $
                  27,949,600
                  
                  
                  
                  >8
                  %
                  
                  $
                  34,937,000
                  
                  
                  
                  >10
                  %Tier I Capital (to Risk Weighted Assets)
                  
                  
                  56,613,240
                  
                  
                  
                  16.20
                  %
                  
                  
                  13,974,800
                  
                  
                  
                  >4
                  %
                  
                  
                  20,962,200
                  
                  
                  
                  >6
                  %Tier I Capital (to Average Assets)
                  
                  
                  56,613,240
                  
                  
                  
                  13.20
                  %
                  
                  
                  17,152,520
                  
                  
                  
                  >4
                  %
                  
                  
                  21,440,650
                  
                  
                  
                  >5
                  %
 
 
 Dividend
payments by the Bank to the Company are subject to the New Jersey Banking Act of
1948 (the “Banking Act”) and the Federal Deposit Insurance Act (the
“FDIA”).  Under the Banking Act and the FDIA, the Bank may not pay any
dividends if after paying the dividend, it would be undercapitalized under
applicable capital requirements.  In addition to these explicit
limitations, the federal regulatory agencies are authorized to prohibit a
banking subsidiary or bank holding company from engaging in an unsafe or unsound
banking practice.  Depending upon the circumstances, the agencies
could take the position that paying a dividend would constitute an unsafe or
unsound banking practice.
 
 In the
event the Company defers payments on the junior subordinated debentures used to
fund payments to be made pursuant to the terms of  the Capital
Securities, the Company would be unable to pay cash dividends on its common
stock until the deferred payments are made.  In addition to the junior
subordinated debenture restrictions on common stock dividends, the dividend
rights of the Company’s common stockholders are qualified by and subject to the
terms of the Preferred Stock Series B (see discussion below under Footnote 20,
Shareholders’ Equity).
 
 F-31
  20.           Shareholders’
Equity
  On
December 23, 2008, pursuant to the Troubled Asset Relief Program (‘TARP”)
Capital Purchase Program (the “CPP”) under the Emergency Economic Stabilization
Act of 2008 (“EESA”), the Company entered into a Letter Agreement, including the
Securities Purchase Agreement – Standard Terms, with the United States
Department of the Treasury (the “Treasury”) pursuant to which the Company issued
and sold, and the Treasury purchased (i) 12,000 shares of the Company’s Fixed
Rate Cumulative Perpetual Preferred Stock, Series B (“Preferred Stock Series B”)
and (ii) a ten-year warrant to purchase up to 200,222 shares of the Company’s
common stock, no par value, at an initial exercise price of $8.99 per share, for
aggregate cash consideration of $12,000,000.  As a result of the 5%
stock dividend paid on February 2, 2009 to holders of record as of the close of
business on January 20, 2009, the shares of common stock initially underlying
the warrant were adjusted to 210,233 shares and the initial exercise price was
adjusted to $8.562 per share.
 
 The
Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per
year for the first five years and thereafter at a rate of 9% per year and has a
liquidation preference of $1,000 per share. The warrant provides for the
adjustment of the exercise price and the number of shares of the Company’s
common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other
assets to holders of the Company’s common stock, and upon certain issuances of
the Company’s common stock at or below a specified price relative to the initial
exercise price. The warrant is immediately exercisable and expires ten years
from the issuance date. If, on or prior to December 31, 2009, the Company
receives aggregate gross cash proceeds of not less than $12,000,000 from
qualified equity offerings announced after October 13, 2008, the number of
shares of common stock issuable pursuant to the Treasury’s exercise of the
warrant will be reduced by one-half of the original number of shares. In
addition, the Treasury has agreed not to exercise voting power with respect to
any shares of common stock issued upon exercise of the warrant.
 
 The
Company is subject to restrictions contained in the agreement between the
Treasury and the Company related to the sale of the Preferred Stock Series B
which among other things restricts the payment of cash dividends or making other
distributions by the Company on its common stock or the repurchase of its shares
of common stock or other capital stock or other equity securities of any kind of
the Company or any of its or its affiliates’ trust preferred securities until
the third anniversary of the purchase of the Preferred Stock Series B by the
Treasury with certain exceptions without approval of the Treasury and the
Company is prohibited by the terms of the Preferred Stock Series B from paying
dividends on the common stock of the Company or redeeming or otherwise acquiring
its common stock or certain other of its equity securities unless all dividends
on the Preferred Stock Series B have been declared and either paid in full or
set aside with certain limited exceptions.
 
 In
addition, EESA and guidance issued by the Treasury limit executive compensation
and require the reporting of information to the Treasury and others and limit
the deductibility for Federal income tax purposes of compensation paid to
certain executives in excess of $500,000 per year and the payment of certain
severance  and change in control payments to certain
executives.  The American Recovery and Reinvestment Act of 2009 (the
“Stimulus Package Act”) contains further limitations on the payment of
compensation to certain executives of the Company or the Bank, the claw back of
certain compensation paid to certain executives of the Company or the Bank and
imposes new corporate governance requirements on the Company, including the
inclusion of a non-binding “say to pay” proposal in the Company’s annual proxy
statement.
 
 The Board
of Governors of the Federal Reserve System has issued a supervisory letter to
bank holding companies that contains guidance on when the board of directors of
a bank  holding company should eliminate or defer or severely limit
dividends including for example when net income available for shareholders for
the past four quarters net of previously paid dividends paid during that period
is not sufficient to fully fund the dividends. The letter also contains guidance
on the redemption of stock by bank holding companies which urges bank holding
companies to advise the Federal Reserve of any such redemption or repurchase of
common stock for cash or other value which results in the net reduction of a
bank holding company’s capital at the beginning of the quarter below the capital
outstanding at the end of the quarter.
 
 The
Company’s Preferred Stock Series B and the warrant issued under the TARP CCP
qualify and are accounted for as permanent equity on the Company’s balance
sheet.  Of the $12 million in issuance proceeds, $11.4 million and
$0.6 million were allocated to the Preferred Stock Series B and the warrant,
respectively, based upon their estimated relative fair values as of December 23,
2008.  The resulting discount of $0.6 million recorded for the
Preferred Stock Series B is being accreted by a charge to retained earnings over
a five year estimated life of the securities based on the likelihood of their
redemption by the Company within that timeframe.  Offering costs of
$50,000 were incurred resulting in net proceeds of $11,950,000.
  F-32
  In July,
2005, the Board of Directors of the Company authorized a stock repurchase
program under which the Company may repurchase in open market or privately
negotiated transactions up to 5%, or 195,076 shares, adjusted for stock
dividends, of its common shares.  The Company established this
repurchase program in order to increase shareholder value.  During the
year ended December 31, 2008, the Company repurchased 6,417 shares, as adjusted
for subsequent stock dividends, for an aggregate price of approximately
$70,527.
 
 21.           Fair
Value Disclosures
  In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value
measurements.  SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements.  The new standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and for interim periods within those fiscal
years.  The Company adopted SFAS 157 effective for its fiscal year
beginning January 1, 2008.
  In
December 2007, the FASB issued FASB Staff Position 157-2 “Effective Date of FASB Statement No.
157” (“FSP 157-2”).  FSP 157-2 delays the effective date of
SFAS 157 for all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years.  As such, the Company only partially adopted the
provisions of SFAS 157 and will begin to account and report for non-financial
assets and liabilities in 2009.  In October 2008, the FASB issued FASB
Staff Position 157-3, “Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active” (“FSP
157-3”), to clarify the application of the provisions of SFAS 157 in an inactive
market and how an entity would determine fair value in an inactive
market.  FSP 157-3 is effective immediately and applies to our
December 31, 2008 consolidated financial statements.  The adoption of
SFAS 157 and FSP 157-3 had no impact on the amounts reported in the consolidated
financial statements.
  The
primary effect of SFAS 157 on the Company was to expand the required disclosures
pertaining to the methods used to determine fair values.
  SFAS 157
established a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value.  The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements).  The three levels of the fair value
hierarchy under SFAS 157 are as follows:
  Level
1:
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities.
  Level
2:
            Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability.
  Level
      3:
            Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e., supported with little
      or no market activity).
  An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
  A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.  These valuation
methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value effective January 1,
2008.
  In
general, fair value is based upon quoted market prices, where
available.  If such quoted market prices are not available, fair value
is based upon internally developed models that primarily use, as inputs,
observable market-based parameters.  Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value.  These adjustments may include amounts to reflect counterparty
credit quality and counterparty creditworthiness, among other things, as well as
unobservable parameters.  Any such valuation adjustments are applied
consistently over time.  The Company’s valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable
value or reflective value or reflective of future values.  While
management believes the Company’s valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date.
  F-33
  Securities Available for
Sale.  Securities classified as available for sale are reported
at fair value utilizing Level 2 Inputs.  For these securities, the
Company obtains fair value measurements from an independent pricing
service.  The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayments
speeds, credit information and the security’s terms and conditions, among other
things.
  Impaired
loans.Loans included in the following table are those
accounted for under SFAS 114, “Accounting by Creditors for
Impairment of a Loan,”in which the Company has measured impairment
generally based on the fair value of the loan’s collateral.  Fair
value is generally determined based upon independent third party appraisals of
the properties, or discounted cash flows based on the expected
proceeds.  These assets are included as Level 3 fair values, based
upon the lowest level of input that is significant to the fair value
measurements.  The fair value consists of the loan balances less
valuation allowance as determined under SFAS 114.
 
  Derivatives.  Derivatives
are reported at fair value utilizing Level 2 Inputs.  The Company
obtains dealer quotations to value its interest rate swap.
  The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of December 31, 2008, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value:
  Level
      1 Inputs
                  
                  
                  Level
      2 Inputs
                  
                  
                  Level
      3 Inputs
                  
                  
                  Total
      Fair ValueSecurities
      available for sale
                  
                  $
                  -
                  
                  
                  $
                  93,477,023
                  
                  
                  $
                  -
                  
                  
                  $
                  93,477,023Derivative
      liabilities
                  
                  
                  -
                  
                  
                  
                  (1,159,156
                  )
                  
                  
                  -
                  
                  
                  
                  (1,159,156
                  )
 
 Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment).  Financial assets and financial liabilities measured at
fair value on a non-recurring basis at December 31, 2008 consist of impaired
loans as follows:
 
 Level
      1 Inputs
                  
                  
                  Level
      2 Inputs
                  
                  
                  Level
      3 Inputs
                  
                  
                  Total
      Fair ValueImpaired
      Loans
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,427,673
                  
                  
                  $
                  1,427,673
 
 Impaired
loans measured at fair value at December 31, 2008, and included in the above
table, consisted of eleven loans having a principal balance of $1,913,012 and
specific loan loss allowances of $485,339.
 
 Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test.  Certain non-financial assets measured
at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial
long-lived assets measured at fair value for impairment
assessment.  As stated above, SFAS No. 157 will be applicable to these
fair value measurements beginning January 1, 2009.
  Effective
January 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115”.  SFAS No. 159 permits the Company to choose to
measure eligible items at fair value at specified election
dates.  Unrealized gains and losses on items for which the fair value
measurement option has been elected are reported in earnings at each subsequent
reporting date.  The fair value option (i) may be applied instrument
by instrument, with certain exceptions, and thus, the Company may record
identical financial assets and liabilities at fair value or by another
measurement basis permitted under generally accepted accounting principals, (ii)
is irrevocable (unless a new election date occurs) and (iii) is applied only to
entire instruments and not to portions of instruments.  Adoption of
SFAS No. 159 on January 1, 2008 did not have a significant impact on the
Company’s financial statements.
  F-34
  The
following is a summary of fair value versus the carrying value of financial
instruments.  For the Company and the Bank, as for most financial
institutions, the bulk of its assets and liabilities are considered financial
instruments.  Many of the financial instruments lack an available
trading market as characterized by a willing buyer and willing seller engaging
in an exchange transaction.  Therefore, significant estimations and
present value calculations were used for the purpose of this
note.  Changes in assumptions could significantly affect these
estimates.
 
 Estimated
fair values have been determined by using the best available data and an
estimation methodology suitable for each category of financial
instruments.  Financial instruments, such as securities available for
sale and securities held to maturity, actively traded in the secondary market
have been valued using available market prices.  The carrying value of
cash and cash equivalents approximates fair value due to the short-term nature
of these instruments.  Other borrowings are valued on a discounted
cash flow method utilizing current market rates for instruments of similar
remaining terms.
 
 Financial
instruments with stated maturities have been valued using a present value
discounted cash flow with a discount rate approximating current market for
similar assets and liabilities.  For those loans and deposits with
floating interest rates, it is assumed that estimated fair values generally
approximate the recorded book balances.
 
 The
estimated fair values, and the recorded book balances, were as
follows:
 
 December
      31, 2008
              
              
              December
      31, 2007Carrying
              
              
              Estimated
              
              
              Carrying
              
              
              EstimatedValue
              
              
              Fair
      Value
              
              
              Value
              
              
              Fair
      ValueCash
      and cash equivalents
              
              $
              14,433,119
              
              
              $
              14,433,119
              
              
              $
              7,548,102
              
              
              $
              7,548,102Securities
      available for sale
              
              
              93,477,023
              
              
              
              93,477,023
              
              
              
              75,192,137
              
              
              
              75,192,137Securities
      held to maturity
              
              
              36,550,557
              
              
              
              36,140,379
              
              
              
              23,512,346
              
              
              
              23,411,269Loans
      held for sale
              
              
              5,702,082
              
              
              
              5,702,082
              
              
              
              10,322,005
              
              
              
              10,321,000Gross
      loans
              
              
              377,348,416
              
              
              
              382,020,000
              
              
              
              294,760,718
              
              
              
              294,845,000Accrued
      interest receivable
              
              
              2,192,601
              
              
              
              2,192,601
              
              
              
              2,495,732
              
              
              
              2,495,732Deposits
              
              
              (414,684,731
              )
              
              
              (416,809,000
              )
              
              
              (329,332,368
              )
              
              
              (329,561,000
              )Other
      borrowings
              
              
              (51,500,000
              )
              
              
              (54,486,000
              )
              
              
              (35,600,000
              )
              
              
              (36,630,000
              )Redeemable
      subordinated debentures
              
              
              (18,557,000
              )
              
              
              (18,583,000
              )
              
              
              (18,557,000
              )
              
              
              (18,557,013
              )Interest
      rate swap contract
              
              
              (1,159,156
              )
              
              
              (1,159,156
              )
              
              
              (99,754
              )
              
              
              (99,754
              )Accrued
      interest payable
              
              
              (1,984,102
              )
              
              
              (1,984,102
              )
              
              
              (1,992,187
              )
              
              
              (1,992,187
              )
 
 Loan
commitments and standby letters of credit as of December 31, 2008 and 2007 are
based on fees charged for similar agreements; accordingly, the estimated fair
value of loan commitments and standby letters of credit is nominal.
 
 22.           Condensed
Financial Statements of 1st Constitution Bancorp (Parent Company
Only)
 
 CONDENSED STATEMENTS OF
CONDITION
 December
      31,
                                    2008
                                  
                                  
                                  December
      31,
                                    2007Assets:Cash
                                  
                                  $
                                  658,093
                                  
                                  
                                  $
                                  938,826Investment
      securities available for sale
                                  
                                  
                                  557,000
                                  
                                  
                                  
                                  557,000Investment
      in subsidiaries
                                  
                                  
                                  71,898,891
                                  
                                  
                                  
                                  56,927,524Other
      assets
                                  
                                  
                                  1,062,668
                                  
                                  
                                  
                                  1,106,427Total
      Assets
                                  
                                  $
                                  74,176,652
                                  
                                  
                                  $
                                  59,529,777Liabilities
      And Shareholders’ EquitySubordinated
      debentures
                                  
                                  
                                  18,557,000
                                  
                                  
                                  
                                  18,557,000Shareholders’
      equity
                                  
                                  
                                  55,619,652
                                  
                                  
                                  
                                  40,972,777Total
      Liabilities and Shareholder’s Equity
                                  
                                  $
                                  74,176,652
                                  
                                  
                                  $
                                  59,529,777
  F-35
  CONDENSED
STATEMENTS OF INCOME
 Year
      ended December 31,2008
                              
                              
                              2007Income:Interest
                              
                              $
                              36,347
                              
                              
                              $
                              76,123Total
      Income
                              
                              
                              36,347
                              
                              
                              
                              76,123Expense:Interest
                              
                              
                              1,096,756
                              
                              
                              
                              1,483,399Other
                              
                              
                              0
                              
                              
                              
                              11,481Total
      Expense
                              
                              
                              1,096,756
                              
                              
                              
                              1,494,880Loss
      before income taxes and equity in undistributed income of
                                Subsidiaries
                              
                              
                              (1,060,409
                              )
                              
                              
                              (1,418,757
                              )Federal
      income tax benefit
                              
                              
                              (352,152
                              )
                              
                              
                              (432,258
                              )Loss
      before equity in undistributed income of subsidiaries
                              
                              
                              (708,257
                              )
                              
                              
                              (986,499
                              )Equity
      in undistributed income of subsidiaries
                              
                              
                              3,467,715
                              
                              
                              
                              6,429,281Net
      Income
                              
                              $
                              2,759,458
                              
                              
                              $
                              5,442,782
  CONDENSED
STATEMENTS OF CASH FLOWS
 Year
      ended December 31,2008
                                    
                                    
                                    2007Operating
      Activities:Net
      Income
                                    
                                    $
                                    2,759,458
                                    
                                    
                                    $
                                    5,442,782Adjustments:Decrease
      in investment securities available for sale
                                    
                                    
                                    0
                                    
                                    
                                    
                                    155,000(Increase)
      decrease in other assets
                                    
                                    
                                    43,760
                                    
                                    
                                    
                                    (587,772
                                    )Equity
      in undistributed income of subsidiaries
                                    
                                    
                                    (3,467,715
                                    )
                                    
                                    
                                    (6,429,281
                                    )Net
      cash used in operating activities
                                    
                                    
                                    (664,497
                                    )
                                    
                                    
                                    (1,419,271
                                    )Investing
      Activities:Investment
      in subsidiaries
                                    
                                    
                                    (12,000,000
                                    )
                                    
                                    
                                    0Repayment
      of investments in subsidiaries
                                    
                                    
                                    273,382
                                    
                                    
                                    
                                    0Net
      cash (used in) provided by investing activities
                                    
                                    
                                    (11,726,618
                                    )
                                    
                                    
                                    0Financing
      Activities:Issuance
      of common stock, net
                                    
                                    
                                    230,909
                                    
                                    
                                    
                                    310,833Purchase
      of treasury stock
                                    
                                    
                                    (70,527
                                    )
                                    
                                    
                                    (246,903
                                    )Issuance
      of preferred stock and warrants, net
                                    
                                    
                                    11,950,000
                                    
                                    
                                    
                                    0Repayments
      of subordinated debentures
                                    
                                    
                                    0
                                    
                                    
                                    
                                    (5,155,000
                                    )Net
      cash provided by (used in) financing activities
                                    
                                    
                                    12,110,382
                                    
                                    
                                    
                                    (5,091,070
                                    )Net
      decrease in cash
                                    
                                    
                                    (280,733
                                    )
                                    
                                    
                                    (6,510,341
                                    )Cash
      as of beginning of year
                                    
                                    
                                    938,826
                                    
                                    
                                    
                                    7,449,167Cash
      as of end of year
                                    
                                    $
                                    658,093
                                    
                                    
                                    $
                                    938,826
  F-36
  23.           Unaudited
Quarterly Financial Data
 
 The
following sets forth a condensed summary of the Company’s quarterly results of
operations:
  2008Dec.
      31
                          
                          
                          Sept.
      30
                          
                          
                          June
      30
                          
                          
                          March
      31Summary
      of OperationsInterest
      income
                          
                          $
                          7,371,872
                          
                          
                          $
                          7,389,253
                          
                          
                          $
                          7,192,130
                          
                          
                          $
                          7,167,056Interest
      expense
                          
                          
                          3,185,601
                          
                          
                          
                          3,201,563
                          
                          
                          
                          3,181,357
                          
                          
                          
                          3,163,926Net
      interest income
                          
                          
                          4,186,271
                          
                          
                          
                          4,187,690
                          
                          
                          
                          4,010,773
                          
                          
                          
                          4,003,130Provision
      for loan losses
                          
                          
                          105,000
                          
                          
                          
                          175,000
                          
                          
                          
                          195,000
                          
                          
                          
                          165,000Net
      interest income after provisionfor
      loan losses
                          
                          
                          4,081,271
                          
                          
                          
                          4,012,690
                          
                          
                          
                          3,815,773
                          
                          
                          
                          3,838,130Non-interest
      income
                          
                          
                          734,467
                          
                          
                          
                          976,211
                          
                          
                          
                          804,904
                          
                          
                          
                          786,377Non-interest
      expense
                          
                          
                          4,091,269
                          
                          
                          
                          3,928,263
                          
                          
                          
                          3,617,142
                          
                          
                          
                          3,414,350Income
      before income taxes
                          
                          
                          724,469
                          
                          
                          
                          1,060,638
                          
                          
                          
                          1,003,535
                          
                          
                          
                          1,210,157Income
      taxes
                          
                          
                          267,448
                          
                          
                          
                          278,244
                          
                          
                          
                          285,689
                          
                          
                          
                          407,960Net  income
                          
                          $
                          457,021
                          
                          
                          $
                          782,394
                          
                          
                          $
                          717,846
                          
                          
                          $
                          802,197Net
      income per share :Basic
                          
                          $
                          0.11
                          
                          
                          $
                          0.19
                          
                          
                          $
                          0.17
                          
                          
                          $
                          0.19Diluted
                          
                          $
                          0.11
                          
                          
                          $
                          0.18
                          
                          
                          $
                          0.17
                          
                          
                          $
                          0.192007Dec.
      31
                          
                          
                          Sept.
      30
                          
                          
                          June
      30
                          
                          
                          March
      31Summary
      of OperationsInterest
      income
                          
                          $
                          7,708,264
                          
                          
                          $
                          7,825,738
                          
                          
                          $
                          7,445,478
                          
                          
                          $
                          7,389,164Interest
      expense
                          
                          
                          3,220,991
                          
                          
                          
                          3,307,196
                          
                          
                          
                          3,130,961
                          
                          
                          
                          2,931,491Net
      interest income
                          
                          
                          4,487,273
                          
                          
                          
                          4,518,542
                          
                          
                          
                          4,314,517
                          
                          
                          
                          4,457,673Provision
      for loan losses
                          
                          
                          30,000
                          
                          
                          
                          30,000
                          
                          
                          
                          30,000
                          
                          
                          
                          40,000Net
      interest income after provisionFor
      loan losses
                          
                          
                          4,457,273
                          
                          
                          
                          4,488,542
                          
                          
                          
                          4,284,517
                          
                          
                          
                          4,417,673Non-interest
      income
                          
                          
                          620,459
                          
                          
                          
                          645,706
                          
                          
                          
                          648,423
                          
                          
                          
                          643,741Non-interest
      expense
                          
                          
                          3,140,326
                          
                          
                          
                          3,011,371
                          
                          
                          
                          2,875,337
                          
                          
                          
                          3,074,224Income
      before income taxes
                          
                          
                          1,937,406
                          
                          
                          
                          2,122,877
                          
                          
                          
                          2,057,603
                          
                          
                          
                          1,987,190Income
      taxes
                          
                          
                          674,337
                          
                          
                          
                          687,147
                          
                          
                          
                          639,504
                          
                          
                          
                          661,296Net  income
                          
                          $
                          1,263,069
                          
                          
                          $
                          1,435,730
                          
                          
                          $
                          1,418,099
                          
                          
                          $
                          1,325,894Net
      income per share :Basic
                          
                          $
                          0.30
                          
                          
                          $
                          0.34
                          
                          
                          $
                          0.34
                          
                          
                          $
                          0.31Diluted
                          
                          $
                          0.30
                          
                          
                          $
                          0.34
                          
                          
                          $
                          0.33
                          
                          
                          $
                          0.31
 24.           Derivative
Financial Instruments
 
 The use
of derivative financial instruments creates exposure to credit
risk.  This credit risk relates to losses that would be recognized if
the counterparts fail to perform their obligations under the
contracts.  As part of the Company’s interest rate risk management
process, the Company entered into an interest rate derivative contract effective
November 27, 2007.  Interest rate derivative contracts are typically
used to limit the variability of the Company’s net interest income that could
result due to shifts in interest rates.  This derivative interest rate
contract was an interest rate swap used to modify the repricing characteristics
of a specific liability.  At December 31, 2008 and December 31, 2007
the Company’s position in derivative contracts consisted entirely of this
interest rate swap.
 
 Maturity
                      Hedged Liability
                      Notional
                        Amounts
                      Swap
      Fixed
                        Interest Rates
                      Swap
      Variable
                        Interest RatesJune
      15, 2011
                      Trust
      Preferred Securities
                      $18,000,000
                      5.87%
                      3
      month LIBOR plus
                        165
      basis
points
 
 During
2006, the Company issued trust preferred securities to fund loan growth and
generate liquidity.  In conjunction with the trust preferred
securities issuance, the Company entered into a $18.0 million in pay fixed swap
designated as fair value hedges that was used to convert floating rate quarterly
interest payments indexed to three month LIBOR, based on common notional amounts
and maturity dates.  The pay fixed swap changed the repricing
characteristics of the quarterly interest payments from floating rate to fixed
rate.   The fair value of the pay fixed swap outstanding at December
31, 2008 and 2007 was ($1,159,156) and ($99,754), respectively, and was
recorded in other liabilities in the consolidated balance
sheets.
  F-37
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
  1st
      CONSTITUTION BANCORPDate:  March 27,
      2009
            By:
            /s/ ROBERT
      F. MANGANORobert
      F. ManganoPresident
      and Chief Executive Officer(Principal
      Executive Officer)
 
  
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 Signature
              
              Capacity
              
              Date/s/
      ROBERT F. MANGANO
              
              President,
      Chief Executive Officer and Director
              
              March 27,
      2009Robert
      F. Mangano
                
                /s/
      CHARLES S. CROW, III
              
              (Principal
      Executive Officer)
                
                Chairman
      of the Board
              
              March 27,
      2009Charles
      S. Crow, III
                
                /s/
      DAVID C. REED
              
              Director
              
              March 27,
      2009David
      C. Reed
                
                /s/
      WILLIAM M. RUE
              
              Director
              
              March 27,
      2009William
      M. Rue
                
                /s/
      FRANK E. WALSH, III
              
              Director
              
              March 27,
      2009Frank
      E. Walsh, III
                
                /s/
      JOSEPH M. REARDON
              
              Senior
      Vice President and Treasurer
              
              March 27,
      2009Joseph
      M. Reardon
              
              (Principal
      Accounting and Financial Officer)
     45