**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**





**FORM
      10-K**


(Mark
      One)


xANNUAL
      REPORT UNDER
      SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      fiscal year ended December 31, 2006





oTRANSITION
      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




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:





Stock
      Purchase Rights Relating to Common Stock, No Par Value


(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. o




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




Large
      accelerated filer  o Accelerated
      filer   o Non-accelerated
      filer  x







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




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 $57,045,025.




As
      of
      March 13, 2007, 3,742,662 shares of the registrant’s common stock were
      outstanding.




Portions
      of the registrant’s definitive Proxy Statement for its 2007 Annual Meeting of
      Shareholders are incorporated by reference into Part III of this
      report.












**FORM
                10-K****TABLE
                OF CONTENTS****PART
                I**Item
              1.
            
            Business
            
            1Item 1A.
            
            Risk Factors
            
            11Item
              1B.
            
            Unresolved
              Staff
              Comments
            
            13Item
              2.
            
            Properties
            
            13Item
              3.
            
            Legal
              Proceedings
            
            14Item
              4.
            
            Submission
              of Matters to a Vote of Security Holders
            
            14**PART
                II**Item
              5.
            
            Market
              for Registrant’s Common Equity, Related Shareholder Matters
              and Issuer Purchases of Equity
              Securities
            
            14Item
              6.
            
            Selected
              Financial Data
            
            15Item
              7.
            
            Management’s
              Discussion and Analysis of Financial Condition and
              Results of Operation
            
            17Item
              7A.
            
            Quantitative
              and
              Qualitative Disclosures About Market Risk
            
            37Item
              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
            
            38**PART
                III**Item
              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
            
            39Item
              13.
            
            Certain
              Relationships and Related Transactions, and Director
              Independence
            
            40Item
              14.
            
            Principal
              Accountant Fees and Services
            
            40**PART
                IV**Item
              15.
            
            Exhibits
              and Financial Statement Schedules
            
            40SIGNATURES
            
            45





i


**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 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.





As
      of
      December 31, 2006, the Company, on a consolidated basis, had total assets of
      approximately $392.7 million, total deposits of approximately $312.7 million,
      total gross loans of approximately $265.1 million and total shareholders’ equity
      of approximately $35.2 million.





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 nine additional branch offices
      in
      downtown Cranbury, Hamilton Square, 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”).





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.




1


*Expansion
      of Branch Banking*




The
      Bank
      continually evaluates opportunities for branch bank expansion, either mini
      branches or full service banks, to continue to grow and meet the needs of the
      community. During the third quarter of 2006, the Bank relocated its Plainsboro
      branch office from 10 Schalks Crossing Road to 11 Schalks Crossing Road and
      opened a new branch office at 180 Main Street, Fort Lee, Bergen County, New
      Jersey. During the fourth quarter of 2006, the Bank announced that it had
      entered into a Purchase and Assumption Agreement to acquire all of the deposit
      liabilities and related assets of the Hightstown, New Jersey branch banking
      office of Sun National Bank. Pending the receipt of regulatory agency approvals,
      the transaction is scheduled to close during the first quarter of 2007.




*Innovative
      Product Offerings*




In
      the
      fourth quarter of 2006, the Bank launched its new EZ Deposit service. This
      new
      product allows customers of the Bank to scan checks, using a scanning device
      furnished by the Bank, at the customer’s place of business and transmit them
      directly to the Bank for deposit into the customer’s account. The Check 21 Act
      allows for the creation of Image Replacement Documents (“IRD”) that are the
      legal equivalent of the original check. Therefore, the check images captured
      at
      customer locations are sent electronically to the Bank and customers can reduce
      the number of trips to the Bank, as deposits are made directly from their place
      of business to the Bank. The service also has a later deposit time cutoff than
      branch locations and this allows customers to process deposits and have them
      posted the same day rather than the following business day.




By
      the
      end of 2006, there were 13 EZ Deposit customers using the service and a number
      of customers requesting the service in 2007. Management believes that there
      is
      great customer acceptance of this service and that the demand for this service
      will be strong in 2007.




*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.




**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.




2


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.




*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.




3


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 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.




*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.




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 (i) has a total risk-based capital ratio of less than
      8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0
      percent, or (iii) 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, 2006, 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, 2006, the Company maintained a Tier 1 capital ratio of 15.42%
      and
      total qualifying capital ratio of 20.23%.




5


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, 2006 was 12.18%.




On
      April
      10, 2002, 1 ST 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 in a pooled institutional placement transaction
      maturing April 22, 2032. These Subordinated Debentures constitute the sole
      assets of Trust I. These Subordinated Debentures are redeemable in whole or
      part
      prior to maturity after April 22, 2007. Trust I is 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, provides 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 on April 22, 2007 the debt securities issued by the Company
      to Trust I.




On
      May
      30, 2006, 1 ST Constitution Bancorp established 1 ST Constitution
      Capital Trust II, a Delaware business trust subsidiary (“Trust II”), for the
      sole purpose of issuing $18 million of trust preferred securities (the “Capital
      Securities”). 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 proceeds from the sale of the Capital Securities were loaned to the Company
      under 30-year floating rate junior subordinated debentures issued to Trust
      II by
      the Company. The debentures are the only asset of Trust II. Interest payments
      on
      the debentures flow through Trust II to the pooling vehicle. Payments of
      distributions by Trust II to the pooling vehicle are guaranteed by the
      Company.




Management
      has determined that Trust I and Trust II (together 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. Each of the Trusts holds, as its sole asset,
      subordinated debentures issued by the Company. 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.




In
      March
      2005, the Federal Reserve Board adopted a final rule that would continue to
      allow the inclusion of trust preferred securities of the kind issued by the
      Trusts 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 $23.7 million in trust preferred securities in Tier 1
      capital at December 31, 2006. Management has evaluated the effects of the final
      rule and does not anticipate a material impact on its capital ratios by the
      end
      of the transition period.




*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.




6


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.




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. 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. 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 on February 10,
      2005. All share and per share data has been retroactively adjusted for 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.




7


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.




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 reports on Forms 10-K, 10-KSB, 10-Q,
                and
                10-QSB by the chief executive officer and the chief 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.




8


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 are not
      required to provide management’s report on internal control over financial
      reporting until we file our annual report for 2007 and compliance with the
      auditor’s attestation report requirement is not required until we file our
      annual report for 2008.




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
      chief executive officer and chief 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, encourages cooperation among financial
      institutions, federal banking agencies, and law enforcement authorities
      regarding possible money laundering or terrorist activities, prohibits the
      anonymous use of “concentration accounts,” and requires 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.




9


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.




*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.




*Insurance
      of Deposits*




The
      Bank’s deposits are insured up to a maximum of $100,000 per depositor 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.




**Employees**




The
      Company has two paid employees. Banking operations are conducted by the Bank,
      and as of December 31, 2006, the Bank had 88 full-time employees and 12
      part-time employees. Neither the Bank’s nor the Company’s employees are
      represented by any collective bargaining group. The Bank and the Company each
      considers its relations with such employees to be good.




**Forward
      Looking Statements**




When
      used
      in this and in future filings by the Company with the Securities and Exchange
      Commission, in the Company’s press releases and in oral statements made with the
      approval of an authorized executive officer of the Company, the words or phrases
      “will,” “will likely result,” “could,” “anticipates,” “believes,” “continues,”
“expects,” “plans,” “will continue,” “is anticipated,” “estimated,” “project” or
“outlook” or similar expressions (including confirmations by an authorized
      executive officer of the Company of any such expressions made by a third party
      with respect to the Company) are intended to identify forward-looking
      statements. The Company wishes to caution readers not to place undue reliance
      on
      any such forward-looking statements, each of which speak only as of the date
      made. Such statements are subject to certain risks and uncertainties that could
      cause actual results to differ materially from historical earnings and those
      presently anticipated or projected.




10


Factors
      that may cause actual results to differ from those results expressed or implied,
      include, but are not limited to, those listed below under “Risk Factors”; 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; and technological changes. 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. Such risks and other aspects of the Company’s
      business and operations are described in “Business”, “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operation.” The Company has no obligation to publicly release the result of any
      revisions which may be made to any forward-looking statements to reflect
      anticipated or unanticipated events or circumstances occurring after the date
      of
      such statements.




**Item
      1A. Risk Factors.**




The
      common stock of the Company is speculative in nature and involves a significant
      degree of risk. The risk factors below are not listed in order of
      importance.




**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. See “BUSINESS --
      Competition.”




**The
      Company’s Business is Affected by Economic Conditions and Related
      Uncertainties.**




Commercial
      banking is affected, directly and indirectly, by local, domestic, and
      international economic and political conditions, and by government monetary
      and
      fiscal policies. Conditions such as inflation, recession, unemployment, volatile
      interest rates, tight money supply, scarce natural resources, real estate
      values, international conflicts and other factors beyond the control of the
      Company may adversely affect the potential profitability of the Company. A
      downtrend in several areas, such as real estate, construction and consumer
      spending, could have a material adverse impact on the Company’s ability to
      maintain or increase profitability.




**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 interest rates paid on
      deposits and other borrowings increase at a faster rate than the interest rates
      received on loans and other investments, 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.




11


**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.




**Federal
      and State Government Regulation Impact 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 is 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. See “BUSINESS -- Supervision and Regulation.”




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 effects 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
      Economic Conditions Deteriorate, Particularly in the Bank’s Market Area, Our
      Results of Operations and Financial Condition Could Be Adversely Affected as
      Borrowers' Ability to Repay Loans Declines and the Value of the Collateral
      Securing Our Loans Decreases.




Our
      financial results may be adversely affected by changes in prevailing economic
      conditions, particularly in the Bank’s market area, including decreases in real
      estate values, changes in interest rates which may cause a decrease in interest
      rate spreads, adverse employment conditions, the monetary and fiscal policies
      of
      the federal government and other significant external events.




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.




12


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.




**Item
      1B. Unresolved Staff Comments**




Not
      Applicable.




**Item
      2. Properties.**




**General**




The
      Company’s and the Bank’s principal office in Cranbury, New Jersey (the
“Principal Office”), which it occupies under a lease that expires in December
      2010, provides for an aggregate monthly rental of $16,619, subject to annual
      rental increases plus real estate taxes and certain common space charges
      allocated by the landlord. This lease grants the Bank two additional five-year
      renewal periods. The Bank also has the right of first refusal to purchase the
      premises of which the Principal Office is a part on the same terms and
      conditions as contained in any bona fide offer for the premises. In 2003, the
      Bank entered into a five-year lease for an additional 1,900 square feet of
      office space in this building for an aggregate monthly rental of $2,216 per
      month, subject to annual rental increases. This lease grants the Bank two
      additional five-year renewal periods.




The
      Bank
      leases approximately 2,400 square feet for its branch office in Montgomery
      Township, New Jersey for an aggregate monthly rental of $5,845. This lease
      expires on September 30, 2007.




In
      September 2005, the Bank exercised its right of first refusal option granted
      under the existing lease agreement and purchased the land and building
      comprising its branch office in downtown Cranbury, New Jersey. The Bank had
      previously leased this 3,780 square feet branch office.




In
      December 2005, the Bank elected to exercise its option for the early termination
      of the lease for its branch located in Plainsboro, New Jersey. The Bank applied
      for and received regulatory agency approval to relocate this branch into the
      Plainsboro Village Center which was accomplished in June 2006. The Bank entered
      into a 15 year lease for approximately 2,500 square feet with two drive-through
      lanes in the multi-tenant retail/office building. The Bank has two five year
      renewal options for this space. The aggregate monthly payment for this lease
      is
      $7,381 with annual escalations.




The
      Bank
      entered into a lease for the branch located in Hamilton Square, New Jersey
      in
      April 1999. This lease expires in July 2014 and provides for a rental of
      approximately 4,170 square feet. The Bank has two five-year renewal options
      for
      this space. The aggregate monthly rental payment for this lease is $9,683,
      with
      annual escalations.




In
      January 2004, the Bank entered into a two-year lease for a new Loan Production
      Office in Fort Lee, New Jersey. The lease provided for the rental of 1,567
      square feet with an aggregate monthly rental of $2,873 in the first year and
      $2,938 in the second year. In December 2005, the Bank entered into a lease
      to
      house a de novo branch plus the loan production office in Fort Lee, New Jersey.
      The Bank applied for and received regulatory agency approval to relocate the
      loan production office and establish a de novo branch which was opened in
      November 2006. This lease expires in February 2014 and provides for the rental
      of 3,100 square feet on the ground floor plus 800 square feet in the basement.
      The aggregate monthly rental payment for this lease is $6,458, with annual
      escalations.




13


In
      June
      2004, the Bank commenced the lease for the West Windsor, New Jersey branch.
      The
      lease expires in July 2019 and provides for a rental of approximately 3,000
      square feet. The lease provides for three five-year renewal options for this
      space. The aggregate monthly rental payment for this lease is $2,083, with
      annual escalations.




In
      August
      2004, the Bank commenced the lease for the Perth Amboy, New Jersey branch.
      This
      lease expires in August 2019 and provides for a rental of approximately 3,000
      square feet The lease provides for two seven and one-half year renewal options
      for this space. The aggregate monthly rental payment for this lease is $6,250,
      with annual escalations.




In
      June
      2004, the Bank completed the construction and renovation project associated
      with
      opening a branch office in Jamesburg, New Jersey. The Bank purchased the site
      at
      1 Harrison Street in 2002.




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, 2006.




**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
      2006 and 2005, as reported on the Nasdaq Global Market.




2006
            
            2005High
            
            Low
            
            High
            
            LowFirst
                Quarter
            
            $19.76
            
            $16.18
            (1)
            $18.40
            
            $14.28
            (1)Second
                Quarter
            
            $18.64
            
            $16.48
            (1)
            18.18
            
            14.99
            (1)Third
                Quarter
            
            $17.92
            
            $16.22
            (1)
            18.75
            
            15.75
            (1)Fourth
                Quarter
            
            $18.84
            
            $16.51
            (1)
            18.82
            
            14.98
            (1)





(1)
      Prices have been retroactively adjusted for the 6% stock dividend declared
      December 21, 2006 and paid January 31, 2007 to shareholders of record on January
      23, 2007.




As
      of
      March 6, 2007, there were approximately 334 holders of the Company’s common
      stock.




14




The
      Company paid a 6% stock dividend on January 31, 2007 and a 5% stock dividend
      on
      January 31, 2006. The Company has never paid a cash dividend and there are
      no
      plans to pay a cash dividend at this time. All per share data has been
      retroactively adjusted for stock dividends. The Company will retain its earnings
      in order to provide capital for growth of the Bank.




**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, 2006.




**Issuer
      Purchases of Equity Securities** **(1)**


**Period**
            **Total
                Number of Shares Purchased**
            **Average
                Price Paid Per Share**
            **Total
                Number of Shares Purchased As Part of Publicly Announced Plan or
                Program**
            **Maximum
                Number of Shares That May Yet be Purchased Under the Plan or
                Program**Beginning
            EndingOctober
                1, 2006
            October
                31, 2006
            3,016
            $17.52
            3,016
            169,135November
                1, 2006
            November
                30, 2006
            3,694
            $18.12
            3,694
            165,441December
                1, 2006
            December
                31, 2006
            -
            -
            -
            165,441Total
            6,710
            $17.85
            6,710
            165,441


_________________





(1)
            The
                Company’s common stock repurchase program covers a maximum of 175,271
                shares of common stock of the Company, representing 5% of the outstanding
                common stock of the Company on July 21, 2005 as adjusted for the
                6% stock
                dividend declared December 21, 2006 and paid January 31, 2007.





**Item
      6. Selected Financial Data.**





The
      following selected financial data should be read in conjunction with the
      Company’s Consolidated Financial Statements and the accompanying notes presented
      elsewhere herein.


15


**Five
                Year****Compounded****For
                years ended December 31**
            **2006**
            **2005**
            **2004**
            **2003**
            **2002**
            **Growth
                Rate****Highlights**Net
                income
            $5,332,844
            $4,560,127
            $3,837,714
            $3,228,500
            $2,687,322
            19.9%Return
                on average assets
            1.40%
            1.31%
            1.22%
            1.18%
            1.06%Return
                on average equity
            16.62%
            16.49%
            15.54%
            14.85%
            14.09%Net
                interest margin
            5.03%
            4.78%
            4.25%
            3.94%
            3.87%**Income
                Statement Data**Net
                interest income
            $17,787,685
            $15,299,893
            $12,470,773
            $10,012,780
            $9,209,044
            17.2%Provision
                for loan losses
            893,500
            405,000
            240,000
            240,000
            240,000Non-interest
                income
            2,591,009
            2,646,861
            2,557,242
            2,401,349
            1,525,526Non-interest
                expenses
            12,037,856
            10,887,225
            8,989,961
            7,168,722
            6,287,881**Balance
                Sheet Data at December 31**Total
                assets
            $392,677,546
            $372,495,466
            $335,830,440
            $293,483,174
            $273,862,343
            11.0%Total
                deposits
            312,724,422
            305,809,467
            276,887,033
            245,353,724
            224,149,464
            10.0%Total
                gross loans
            265,142,313
            240,014,349
            210,653,051
            163,950,306
            151,049,736
            16.2%Shareholders’
                equity
            35,196,570
            29,796,867
            26,790,384
            25,585,256
            20,994,842
            15.4%Allowance
                for loan losses
            3,228,360
            2,361,375
            2,005,169
            1,786,632
            1,669,882
            15.0%**Share
                Information****(1)**Earnings
                per share - basic
            $1.45
            $1.25
            $1.05
            $0.89
            $0.75
            18.2%Earnings
                per share - diluted
            $1.41
            $1.20
            $1.02
            $0.84
            $0.71
            18.3%Book
                value per share
            $9.40
            $8.18
            $7.28
            $6.45
            $5.81
            13.3%Average
                diluted shares
              Outstanding
            3,772,182
            3,803,871
            3,799,270
            3,825,688
            3,808,305**Capital
                Ratios****(2)**Total
                capital to risk-weighted
              assets
            20.23%
            13.30%
            13.99%
            14.94%
            14.75%Tier
                1 capital to risk-weighted
              assets
            15.42%
            12.47%
            13.17%
            14.06%
            13.84%Tier
                1 capital to average assets
            12.18%
            9.76%
            10.16%
            9.74%
            9.64%





(1) All
      share information has been restated for the effect of a 6% stock dividend
      declared on December 21, 2006 and paid on January 31, 2007 to shareholders
      of
      record on January 23, 2007.





(2) Capital
      ratios are for the Company. See footnote 15 to the financial statements for
      capital ratios of the Company and the Bank.





16


**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 1 ST Constitution Bancorp and its wholly owned subsidiaries, 1 ST Constitution Bank, 1 ST Constitution Capital Trust I, and 1 ST Constitution Capital Trust II, the “Bank” refers to 1 ST Constitution Bank, and the “Trusts” refers to 1 ST Constitution Capital Trust I and 1 ST 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.




**Executive
      Summary**




The
      Company reported net income for the 12 months ended December 31, 2006 of
      $5,332,844, an increase of 16.9% from the $4,560,127 reported for the 12 months
      ended December 31, 2005. Diluted net income per share was $1.41 for the year
      ended December 31, 2006 compared to $1.20 reported for the year ended December
      31, 2005. Basic net income per share for the year ended December 31, 2006 was
      $1.45 as compared to the $1.25 reported for the year ended December 31, 2005.
      The Company has achieved a five-year compounded growth rate for net income
      of
      19.9% over the 2001-2006 period. All share information has been restated for
      the
      effect of a 6% stock dividend declared on December 21, 2006 and paid on January
      31, 2007 to shareholders of record on January 23, 2007.




Key
      performance ratios continued to improve in the 2006 fiscal year as compared
      to
      the prior year. Return on average assets (“ROA”) and return on average equity
      (“ROE”) were 1.40% and 16.62%, respectively, for the year ended December 31,
      2006, compared to 1.31% and 16.49%, respectively, for the year ended December
      31, 2005.




The
      Company’s record earnings for the 2006 fiscal year reflect continuing momentum
      across a broad range of product and service offerings. Increased lending
      activity, coupled with increases in deposits through branch network expansion
      and secondary market loan sales volume, fueled both the record earnings and
      balance sheet growth.




The
      Company’s net interest income for the year ended December 31, 2006 was
      $17,787,685, an increase of 16.3% from the $15,299,893 reported for the year
      ended December 31, 2005. For the year ended December 31, 2006, the Company’s net
      interest margin increased to 5.03% compared to 4.78% reported for the year
      ended
      December 31, 2005. During 2004, a rising interest rate environment evolved
      during the latter half of the year and continued through the first half of
      2006.
      The Federal Reserve Bank’s Open Market Committee (“FOMC”) held eight meetings in
      2004, 2005 and 2006. Beginning with the June 30, 2004 meeting, the FOMC
      increased short-term interest rates by 25 basis points and continued with a
      series of 16 consecutive 25 basis point increases in each of the subsequent
      meetings through June 2006. The FOMC then made no changes to short-term rates
      at
      any of the remaining four meetings in 2006. The immediate benefit of the
      interest rate increases to the Company’s investment security purchases and
      floating rate assets resulted in an 106 basis point increase in the yield on
      total interest-earning assets for 2006. In addition, management’s ability to lag
      the interest rate increases on deposits coupled with a tight discipline in
      deposit pricing resulted in an increase of 25 basis points in the Company’s net
      interest margin for the year ended December 31, 2006 when compared to the year
      ended December 31, 2005. Management expects the FOMC to continue to hold
      interest rates at their current level in early 2007 and has structured the
      Company’s balance sheet in a moderately asset sensitive position **** in
      response to this present market rate environment.




Driven
      by
      construction loan growth, the Bank’s loan portfolio increased 8.6% at December
      31, 2006 as compared to December 31, 2005. At December 31, 2006, total loans
      outstanding (including loans held for sale) reached $278,751,255 compared to
      $256,772,083 at December 31, 2005. The Bank’s deposit base increased by
      $6,914,955 to $312,724,422 at December 31, 2006 from $305,809,467 at December
      31, 2005. Management strategically priced deposit products to be competitive
      with other financial institutions with branch locations in its market yet still
      maintain a strong net interest margin to support earnings growth.




17


Management
      believes that the Company has positioned itself for continued success with
      the
      combination of a strong capital base, a commitment to provide exceptional
      customer service, and a commitment to maintain the technology necessary to
      provide its customers with easy access to the financial products and services
      offered by the Bank.




**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, 2006 contains a summary
      of
      the Company’s significant accounting policies. Management believes the Company’s
      policy with respect to the methodology for the determination of the allowance
      for loan losses involves a higher degree of complexity and requires management
      to make difficult and subjective judgments which often require assumptions
      or
      estimates about highly uncertain matters. Changes in these judgments,
      assumptions or estimates could materially impact results of operations. This
      critical policy and its application is 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.




**Results
      of Operations**




The
      Company reported record earnings of $5,332,844, or $1.41 per share (diluted),
      for the year ended December 31, 2006 compared to $4,560,127, or $1.20 per share
      (diluted), in 2005. Net income and diluted earnings per share grew 16.9% and
      17.5%, respectively, for the year ended December 31, 2006. The Company posted
      net income of $3,837,714, or $1.02 per share (diluted), for the year ended
      December 31, 2004. All share information has been restated for the effect of
      a
      6% stock dividend declared on December 21, 2006 and paid on January 31, 2007
      to
      shareholders of record on January 23, 2007.




**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 87.3% of the Company’s net revenues for the year ended
      December 31, 2006. 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, 2006, 2005 and 2004. The average rates are derived by dividing
      interest income and expense by the average balance of assets and liabilities,
      respectively.




18


**Average
                Balance Sheets with Resultant Interest and Rates**(yields
                on a tax-equivalent basis)
            
            **2006**
            
            **2005**
            
            **2004****Average**
            
            
            
            **Average**
            
            **Average**
            
            
            
            **Average**
            
            **Average**
            
            
            
            **Average****Balance**
            
            **Interest**
            
            **Rate**
            
            **Balance**
            
            **Interest**
            
            **Rate**
            
            **Balance**
            
            **Interest**
            
            **Rate****Assets:**Federal
                Funds Sold/Short-Term
              Investments
            
            $
            1,457,568
            
            $
            85,012
            
            
            5.83
            %
            $
            850,741
            
            $
            27,181
            
            
            3.19
            %
            $
            976,584
            
            $
            10,977
            
            
            1.12
            %Investment
                Securities:Collateralized
                MortgageObligations
                / Mortgage
              Backed
                Securities
            
            
            70,048,748
            
            
            3,448,780
            
            
            4.92
            %
            
            75,758,305
            
            
            3,017,885
            
            
            3.98
            %
            
            87,636,728
            
            
            3,196,936
            
            
            3.65
            %Obligations
                of States andPolitical
                Subdivisions (4)
            
            
            16,198,497
            
            
            895,172
            
            
            5.53
            %
            
            18,975,766
            
            
            978,099
            
            
            5.15
            %
            
            10,132,976
            
            
            571,410
            
            
            5.64
            %Total
            
            
            86,247,245
            
            
            4,343,952
            
            
            5.04
            %
            
            94,734,071
            
            
            3,995,984
            
            
            4.22
            %
            
            97,769,704
            
            
            3,768,346
            
            
            3.85
            %Loan
                Portfolio:Construction
            
            
            125,022,769
            
            
            11,129,600
            
            
            8.90
            %
            
            94,253,131
            
            
            7,010,571
            
            
            7.44
            %
            
            76,191,687
            
            
            4,108,903
            
            
            5.39
            %Residential
                Real Estate
            
            
            8,072,109
            
            
            517,146
            
            
            6.41
            %
            
            9,127,634
            
            
            572,844
            
            
            6.28
            %
            
            9,448,423
            
            
            645,026
            
            
            6.83
            %Commercial
                and CommercialReal
                Estate
            
            
            99,521,245
            
            
            7,706,864
            
            
            7.74
            %
            
            93,871,685
            
            
            6,831,503
            
            
            7.28
            %
            
            82,412,002
            
            
            5,985,833
            
            
            7.26
            %Installment
            
            
            2,013,438
            
            
            167,126
            
            
            8.30
            %
            
            2,394,026
            
            
            200,020
            
            
            8.35
            %
            
            3,255,459
            
            
            264,074
            
            
            8.11
            %All
                Other Loans
            
            
            37,111,086
            
            
            3,645,808
            
            
            9.82
            %
            
            31,772,196
            
            
            3,007,190
            
            
            9.46
            %
            
            27,144,851
            
            
            2,418,231
            
            
            8.91
            %Total
                (1)
            
            
            271,740,647
            
            
            23,166,544
            
            
            8.53
            %
            
            231,418,672
            
            
            17,622,128
            
            
            7.61
            %
            
            198,452,422
            
            
            13,422,067
            
            
            6.76
            %**Total
                Interest-Earning Assets**
            
            
            **359,445,460**
            
            
            **27,595,508**
            
            
            **7.68**
            **%**
            
            **327,003,484**
            
            
            **21,645,293**
            
            
            **6.62**
            **%**
            
            **297,198,710**
            
            
            **17,201,390**
            
            
            **5.79**
            **%**Allowance
                for Loan Losses
            
            
            (2,662,370
            )
            
            
            
            
            
            
            
            (2,177,263
            )
            
            
            
            
            
            
            
            (1,909,294
            )Cash
                and Due From Banks
            
            
            9,391,415
            
            
            
            
            
            
            
            
            9,130,543
            
            
            
            
            
            
            
            
            7,853,303Other
                Assets
            
            
            15,422,593
            
            
            
            
            
            
            
            
            12,893,312
            
            
            
            
            
            
            
            
            10,815,249**Total
                Assets**
            
            **$**
            **381,597,098**
            
            
            
            
            
            
            
            **$**
            **346,850,076**
            
            
            
            
            
            
            
            **$**
            **313,957,968****Liabilities
                and Shareholders' Equity:**Interest-Bearing
                Liabilities:Money
                Market and NOWAccounts
            
            $
            87,135,125
            
            $
            1,455,755
            
            
            1.67
            %
            $
            101,189,352
            
            $
            1,211,901
            
            
            1.20
            %
            $
            96,113,368
            
            $
            986,531
            
            
            1.03
            %Savings
                Accounts
            
            
            44,867,384
            
            
            939,324
            
            
            2.09
            %
            
            33,671,684
            
            
            409,397
            
            
            1.22
            %
            
            26,890,218
            
            
            136,530
            
            
            0.51
            %Certificates
                of Deposit
            
            
            58,183,657
            
            
            2,907,883
            
            
            5.00
            %
            
            77,183,169
            
            
            2,383,392
            
            
            3.09
            %
            
            74,136,634
            
            
            1,917,353
            
            
            2.59
            %Certificates
                of Deposit of$100,000
                and Over
            
            
            43,870,647
            
            
            1,385,118
            
            
            3.16
            %
            
            9,771,290
            
            
            309,159
            
            
            3.16
            %
            
            10,156,576
            
            
            260,109
            
            
            2.56
            %Other
                Borrowed Funds
            
            
            32,539,699
            
            
            1,687,749
            
            
            5.19
            %
            
            31,143,663
            
            
            1,363,507
            
            
            4.38
            %
            
            24,812,983
            
            
            981,689
            
            
            3.96
            %Trust
                Preferred Securities
            
            
            14,863,014
            
            
            1,141,668
            
            
            7.68
            %
            
            5,000,000
            
            
            350,823
            
            
            7.02
            %
            
            5,000,000
            
            
            263,083
            
            
            5.26
            %**Total
                Interest-Bearing Liabilities**
            
            
            **281,459,526**
            
            
            **9,517,497**
            
            
            **3.38**
            **%**
            
            **257,959,158**
            
            
            **6,028,179**
            
            
            **2.34**
            **%**
            
            **237,109,779**
            
            
            **4,545,295**
            
            
            **1.92**
            **%****Net
                Interest Spread (2)**
            
            
            
            
            
            
            
            
            **4.30**
            **%**
            
            
            
            
            
            
            
            **4.28**
            **%**
            
            
            
            
            
            
            
            **3.87**
            **%**Non-interest
                BearingDemand
                Deposits
            
            
            63,040,519
            
            
            
            
            
            
            
            
            57,792,902
            
            
            
            
            
            
            
            
            49,622,127Other
                Liabilities
            
            
            5,013,813
            
            
            
            
            
            
            
            
            3,447,534
            
            
            
            
            
            
            
            
            2,536,002Total
                Liabilities
            
            
            349,513,857
            
            
            
            
            
            
            
            
            319,199,594
            
            
            
            
            
            
            
            
            289,267,908Shareholders'
                Equity
            
            
            32,083,240
            
            
            
            
            
            
            
            
            27,650,482
            
            
            
            
            
            
            
            
            24,690,060**Total
                Liabilities and Shareholders' Equity**
            
            **$**
            **381,597,097**
            
            
            
            
            
            
            
            **$**
            **346,850,076**
            
            
            
            
            
            
            
            **$**
            **313,957,968****Net
                Interest Margin (3)**
            
            
            
            
            **$**
            **18,078,011**
            
            
            **5.03**
            **%**
            
            
            
            **$**
            **15,617,114**
            
            
            **4.78**
            **%**
            
            
            
            **$**
            **12,656,095**
            
            
            **4.25**
            **%**





(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.




19


The
      Company’s net interest income increased on a tax equivalent basis by $2,460,897,
      or 15.8%, to $18,078,011 for the year ended December 31, 2006, from the
      $15,617,114 reported for the year ended December 31, 2005. As indicated in
      the
      Rate/Volume Table, the principal factor contributing to the 2006 increase in
      net
      interest income was an increase in the interest income of $3,368,409, resulting
      from increased balances in the loan portfolio components. This was partially
      offset by an increase in interest expense resulting from increases in the rates
      paid on deposit components.




The
      Company’s net interest income on a tax-equivalent basis increased by $2,961,019,
      or 23.4%, to $15,617,114 for the year ended December 31, 2005, from the
      $12,656,095 reported for the year ended December 31, 2004. As indicated in
      the
      Rate/Volume Table, the principal factor contributing to the 2005 increase in
      net
      interest income was an increase in the interest income of $2,319,709, resulting
      from increased balances in the loan portfolio 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,
              2006
                versus 2005
            
            Year
                Ended December 31,
              2005
                versus 2004Due
                to Change in:
            
            Due
                to Change in:(Tax-equivalent
                basis)
            
            Volume
            
            Rate
            
            Total
            
            Volume
            
            Rate
            
            TotalInterest
                Income:Loans:Construction
            
            $
            2,516,095
            
            $
            1,602,934
            
            $
            4,119,029
            
            $
            1,156,625
            
            $
            1,745,044
            
            $
            2,901,668Residential
                Real Estate
            
            
            (67,564
            )
            
            11,866
            
            
            (55,698
            )
            
            (20,216
            )
            
            (51,966
            )
            
            (72,182
            )Commercial
                and Commercial Real Estate
            
            
            427,419
            
            
            447,942
            
            
            875,361
            
            
            829,188
            
            
            16,482
            
            
            845,670Installment
            
            
            (31,770
            )
            
            (1,115
            )
            
            (32,894
            )
            
            (71,867
            )
            
            7,813
            
            
            (64,054
            )All
                Other Loans
            
            
            524,238
            
            
            114,380
            
            
            638,618
            
            
            425,979
            
            
            162,981
            
            
            588,960Total
                Loans
            
            
            3,368,409
            
            
            2,176,006
            
            
            5,544,415
            
            
            2,319,709
            
            
            1,880,353
            
            
            4,200,063Investment
                Securities :Collat.
                Mortg. Obligations / Mortg. Backed Securities
            
            
            (281,233
            )
            
            712,128
            
            
            430,895
            
            
            (450,907
            )
            
            271,857
            
            
            (179,050
            )States
                and political subdivisions
            
            
            (155,035
            )
            
            72,108
            
            
            (82,927
            )
            
            477,537
            
            
            (70,849
            )
            
            406,688Total
                Investment Securities
            
            
            (436,268
            )
            
            784,236
            
            
            347,968
            
            
            26,630
            
            
            201,008
            
            
            227,638Federal
                Funds Sold / Short-Term Investments
            
            
            30,300
            
            
            27,531
            
            
            57,831
            
            
            (4,011
            )
            
            20,215
            
            
            16,204Total
                Interest Income
            
            
            2,962,440
            
            
            2,987,774
            
            
            5,950,214
            
            
            2,342,328
            
            
            2,101,576
            
            
            4,443,904Interest
                Expense :Money
                Market and NOW Accounts
            
            
            (168,651
            )
            
            412,505
            
            
            243,854
            
            
            51,775
            
            
            173,595
            
            
            225,370Savings
                Accounts
            
            
            186,786
            
            
            343,141
            
            
            529,927
            
            
            58,265
            
            
            214,602
            
            
            272,867Certificates
                of Deposit
            
            
            (1,340,184
            )
            
            1,864,675
            
            
            524,491
            
            
            83,271
            
            
            382,768
            
            
            466,039Certificates
                of Deposit of $100,000 And Over
            
            
            1,268,520
            
            
            (192,561
            )
            
            1,075,959
            
            
            (9,825
            )
            
            58,874
            
            
            49,049Other
                Borrowed Funds
            
            
            61,146
            
            
            263,096
            
            
            324,242
            
            
            262,592
            
            
            119,226
            
            
            381,818Trust
                Preferred Securities
            
            
            757,845
            
            
            33,000
            
            
            790,845
            
            
            -
            
            
            87,740
            
            
            87,740Total
                interest expense
            
            
            765,462
            
            
            2,723,856
            
            
            3,489,318
            
            
            446,078
            
            
            1,036,805
            
            
            1,482,883Net
                Interest Income
            
            $
            765,461
            
            $
            2,723,857
            
            $
            3,489,318
            
            $
            446,078
            
            $
            1,036,805
            
            $
            1,482,884





Average
      interest earning assets increased by $32,441,976, or 9.9%, to $359,445,460
      for
      the year ended December 31, 2006 from $327,003,484 for the year ended December
      31, 2005, consisting primarily of an increase for 2006 of $40,321,975 in loans
      partially offset by a decrease of $8,486,826 in investment securities compared
      to 2005. Led by the construction loans component, the Bank’s average total loan
      portfolio grew by 17.4% and loan yields averaged 8.53% for the year ended
      December 31, 2006, 92 basis points higher than for the year ended December
      31,
      2005. This increase was primarily the result of 2006 loan growth at floating
      yields amid the increasing interest rate environment that continued during
      the
      first half of the year. The Bank’s average investment securities portfolio
      decreased 9.0%, and the yield on that portfolio increased 82 basis points for
      the year ended December 31, 2006 compared to the year ended December 31, 2005.
      Net premium amortization for the year ended December 31, 2006 was $41,405
      compared to $139,507 for the year ended December 31, 2005. Overall, the yield
      on
      interest earning assets increased 106 basis points to 7.68% in the 2006 fiscal
      year from 6.62% in the 2005 fiscal year.




20


Average
      interest earning assets increased by $29,805,774, or 10.0%, to $327,003,484
      for
      the year ended December 31, 2005 from $297,198,710 for the year ended December
      31, 2004, consisting primarily of an increase in 2005 of $32,966,250 in loans
      partially offset by a decrease of $3,035,633 in investment securities compared
      to 2004. Led by the construction component, the Bank’s average total loan
      portfolio grew by 16.6%, and loan yields averaged 7.61%, in 2005, 85 basis
      points higher than 2004. This increase was primarily the result of 2005 loan
      growth at floating yields amid the increasing interest rate environment that
      continued during the year. The Bank’s average investment securities portfolio
      decreased 3.1%, and the yield on that portfolio increased 37 basis points in
      2005 compared to 2004, primarily as a result of the reduced level of premium
      amortization on mortgage-backed securities due to the rising rate environment
      that continued throughout the year during 2005. Net premium amortization for
      2005 was $139,507 compared to $350,168 for 2004. Overall, the yield on interest
      earnings assets increased 83 basis points to 6.62% in 2005 from 5.79% in
      2004.




Interest
      expense increased by $3,489,318, or 57.9%, to $9,517,497 for the year ended
      December 31, 2006, from $6,028,179 for the year ended December 31, 2005. 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 $11,195,700 in 2006, or 33.2%, as
      compared to 2005, contributing to the funding of loan portfolio growth. The
      cost
      on these deposits increased 87 basis points in 2006 from 2005. Average interest
      bearing liabilities rose 9.1% in 2006 from 2005. The cost of total
      interest-bearing liabilities increased 104 basis points to 3.38% in 2006 from
      2.34% in 2005.




Interest
      expense increased by $1,482,884, or 32.6%, to $6,028,179 for the year ended
      December 31, 2005, from $4,545,295 for the year ended December 31, 2004. 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 $6,781,466 in 2005 as compared to
      2004,
      contributing to the funding of loan portfolio growth. The cost on these deposits
      increased 71 basis points in 2005 from 2004. Average interest bearing
      liabilities rose 8.8% in 2005 from 2004. The cost of total interest-bearing
      liabilities decreased 43 basis points to 2.34% in 2005 from 1.91% in
      2004.




Average
      non-interest bearing demand deposits increased by $5,247,617, or 9.1%, to
      $63,040,519 for the year ended December 31, 2006 from $57,792,902 for the year
      ended December 31, 2005. Expansion of the branch network and the resulting
      new
      business relationships have generated most of this increase. Throughout the
      comparative periods, increases in average non-interest bearing deposits
      contributed to the increases in net interest income.




**Non-Interest
      Income**




Non-interest
      income decreased by $55,852, or 2.1%, to $2,591,009 for the year ended December
      31, 2006 from $2,646,861 for the year ended December 31, 2005. Non-interest
      income in 2005 increased by $89,618, or 3.5%, from a total of $2,557,242 for
      2004.




Service
      charges on deposit accounts represent a significant source of non-interest
      income. Service charge revenues decreased by $22,033, or 3.2%, to $668,071
      for
      the year ended December 31, 2006 from $690,104 for the year ended December
      31,
      2005. Service charge revenue totaled $514,494 in 2004. This component of
      non-interest income represented 25.8%, 26.1%, and 20.1% of the total
      non-interest income for the years ended December 31, 2006, 2005, and 2004,
      respectively. Service charge income decreased in 2006 principally due to
      management’s actions to restructure service charges and fees based on the
      results of a comparative study of market fees performed in early 2005. During
      2005, new fees were assessed on accounts overdrawn for drawing on uncollected
      funds and for processing incoming wire transfers. Service charge income
      decreased in 2004 as a result of the Bank waiving service charges on new
      accounts during the period of branch expansion, and a decreasing number of
      accounts subject to service charges. Management continues to utilize a strategy
      of requiring compensating balances from its commercial customers. Those who
      meet
      balance requirements are not assessed service charges.




Gains
      on
      sales of loans held for sale decreased by $371,790, or 25.7%, to $1,072,731
      for
      the year ended December 31, 2006, from $1,444,521 for the year ended December
      31, 2005. Gains on sales of loans held for sale totaled $1,373,660 in 2004.
      Market interest rates on 30-year fixed rate mortgages fell consistently during
      2004, and into the first half of 2005. Consumer refinance of home loans, which,
      along with a strong housing market, led to the Bank achieving high levels in
      mortgage origination volumes and mortgage loan sale gains, as newly-originated
      loans were sold at higher than normal spreads due to the consistently lower
      level of market interest rates. The rising rate environment that evolved during
      late 2004 and continued throughout the first half of 2006 has significantly
      impacted the mortgage market and resultant secondary loan sales for 2006 as
      long
      term rates have increased.




21


Non-interest
      income also includes income from bank-owned life insurance (“BOLI”) which
      amounted to $350,476 for the year ended December 31, 2006 compared to $235,430
      for the year ended December 31, 2005. The Bank purchased $6.0 million in
      tax-free BOLI assets in 2002 and $2.0 million in 2005, which partially offset
      the cost of employee benefit plans and reduced the 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-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 to offer the products or services and prices
      charged by competitor financial institutions amid the Bank’s competitive
      market.




The
      Company recorded net losses on sales of securities available for sale of $99,714
      for the year ended December 31, 2006 and $271,871 for the year ended December
      31, 2005. The Company recorded net gains on sales of securities available for
      sale of $27,545 in 2004. These portfolio transactions in 2006, 2005 and 2004
      were primarily the result of modest portfolio restructurings. Their purpose
      was
      to improve the Company’s longer-term interest rate risk position.




**Non-Interest
      Expenses**




Non-interest
      expenses increased by $1,150,631, or 10.6%, to $12,037,856 for the year ended
      December 31, 2006, from $10,887,225 for the year ended December 31, 2005.
      Non-interest expenses in 2005 increased 21.1% to $10,887,225 from $8,989,961
      in
      2004. The largest increase in non-interest expenses for 2006 compared to 2005
      was in salaries and employees benefits. To a lesser extent, occupancy, and
      other
      non-interest expenses also reflect increases for the comparable periods. The
      largest increase in non-interest expenses in 2005 compared to 2004 was in
      salaries and employee benefits and, to a lesser extent, other non-interest
      expenses, as indicated in the table below. The following table presents the
      major components of non-interest expenses for the years 2004 through
      2006.







**Non-interest
                Expenses**2006
            
            2005
            
            2004Salaries
                and employee benefits
            
            $
            6,799,619
            
            $
            5,894,200
            
            $
            4,955,587Occupancy
                expense
            
            
            1,434,728
            
            
            1,365,930
            
            
            1,071,463Equipment
                expense
            
            
            507,402
            
            
            491,735
            
            
            464,928Marketing
            
            
            258,012
            
            
            292,352
            
            
            274,095Date
                processing services
            
            
            733,954
            
            
            623,001
            
            
            636,076Regulatory,
                professional and other fees
            
            
            802,309
            
            
            1,102,691
            
            
            542,001Office
                expense
            
            
            470,211
            
            
            401,490
            
            
            462,586All
                other expenses
            
            
            1,031,621
            
            
            715,826
            
            
            583,225Total
            
            $
            12,037,856
            
            $
            10,887,225
            
            $
            8,989,961





Salaries
      and employee benefits, which represent the largest portion of non-interest
      expenses, increased by $905,419, or 15.4%, to $6,799,619 for the year ended
      December 31, 2006 compared to $5,894,200 for the year ended December 31, 2005.
      The 2006 increase is primarily due to (a) increased staffing levels for all
      of
      2006 as a result of the opening of two new branch locations (b) normal employee
      salary increases. These expenses increased in 2005 by $938,613, or 18.9%, over
      the $4,955,587 reported for 2004. The increase in the level of salaries and
      employee benefits for 2005 versus 2004 reflects the increase in staffing levels
      due to the branch expansion program plus normal salary increases. Salaries
      and
      employee benefits as a percentage of average assets were 1.78% for 2006, 1.70%
      for 2005 and 1.58% for 2004. As the result of the adoption by the Company as
      of
      January 1, 2006 of Financial Accounting Standards Board Statement No. 123(R), *Share
      Based Payment* ,
      the
      Company is required to recognize for the first time the expense of stock
      options. For the year ended December 31, 2006, the expense amounted to $95,230,
      which represented all the unvested and issued stock options outstanding on
      December 31, 2006 plus all stock options issued in 2006.




22


For
      the
      year ended December 31, 2006, occupancy expense increased by $68,798, or 5.0%,
      to $1,434,728 from $1,365,930 for the year ended December 31, 2005. During
      June
      2006, the Bank opened the new Plainsboro branch which is now relocated in the
      newly constructed Plainsboro Village Center. This expanded location allows
      the
      Bank to offer drive-through banking plus ATM services that were not available
      at
      the previous location. The current period increase in occupancy costs is
      primarily attributable to this branch relocation project. In addition, the
      relocation and expansion of our Fort Lee loan production office to a full
      service branch of the Bank was completed in early November 2006. Certain costs
      related to this relocation have been incurred prior to the actual opening of
      this branch.




The
      occupancy expense component of total non-interest expense as a percentage of
      average assets was 0.38% for the year ended December 31, 2006, 0.39% for the
      year ended December 31, 2005 and 0.34% for the year ended December 31, 2004,
      respectively.




Data
      processing service expense increased by $110,953, or 17.8%, to $733,954 for
      the
      year ended December 31, 2006 compared to $623,001 for the year ended December
      31, 2005 as the Company incurred operating costs to bring the two new branch
      locations online during 2006 as well upgrading existing systems throughout
      the
      year.




The
      Bank’s ratio of non-interest expense to average assets has remained consistently
      favorable at 3.16% for the year ended December 31, 2006 compared to 3.14% for
      the year ended December 31, 2005 and 2.86% for the year ended December 31,
      2004.




An
      important industry productivity measure is the efficiency ratio. The efficiency
      ratio is calculated by dividing total operating expenses by net interest income
      and other income. An increase in the efficiency ratio indicates that more
      resources are being utilized to generate the same or greater volume of income,
      while a decrease would indicate a more efficient allocation of resources. The
      Bank’s efficiency ratio decreased for the year ended December 31, 2006 to 59.1%
      compared to 60.7% for the year ended December 31, 2005 and 59.8% for the year
      ended December 31, 2004.




**Financial
      Condition**


**Cash
      and Cash Equivalents**




At
      December 31, 2006, cash and cash equivalents totaled $10,361,812 compared to
      $12,137,750 at December 31, 2005. Cash and cash equivalents at December 31,
      2006
      consisted of cash and due from banks of $10,336,334 and federal funds
      sold/short-term investments of $25,478. The corresponding balances at December
      31, 2005 were $9,394,929 and $2,742,821, respectively.




**Investment
      Securities**




The
      Bank’s investment securities portfolio amounted to $89,675,804, or 22.8% of
      total assets at December 31, 2006, compared to $90,995,028, or 24.4% of total
      assets at December 31, 2005. On an average balance basis, the investment
      securities portfolio represented 24.0% and 29.0% of average interest-earning
      assets for the years ended December 31, 2006 and 2005, respectively. The average
      yield earned on the portfolio was 5.04% for the year ended December 31, 2006,
      an
      increase of 82 basis points from 4.22% earned for the year ended December 31,
      2005.




Securities
      available for sale are investments that may be sold in response to changing
      market and interest rate conditions or for other business purposes. Securities
      available for sale consist primarily of U.S. Government and Federal agency
      securities as well as mortgage-backed securities. 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, 2006, available-for-sale securities amounted to $70,421,328,
      an
      increase of $1,184,670 from December 31, 2005. The Company recorded net losses
      on sales of securities available for sale of $99,714 for 2006 and $271,871
      for
      2005.




23




2006
              
              AmortizedCost
              
              GrossUnrealizedGains
              
              Gross UnrealizedLosses
              
              FairValueAvailable
                  for sale-U.
                  S. Treasury securities andobligations
                  of U.S. Governmentsponsored
                  corporations and agencies
              
              $
              35,625,182
              
              $
              124,144
              
              $
              (694,261
              )
              $
              35,055,065Mortgage
                  backed securities
              
              
              28,305,557
              
              
              113,353
              
              
              (216,111
              )
              
              28,202,799Obligations
                  of State andPolitical
                  subdivisions
              
              
              3,655,197
              
              
              15,902
              
              
              (31,749
              )
              
              3,639,350FHLB
                  stock and other securities
              
              
              3,554,759
              
              
              304
              
              
              (30,949
              )
              
              3,524,115$
              71,140,695
              
              $
              253,703
              
              $
              (973,070
              )
              $
              70,421,328Held
                  to maturity-Mortgage
                  backed securities
              
              $
              5,540,670
              
              $
              2,015
              
              $
              175,826
              )
              $
              5,366,859Obligations
                  of State andPolitical
                  subdivisions
              
              
              13,713,806
              
              
              131,955
              
              
              (47,941
              )
              
              13,797,820$
              19,254,476
              
              $
              133,970
              
              $
              (223,767
              )
              $
              19,164,6792005
              
              
              AmortizedCost
              
              
              GrossUnrealizedGains
              
              
              Gross
                UnrealizedLosses
              
              
              FairValueAvailable
                  for sale-U.
                  S. Treasury securities andobligations
                  of U.S. Governmentsponsored
                  corporations and agencies
              
              $
              34,032,814
              
              $
              7,198
              
              $
              (977,560
              )
              $
              33,062,452Mortgage
                  backed securities
              
              
              29,250,341
              
              
              90,286
              
              
              (302,193
              )
              
              29,038,434Obligations
                  of State andPolitical
                  subdivisions
              
              
              3,855,987
              
              
              1,333
              
              
              (65,063
              )
              
              3,792,257FHLB
                  stock and other securities
              
              
              3,371,673
              
              
              -
              
              
              (28,158
              )
              
              3,343,515$
              70,510,815
              
              $
              98,817
              
              $
              (1,372,974
              )
              $
              69,236,658Held
                  to maturity-Mortgage
                  backed securities
              
              $
              5,807,730
              
              $
              7,233
              
              $
              (206,275
              )
              $
              5,608,688Obligations
                  of State andPolitical
                  subdivisions
              
              
              15,950,640
              
              
              108,525
              
              
              (146,827
              )
              
              15,912,338$
              21,758,370
              
              $
              115,758
              
              $
              (353,102
              )
              $
              21,521,026




24




2004
            
            Amortized
              Cost
            
            GrossUnrealizedGains
            
            GrossUnrealized
                Losses
            
            FairValueAvailable
                for sale-U.
                S. Treasury securities andobligations
                of U.S. Governmentsponsored
                corporations and agencies
            
            $
            57,848,615
            
            $
            85,649
            
            $
            538,057
            
            $
            57,396,206Mortgage
                backed securities
            
            
            20,877,821
            
            
            412,179
            
            
            53,848
            
            
            21,236,152Obligations
                of State andPolitical
                subdivisions
            
            
            3,883,354
            
            
            3,070
            
            
            47,662
            
            
            3,838,762FHLB
                stock and other securities
            
            
            3,149,734
            
            
            0
            
            
            32,205
            
            
            3,117,529$
            85,759,524
            
            $
            500,897
            
            $
            671,772
            
            $
            85,588,649Held
                to maturity-Mortgage
                backed securities
            
            $
            604,705
            
            $
            24,174
            
            $
            0
            
            $
            628,879Obligations
                of State andPolitical
                subdivisions
            
            
            11,562,432
            
            
            164,247
            
            
            63,308
            
            
            11,553,371$
            12,167,137
            
            $
            188,421
            
            $
            63,308
            
            $
            12,292,250






Proceeds
      from maturities and prepayments of securities available for sale amounted to
      $13,736,214 for the year ended December 31, 2006 and $17,074,576 for the year
      ended December 31, 2005. At December 31, 2006, the portfolio had net unrealized
      losses of $719,367, compared to net unrealized losses of $1,274,157 at December
      31, 2005. These unrealized losses are reflected net of tax in shareholders’
equity as other comprehensive income (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. The held-to-maturity portfolio consists primarily of obligations
      of
      states and political subdivisions. At December 31, 2006, securities held to
      maturity were $19,254,476, a decrease of $2,503,894 from $21,758,370 at December
      31, 2005. The fair value of the held-to-maturity portfolio at December 31,
      2006
      was $19,164,679, resulting in a net unrealized loss of $89,796.




The
      amortized cost, estimated fair value and weighted average yield of investment
      securities at December 31, 2006, 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
            
            Estimated
              Fair
              Value
            
            Weighted
              Average
              Yield*Available
                for sale-Due
                in one year or less
            
            $
            1,301,989
            
            $
            1,301,354
            
            
            5.27
            %Due
                after one year through five years
            
            
            17,420,177
            
            
            17,352,325
            
            
            4.67
            %Due
                after five years through ten years
            
            
            15,836,536
            
            
            15,698,842
            
            
            4.22
            %Due
                after ten years
            
            
            36,581,993
            
            
            36,068,807
            
            
            4.73
            %Total
            
            $
            71,140,695
            
            $
            70,421,328
            
            
            5.01
            %Held
                to maturity-Due
                in one year or less
            
            $
            2,363,612
            
            $
            2,351,783
            
            
            3.47
            %Due
                after one year through five years
            
            
            2,839,631
            
            
            2,838,985
            
            
            5.38
            %Due
                after five years through ten years
            
            
            3,615,640
            
            
            3,625,656
            
            
            5.52
            %Due
                after ten years
            
            
            10,435,593
            
            
            10,348,255
            
            
            5.59
            %Total
            
            $
            19,254,476
            
            $
            19,164,679
            
            
            5.41
            %


***** computed
      on a tax equivalent basis.





25


**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 $271,740,647 for the year ended December
      31,
      2006, an increase of $40,321,975, or 17.4%, compared to an average of
      $231,418,672 for the year ended December 31, 2005. Growth in the average loan
      portfolio balance was generated primarily by an increase of $30,769,638, or
      32.6%, in construction loans. At December 31, 2006, total loans amounted to
      $265,142,313 compared to $240,014,349 at December 31, 2005, an increase of
      $25,127,964, or 10.5%. The average yield earned on the loan portfolio was 8.53%
      for the year ended December 31, 2006 compared to 7.61% for the year ended
      December 31, 2005, an increase of 92 basis points. This increase is primarily
      due to the rising interest rate environment that evolved during the last half
      of
      2004 and continued throughout the first half of 2006.




The
      following table represents the components of the loan portfolio for the dates
      indicated.


December
                31,2006
            
            2005
            
            2004
            
            2003
            
            2002Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %Construction
                loans
            
            $
            125,268,871
            
            
            47
            %
            $
            109,862,614
            
            
            46
            %
            $
            88,027,024
            
            
            42
            %
            $
            56,971,265
            
            
            35
            %
            $
            32,342,880
            
            
            21
            %Residential
                real estate
              loans
            
            
            7,670,370
            
            
            3
            %
            
            8,602,975
            
            
            4
            %
            
            9,815,366
            
            
            5
            %
            
            8,059,032
            
            
            5
            %
            
            9,023,228
            
            
            6
            %Commercial
                and
              commercial
                real estate
              loans
            
            
            114,897,040
            
            
            44
            %
            
            104,448,196
            
            
            43
            %
            
            96,021,077
            
            
            46
            %
            
            83,840,831
            
            
            51
            %
            
            89,415,759
            
            
            59
            %Loans
                to individuals
            
            
            16,728,025
            
            
            6
            %
            
            16,441,994
            
            
            7
            %
            
            16,002,619
            
            
            7
            %
            
            13,236,895
            
            
            8
            %
            
            14,851,742
            
            
            10
            %Lease
                financing
            
            
            0
            
            
            0
            %
            
            21,073
            
            
            0
            %
            
            74,543
            
            
            0
            %
            
            1,054,198
            
            
            1
            %
            
            4,773,528
            
            
            4
            %Deferred
                loan fees
            
            
            404,074
            
            
            0
            %
            
            466,678
            
            
            0
            %
            
            512,416
            
            
            0
            %
            
            442,212
            
            
            0
            %
            
            412,961
            
            
            0
            %All
                other loans
            
            
            173,933
            
            
            0
            %
            
            170,819
            
            
            0
            %
            
            200,118
            
            
            0
            %
            
            345,873
            
            
            0
            %
            
            229,638
            
            
            0
            %Total
            
            $
            265,142,313
            
            
            100
            %
            $
            240,014,349
            
            
            100
            %
            $
            210,653,051
            
            
            100
            %
            $
            163,950,306
            
            
            100
            %
            $
            151,049,736
            
            
            100
            %




The
      rising interest rate environment that existed throughout the first half of
      2006,
      especially the rising average prime rate, and competitive loan pricing resulted
      in the increased portfolio components discussed in the following
      paragraphs.




Commercial
      and commercial real estate loans averaged $99,521,245 for the year ended
      December 31, 2006, an increase of $5,649,560, or 6.0%, compared to $93,871,685
      for the year ended December 31, 2005. 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 increased
      46
      basis points to 7.74% for 2006 from 7.28% for 2005.




Construction
      loans averaged $125,022,769 for the year ended December 31, 2006, an increase
      of
      $38,186,361, or 25.9%, compared to $94,253,131 for the year ended December
      31,
      2005. 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 average
      yield on the construction loan portfolio increased 146 basis points to 8.90%
      for
      2006 from 7.44% for 2005.




Residential
      loans averaged $8,072,109 for the year ended December 31, 2006, a decrease
      of
      $1,055,525, or 11.6%, compared to $9,127,634 for the year ended December 31,
      2005. These loans consist primarily of residential mortgage loans secured by
      residential real estate. The average yield on this portfolio increased 13 basis
      points to 6.41% for 2006 from 6.28% for 2005.




26


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, 2006.





Maturity
                RangeType
            
            WithinOne
              Year
            
            After
                One But
              Within
              Five
                Years
            
            After
              Five
              Years
            
            TotalCommercial
                & commercial real estate
            
            $
            25,571,909
            
            $
            16,962,095
            
            $
            72,363,036
            
            $
            114,897,040Construction
            
            
            114,958,027
            
            
            9,420,908
            
            
            889,936
            
            
            125,268,871Total
            
            $
            140,529,936
            
            $
            26,383,003
            
            $
            73,252,972
            
            $
            240,165,911Fixed
                rate loans
            
            $
            6,787,253
            
            $
            12,692,806
            
            $
            6,224,384
            
            $
            25,704,443Floating
                rate loans
            
            
            133,742,683
            
            
            13,690,197
            
            
            67,028,588
            
            
            214,461,468Total
            
            $
            140,529,936
            
            $
            26,383,003
            
            $
            73,252,972
            
            $
            240,165,911




**Non-Performing
      Assets**




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




The
      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
      loan increased by $3,359,850 to $4,193,209 at December 31, 2006 from $833,359
      at
      December 31, 2005. This increase is primarily due to an increase of $3,360,059
      in non-accrual loans to $4,193,209 at December 31, 2006 compared to $833,150
      at
      December 31, 2005. The increase in non-accrual loans is primarily related to
      the
      Bank’s construction lending activities totaling $3,422,118 being designated as
      non-accrual. The largest segment of the increase represents unfinished
      residential construction where litigation has been commenced and work out
      negotiations are in process. The balance of the non-performing loans are
      centered in completed residential and commercial properties which are in
      foreclosure. The table below sets forth non-performing assets and risk elements
      in the Bank’s portfolio by type for the years indicated. As the table
      demonstrates, non-performing loans to total loans increased to 1.58% at December
      31, 2006 from 0.35% at December 31, 2005 for the reasons previously stated,
      but
      loan quality is still considered to be strong. This was accomplished through
      quality loan underwriting, a proactive approach to loan monitoring and
      aggressive workout strategies.




Non-performing
      assets increased by $3,359,850 to $4,193,209 at December 31, 2006 from $833,359
      at December 31, 2005. Non-performing assets represented 1.07% of total assets
      at
      December 31, 2006 and 0.22% at December 31, 2005. Non-performing loans as a
      percentage of total loans were 1.58% at December 31, 2006, compared to 0.35%
      at
      December 31, 2005.




The
      Bank
      had no loans classified as restructured loans at December 31, 2006 or 2005.




27


At
      December 31, 2006, the Bank had no loans that were 90 days or more past due
      but
      still accruing interest income compared to $209 of loans in this category of
      non-performing loans at December 31, 2005. Management’s decision to accrue
      income on these loans was based on the level of collateral and the status of
      collection efforts.


**Non-Performing
                Assets and Loans**2006
            
            2005
            
            2004
            
            2003
            
            2002Non-Performing
                loans:Loans
                90 days or more past due and still accruing
            
            $
            0
            
            $
            209
            
            $
            63,130
            
            $
            0
            
            $
            2,156Non-accrual
                loans
            
            
            4,193,209
            
            
            833,150
            
            
            1,049,411
            
            
            330,783
            
            
            156,156Total
                non-performing loans
            
            
            4,193,209
            
            
            833,359
            
            
            1,112,541
            
            
            330,783
            
            
            158,312Other
                real estate owned
            
            
            0
            
            
            0
            
            
            0
            
            
            8,971
            
            
            9,492Total
                non-performing assets
            
            $
            4,193,209
            
            $
            833,359
            
            $
            1,112,541
            
            $
            339,754
            
            $
            167,804Non-performing
                loans to total loans
            
            
            1.58
            %
            
            0.35
            %
            
            0.53
            %
            
            0.20
            %
            
            0.10
            %Non-performing
                assets to total assets
            
            
            1.07
            %
            
            0.22
            %
            
            0.33
            %
            
            0.12
            %
            
            0.06
            %





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 at cost. The amount, if any, by which the
      recorded amount of the loan exceeds the fair market value of the asset 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.




**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 including construction loans. Based on the
      composition of the loan portfolio, the primary risks inherent in it are
      deteriorating credit quality, increases in interest rates, 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 and lease losses is restricted to any individual loan or groups of
      loans, and the entire allowance is available to absorb any and all loan and
      lease losses.




Management
      reviews the adequacy of the allowance on at least a quarterly basis to ensure
      that the provision for loan and lease 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 and lease
      losses consists of several key elements. These elements 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.




28


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





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 for 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.




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 which is often
      subjective and changing rapidly. At December 31, 2006, management believed
      that
      the allowance for loan losses and non-performing loans was
      adequate.




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.




29


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




**Allowance
                for Loan Losses**2006
            
            2005
            
            2004
            
            2003
            
            2002Balance,
                beginning of period
            
            $
            2,361,375
            
            $
            2,005,169
            
            $
            1,786,632
            
            $
            1,669,882
            
            $
            1,414,495Provision
                charged to operating expenses
            
            
            893,500
            
            
            405,000
            
            
            240,000
            
            
            240,000
            
            
            240,000Loans
                charged off:Construction
                loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Residential
                real estate loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
                and commercial real estate loans
            
            
            (11,154
            )
            
            (39,150
            )
            
            (17,070
            )
            
            (115,698
            )
            
            (7,034
            )Loans
                to individuals
            
            
            (18,314
            )
            
            (13,653
            )
            
            (5,203
            )
            
            (7,968
            )
            
            (1,148
            )Lease
                financing
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -All
                other loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -(29,468
            )
            
            (52,803
            )
            
            (22,273
            )
            
            (123,666
            )
            
            (8,182
            )Recoveries:Construction
                loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Residential
                real estate loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
                and commercial real estate loans
            
            
            153
            
            
            1,498
            
            
            750
            
            
            
            
            
            20,296Loans
                to individuals
            
            
            2,800
            
            
            2,511
            
            
            60
            
            
            416
            
            
            3,273Lease
                financing
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -All
                other loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -2,953
            
            
            4,009
            
            
            810
            
            
            416
            
            
            23,569Net
                (charge offs) / recoveries
            
            
            (26,515
            )
            
            (48,794
            )
            
            (21,463
            )
            
            (123,250
            )
            
            15,387Balance,
                end of period
            
            $
            3,228,360
            
            $
            2,361,375
            
            $
            2,005,169
            
            $
            1,786,632
            
            $
            1,669,882Loans:At
                year end
            
            $
            278,751,255
            
            $
            256,772,083
            
            $
            220,580,932
            
            $
            163,950,306
            
            $
            151,049,736Average
                during the year
            
            
            271,740,647
            
            
            231,418,672
            
            
            198,452,421
            
            
            170,191,619
            
            
            145,159,286Net
                (charge offs) recoveries to average loans outstanding
            
            
            (0.01
            %)
            
            (0.02
            %)
            
            (0.01
            %)
            
            0.07
            %
            
            (0.01
            %)Allowance
                for loan losses to:Total
                loans at year end
            
            
            1.16
            %
            
            0.92
            %
            
            0.91
            %
            
            1.09
            %
            
            1.11
            %Non-performing
                loans
            
            
            76.99
            %
            
            283.36
            %
            
            180.23
            %
            
            540.12
            %
            
            270.16
            %





At
      December 31, 2006, the allowance for loan losses was $3,228,360 compared to
      $2,361,375 at December 31, 2005, an increase of $866,985, or 36.7%. The ratio
      of
      the allowance for loan losses to total loans at December 31, 2006 and 2005
      was
      1.16% and 0.92%, respectively. The allowance for loan losses as a percentage
      of
      non-performing loans was 76.99% at December 31, 2006, compared to 283.36% at
      December 31, 2005. Management believes the quality of the loan portfolio remains
      strong and that the allowance for loan losses is adequate in relation to credit
      risk exposure levels.




The
      provision for loan losses was $893,500 and $405,000, respectively, for the
      years
      ended December 31, 2006 and 2005. Management considers a complete review of
      the
      following specific factors in determining the provision 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 portfolio. In addition to these factors, management takes into
      consideration current economic conditions and local real estate market
      conditions. The increase in the provision for the year ended December 31, 2006
      was primarily due to inherent risk related to loan growth and increased watch
      list loans. Management believes the quality of the loan portfolio remains sound,
      the determination of the provision for loan losses amount was primarily due
      to
      the manageable balances in non-accrual loans and management’s assessment of
      economic conditions in the Bank’s marketplace.




30


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 Losses**December
                31, 2006
            
            December
                31, 2005
            
            December
                31, 2004
            
            December
                31, 2003
            
            December
                31, 2002Amount
            
            %
                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
            
            $
            1,131,536
            
            
            44
            %
            $
            1,393,210
            
            
            43
            %
            $
            1,183,050
            
            
            46
            %
            $
            1,054,113
            
            
            51
            %
            $
            985,231
            
            
            60
            %Construction
                loans
            
            
            1,696,175
            
            
            47
            %
            
            578,537
            
            
            46
            %
            
            491,266
            
            
            42
            %
            
            375,193
            
            
            35
            %
            
            350,675
            
            
            21
            %Residential
                real estate loans
            
            
            61,634
            
            
            3
            %
            
            141,683
            
            
            4
            %
            
            120,310
            
            
            5
            %
            
            107,198
            
            
            5
            %
            
            100,193
            
            
            6
            %Loans
                to individuals
            
            
            139,055
            
            
            6
            %
            
            236,138
            
            
            7
            %
            
            200,517
            
            
            7
            %
            
            178,663
            
            
            8
            %
            
            166,988
            
            
            10
            %Lease
                financing
            
            
            -
            
            
            0
            %
            
            4,723
            
            
            0
            %
            
            4,010
            
            
            0
            %
            
            53,599
            
            
            1
            %
            
            50,096
            
            
            3
            %Unallocated
            
            
            200,230
            
            
            N/A
            
            
            7,084
            
            
            N/A
            
            
            6,016
            
            
            N/A
            
            
            17,866
            
            
            N/A
            
            
            16,699
            
            
            N/A$
            3,228,360
            
            
            100
            %
            $
            2,361,375
            
            
            100
            %
            $
            2,005,169
            
            
            100
            %
            $
            1,786,632
            
            
            100
            %
            $
            1,669,882
            
            
            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 building and expanding
      long-term relationships. Deposits in the year ended December 31, 2006 averaged
      $297,097,332, an increase of $17,488,935, or 6.3%, compared to $279,608,397
      in
      the year ended December 31, 2005. At December 31, 2006, total deposits were
      $312,724,422, an increase of $6,914,955, or 2.3%, from $305,809,467 at December
      31, 2005. The average rate paid on the Bank’s interest-bearing deposit balances
      for 2006 was 2.86%, increasing from the 1.94% average rate for 2005. Total
      interest bearing deposits increased by $5,296,312, or 2.2%, to $248,418,977
      at
      December 31, 2006 from $243,122,665 at December 31, 2005.




The
      significant contributors to the increased level of deposit growth in the year
      ended December 31, 2006 were an increase in average certificates of deposit
      of
      $100,000 or more, followed by increases in non-interest bearing demand deposits
      and savings deposits, offset by declines in other time deposits and
      interest-bearing demand deposits.




Time
      deposits consists primarily of retail certificates of deposit and certificates
      of deposit of $100,000 and over. Time deposits at December 31, 2006 were
      $112,675,086, an increase of $21,579,753, or 23.7%, from $91,095,333 at December
      31, 2005. The retail certificates of deposit component of time deposits
      decreased by $18,999,512, or 24.6%, to an average of $58,183,657 for 2006 from
      an average of $77,183,169 for 2005. The average cost of these deposits increased
      by 191 basis points to 5.00% for 2006 from 3.09% for 2005. Certificates of
      deposit of $100,000 and over increased by $34,099,357 to an average of
      $43,870,647 for 2006 from an average of $9,771,290 for 2005. The average cost
      for these deposits remained unchanged at 3.16% for 2006 and 3.16% for 2005.
      Certificates of deposit of $100,000 and over are a less stable funding source
      and are used primarily as an alternative to other sources of borrowed
      funds.




Average
      non-interest bearing demand deposits increased by $5,248,392, or 9.1%, to
      $63,040,519 for the year ended December 31, 2006 from $57,792,127 for the year
      ended December 31, 2005. At December 31, 2006, non-interest bearing demand
      deposits totaled $64,305,445, an increase of 2.6% compared to $62,686,802 at
      December 31, 2005. Non-interest bearing demand deposits represent a stable,
      interest-free source of funds. Growth in business and personal checking accounts
      through the Bank’s marketing programs generated most of the current year
      increase.




Savings
      accounts increased by $4,083,288, or 8.2%, to $53,630,726 at December 31, 2006
      from $49,547,438 at December 31, 2005. The average balance of savings accounts
      for 2006 increased by $11,195,700 to $44,867,384 compared to an average balance
      of $33,671,684 for 2005.


31




Interest
      bearing demand deposits, which include interest-bearing checking, money market
      and the Bank’s premier money market product, 1 ST Choice
      accounts, decreased by $38,148,833, or 37.7%, to an average of $63,040,519
      for
      2006 from an average of $101,189,352 in 2005. The average cost of interest
      bearing demand deposits increased 47 basis points to 1.67% for 2006 compared
      to
      1.20% for 2005.




The
      following table illustrates the components of average total deposits for the
      dates indicated.


**Average
                  Deposit Balances**2006
              
              2005
              
              2004Average
                Balance
              Percentage
                of
                  Total
              
              Average
                Balance
              Percentage
                  of Total
              
              Average
                Balance
              Percentage
                  of TotalNon-interest
                  bearing demand
                Deposits
              
              $63,040,519
              21.22%
              
              $57,792,902
              20.67%
              
              $49,622,127
              19.31%Interest
                  bearing demanddeposits
              
              87,135,125
              29.33%
              
              101,189,352
              36.19%
              
              96,113,368
              37.41%Savings
                  deposits
              
              44,867,384
              15.10%
              
              33,671,684
              12.04%
              
              26,890,218
              10.47%Certificates
                  of deposit of $100,000or
                  more
              
              43,870,647
              14.77%
              
              9,771,290
              3.49%
              
              10,156,576
              3.95%Other
                  time deposits
              
              58,183,657
              19.58%
              
              77,183,169
              27.60%
              
              74,136,634
              28.86%Total
              
              $297,097,332
              100.00%
              
              $279,608,397
              100.00%
              
              $256,918,923
              100.00%





**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 $1,396,036, or 4.5%, to $32,539,699 for the year ended December
      31,
      2006 from the average balance of $31,143,663 for the year ended December 31,
      2005. This increase is primarily due to the fact that loan portfolio growth
      exceeded deposit growth. The average cost of other borrowed funds increased
      81
      basis points to 5.19% for 2006 compared to 4.38% for 2005.




The
      balance of other borrowings was $17,200,000 at December 31, 2006, consisting
      of
      long-term FHLB borrowings of $15,500,000 and overnight funds purchased of
      $1,700,000. The balance of other borrowings at December 31, 2005 consisted
      of
      FHLB borrowings of $23,500,000 and overnight funds purchased of $5,000,000.
      The
      average cost of other borrowed funds increased 81 basis points to 5.19% for
      2006
      compared with 4.38% for 2005.




During
      2000, the Bank purchased three ten-year fixed rate convertible advances from
      the
      FHLB. These advances, in the amounts of $2,500,000, $5,000,000, and $5,000,000
      bear interest at the rates of 5.50%, 5.34%, and 5.06%, respectively. These
      advances are convertible quarterly at the option of the FHLB.




These
      advances are fully secured by marketable securities and qualifying one-to-four
      family mortgage loans.




32


Securities
      sold under agreements to repurchase are summarized as follows:




2006
            
            2005
            
            2004Balance
                outstanding at year end
            
            
            -
            
            
            -
            
            
            -Weighted
                average interest rate at year end
            
            
            -
            
            
            -
            
            
            1.27
            %Average
                daily balance outstanding during year
            
            
            -
            
            
            -
            
            $
            1,674,172Weighted
                average interest rate during year
            
            
            -
            
            
            -
            
            
            1.28
            %Highest
                month-end outstanding balance
            
            
            -
            
            
            -
            
            $
            1,941,042





**Shareholders’
      Equity and Dividends**




Shareholders’
      equity increased by $5,399,703, or 18.1%, to $35,196,570 at December 31, 2006,
      from $29,796,867 at December 31, 2005. Book value per common share increased
      by
      $1.22, or 14.9%, to $9.40 at December 31, 2006 from $8.18 at December 31, 2005.
      The increase in shareholders’ equity and book value per share resulted primarily
      from net income of $5,332,844, less the effect of stock buybacks, the unrealized
      holding loss on securities held for resale and an increase in accumulated and
      other comprehensive loss of $499,194 as a result of the adoption of SFAS No.
      158
      in the fourth quarter of 2006 (see Note 1 of the Notes to Consolidated Financial
      Statements on page F-11). The ratio of shareholders’ equity to total assets was
      8.96%, 8.00% and 7.98% at December 31, 2006, 2005, and 2004,
      respectively.




During
      the period January 1, 2002 through December 31, 2006, the Company achieved
      a
      five year compounded growth rate for shareholders’ equity of 19.9%. The
      Company’s book value per share has also increased over this period at a
      compounded growth rate of 13.3%. 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 6% stock dividend was declared
      in 2006 and paid in 2007 and a 5% stock dividend was declared in each of the
      years 2005 and 2004 and paid in each of the years 2006 and 2005, respectively.




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 15 of the Notes
      to
      Consolidated Financial Statements on page F-25.




**Off-Balance
      Sheet Arrangements and Contractual Obligations**




**Off-Balance
      Sheet Arrangements**




The
      following table shows the amounts and expected maturities of significant
      commitments as of December 31, 2006. Further discussion of these commitments
      is
      included in Note 13 to the Consolidated Financial Statements.


One
                Year
              or
                Less
            
            One
                to
              Three
                Years
            
            Three
                to
              Five
                Years
            
            Over
                Five
              Years
            
            TotalStandby
                letters of credit
            
            $
            5,999,658
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            5,999,658Commitments
                to extend credit
            
            $
            104,050,000
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            104,050,000Commitments
                to sell residential loans
            
            $
            13,608,942
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            13,608,942





33


**Contractual
      Obligations**




The
      following table shows the significant contractual obligations of the Company
      by
      expected payment period as of December 31, 2006. Further discussion of these
      commitments is included in Note 13 to the Consolidated Financial
      Statements.


Contractual
                Obligation
            Total
            Less
                Than One Year
            One
                to Three Years
            Three
                to Five Years
            Over
                Five YearsLong-term
                debt obligations
            $15,500,000
            $0
            $3,000,000
            $12,500,000
            $0Operating
                lease obligation
            $5,581,372
            $663,526
            $1,225,353
            $1,041,269
            $2,651,224Purchase
                obligations
            $861,000
            $789,000
            $72,000
            $0
            $0Certificates
                of deposit
            $112,675,086
            $98,524,127
            $11,692,690
            $2,458,269
            $0Redeemable
                subordinated debentures
            $23,712,000
            $5,155,000
            $0
            $0
            $18,557,000





Long-term
      debt obligations includes fixed term borrowings from the Federal Home Loan
      Bank.
      The borrowings have defined terms and under certain circumstances are callable
      at the option of the lender. Operating leases represent obligations entered
      into
      by the Company for the use of land and premises. The leases generally have
      escalation terms based upon certain defined indices. Purchase obligations
      represent legally binding and enforceable agreements to purchase goods and
      services from third parties and consists primarily of contractual obligations
      under data processing service agreements.




On
      February 23, 2007, the Company delivered a notice of redemption effective April
      22, 2007 of $5,155,000 of floating rate debentures due to mature on April 22,
      2032.




The
      Company also has commitments and obligations under its employee benefit plans
      as
      described in Note 11 to the Consolidated Financial Statements.




**Liquidity**




Liquidity
      measures the ability to satisfy current and future cash flow needs as they
      become due.




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




The
      Bank
      has established a borrowing relationship with the FHLB and a correspondent
      bank
      which further supports and enhances liquidity. At December 31, 2006, the Bank
      maintained an Overnight Line of Credit at the FHLB in the amount of $16,176,500
      plus a One-Month Overnight Repricing Line of Credit of $10,176,500. 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
      $13,500,000 with a correspondent bank.




The
      Consolidated Statements of Cash Flows present the changes in cash from
      operating, investing and financing activities. At December 31, 2006, the balance
      of cash and cash equivalents was $10,361,812.




Net
      cash
      provided by operating activities totaled $8,355,014 for the year ended December
      31, 2006 compared to net cash used in operations of $548,080 for the year ended
      December 31, 2005. The primary source of funds is net income from operations
      adjusted for provision for loan losses, depreciation expenses, and net
      amortization of premiums on securities. During 2006, lower volume of
      originations of loans held for sale resulted in less cash being used in this
      operating activity.




34


Net
      cash
      used in investing activities decreased by $2,423,884, or 9.0%, to $24,486,184
      for the year ended December 31, 2006 from $26,910,068 for the year ended
      December 31, 2005. The decrease in cash usage for 2006 compared to 2005 resulted
      from decreases in loans and purchases of securities.




Net
      cash
      provided by financing activities decreased by $17,316,257, or 54.7%, to
      $14,355,232 for the year ended December 31, 2006 from $31,671,489 for the year
      ended December 31, 2005. The cash provided in 2006 resulted primarily from
      the
      issuance of trust preferred securities.




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,
      2006, prepayments and maturities of investment securities totaled $16,219,982.
      Another source of liquidity is the loan portfolio, which provides a flow of
      payments and maturities.




**Interest
      Rate Sensitivity Analysis**




The
      largest component of the 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, 2006.





**Interest
      Rate Sensitivity Analysis At December 31, 2006**


(*$
                in thousands**)*
            
            Interest
                Sensitivity Period
            
            Total
                Within One Year
            
            One
                Year To
              Two
                Years
            
            Non-interest
              Sensitive
                and
              Over
                Two Years
            
            Total30
                Day
            
            90
                Day
            
            180
                Day
            
            365
                DayEarning
                Assets:Total
                Investment Securities
            
            $
            1,540
            
            $
            2,883
            
            $
            1,925
            
            $
            7,139
            
            $
            13,487
            
            $
            20,523
            
            $
            55,666
            
            $
            89,676Loans
            
            
            169,679
            
            
            5,675
            
            
            5,848
            
            
            11,242
            
            
            192,444
            
            
            16,849
            
            
            55,849
            
            
            265,142Other
                Interest-earning assets
            
            
            14,109
            
            
            -
            
            
            -
            
            
            -
            
            
            14,109
            
            
            -
            
            
            23,751
            
            
            37,860185,328
            
            
            8,558
            
            
            7,773
            
            
            18,381
            
            
            220,040
            
            
            37,372
            
            
            135,266
            
            
            392,678Source
                of Funds:Savings
                and time deposits
            
            
            37,323
            
            
            26,753
            
            
            37,463
            
            
            26,140
            
            
            127,679
            
            
            20,372
            
            
            27,767
            
            
            175,818Other
                interest-bearing liabilities
            
            
            50,405
            
            
            18,000
            
            
            5,000
            
            
            3,000
            
            
            76,405
            
            
            15,318
            
            
            21,078
            
            
            112,801Non-interest-bearing
                sources
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            104,059
            
            
            104,05987,728
            
            
            44,753
            
            
            42,463
            
            
            29,140
            
            
            204,084
            
            
            35,690
            
            
            152,904
            
            
            392,678Asset
                (Liability) Sensitivity Gap:Period
                Gap
            
            $
            97,600
            
            
            ($36,195
            )
            
            ($34,690
            )
            
            ($10,759
            )
            $
            15,956
            
            $
            1,682
            
            
            ($17,638
            )
            $
            0Cumulative
                Gap
            
            $
            97,600
            
            $
            61,405
            
            $
            26,715
            
            $
            15,956
            
            $
            15,956
            
            $
            17,638Cumulative
                Gap to Total Assets
            
            
            24.8
            %
            
            15.6
            %
            
            6.8
            %
            
            4.1
            %
            
            4.1
            %
            
            4.5
            %





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-costing
      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.




35


**Recent
      Accounting Pronouncements**




In
      February, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140: (“SFAS
      155”), to simplify and make more consistent the accounting for certain financial
      instruments. SFAF 155 amends SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities” (“SFAS 133”) and permits fair value
      re-measurement for any hybrid financial instrument with an embedded derivative
      that otherwise would require bifurcation, provided that the whole instrument
      is
      accounted for on a fair value basis. Prior to fair value measurement, interests
      in securitized financial assets must be evaluated to identify interests
      containing embedded derivatives requiring bifurcation. The amendments to SFAS
      133 also clarify which interest-only and principal-only strips are not subject
      to the requirements of SFAS 133, and that concentration of credit risk in the
      form of subordination are not embedded derivatives. SFAS 155 amends SFAS 140
      to
      allow a qualifying special-purpose entity to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS 155 applies to all financial instruments acquired
      or
      issued after the beginning of an entity’s first fiscal year that begins after
      September 15, 2006, with earlier application allowed. SFAS 155 is not expected
      to have a material impact on the Company’s results of operations or financial
      condition.




In
      March
      2006, the Financial Accounting Standards Board (FASB) issued Statement No.
      156
      (SFAS 156), Amending “Accounting for separately Recognized Assets and Servicing
      Liabilities”. SFAS 156 amends SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156
      permits, but does not require, an entity to choose either the amortization
      method or the fair value measurement method for measuring each class of
      separately recognized servicing assets and servicing liabilities. SFAS 156
      is
      effective for fiscal years beginning after September 15, 2006 and is not
      expected to have a material impact on the Company’s consolidated financial
      statements.




In
      July
      2006, FASB issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in
      Income Taxes: an interpretation of FASB Statement No. 109, “Accounting for
      Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
      recognized in an entity’s financial statements in accordance with Statement of
      SFAS No. 109. FIN 48 prescribes a **** recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a **** tax
      return. FIN 48 also provides guidance on derecognition, classification, interest
      and penalties, **** accounting
      in interim periods, disclosure and transition. FIN 48 is effective for fiscal
      years beginning after December 15 **,** 2006
      and
      is currently under evaluation by the Company to determine the impact on the
      Company’s consolidated financial statements.




In
      September 2006, FASB Issued Statement No. 157 (SFAS 157), **“** Fair **** Value
      Measurements” which is effective for **** fiscal
      years beginning after November 15, 2007 and for interim **** periods
      within those years. This statement defines fair value, establishes a
      framework **** for
      measuring fair value and expands the related disclosure requirements. The
      Company is **** currently
      evaluating the impact the adoption of **** SFAS
      No.
      157 will have on its consolidated **** financial
      statements.




In
      September 2006, FASB Issued Statement No. 158 (SFAS 158), **“** Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans—an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires an
      employer to recognize the overfunded or underfunded 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.
      This
      Statement also improves financial reporting by requiring an employer to measure
      the funded status of a **** plan
      as
      of the **** date
      of
      its year-end statement of **** financial
      position, with limited exceptions. An employer with publicly traded equity
      securities is required to initially recognize the funded status of a defined
      benefit postretirement plan and to provide the required disclosures as of the
      end of the **** fiscal
      year ending after December 15, 2006. See Note 1 of the Notes to Consolidated
      Financial Statements on page F-11 for the effect the adoption of **** SFAS
      No.
      158 **** had
      on **** the
      consolidated financial statements.




36


In
      September 2006, the SEC staff issued Staff Accounting Bulletin No.
      108 **** “Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements
      in **** Current
      Year Financial Statements.” SAB 108 was issued to **** provide
      consistency among registrants in the quantification of **** financial
      statement misstatements. SAB 108 **** established
      an approach **** that
      requires quantification of financial statement misstatements based on the
      effects of the misstatement on each of the **** company’s
      financial statements and the related **** disclosures.
      SAB 108 **** allows
      registrants **** to
      initially apply the approach either by (1) retroactively adjusting prior
      financial statements as if the approach had always been used or (2) recording
      the cumulative effect of initially applying the approach as adjustments to
      the
      carrying values of assets and liabilities as of January 1, 2006 with the related
      offset recorded to the opening balance of retained earnings. Use of the
“cumulative effect” transition requires full disclosure as to the nature and
      amount of each individual error being corrected. The Company adopted SAB No.
      108
      as of December 31, 2006. The
      adoption of SAB No. 108 by the Company did not have a material effect on the
      Company’s consolidated financial statements.




At
      its
      September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final
      consensus on Issue 06-04, “ *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements.”* In
      accordance with the EITF consensus, an agreement by an employer to share a
      portion of the proceeds of a life insurance policy with an employee during
      the
      postretirement period is a postretirement benefit arrangement required to be
      accounted for under SFAS No. 106 and, therefore, a liability for the
      postretirement obligation must be recognized under SFAS No. 106 if the benefit
      is offered under an arrangement that constitutes a plan or under APB No. 12
      if
      it is not part of a plan. The provisions of Issue 06-04 are to be applied
      through either a cumulative -effect adjustment to retained earnings as of the
      beginning of the year of adoption or retrospective application. Issue 06-04
      is
      effective for annual or interim reporting periods beginning after December
      15,
      2007. The application of Issue 06-04 is not expected to have a material effect
      on the Company’s financial position or results of operations.




At
      its
      September 2006 meeting, the EITF reached a final consensus on Issue 06-05,
      “ *Accounting
      for Purchases of Life Insurance -Determining the Amount That Could be Realized
      in Accordance with FASB Technical Bulletin No. 85-4.* ”
Issue
      06-05 concludes that in determining the amount that could be realized under
      an
      insurance contract accounted fro under FASB Technical Bulletin No. 85-4,
“ *Accounting
      for Purchases of Life Insurance,* ”
the
      policyholder should (1) consider any additional amounts included in the
      contractual terms of the policy; (2) assume the surrender value on an individual
      life-by individual-life policy basis; and (3) not discount the cash surrender
      value component of the amount that could be realized when contractual
      restrictions on the ability to surrender a policy exist. Issue 06-05 should
      be
      adopted through either (1) a change in accounting principle through a
      cumulative-effect adjustment to retained earnings as of the beginning of the
      year of adoption or (2) a change in accounting principle through retrospective
      application to all prior periods. Issue 06-05 is effective for fiscal years
      beginning after December 15, 2006. The application of Issue 06-05 is not
      expected to have a material effect on the Company’s financial position or
      results of operations.




**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk.**




**Market
      Risk Analysis**




To
      measure the impacts of longer-term asset and liability mismatches beyond two
      years, the Company utilizes Modified Duration of Equity and Economic Value
      of
      Portfolio Equity (“EVPE”) models. The modified duration of equity measures the
      potential price risk of equity to changes in interest rates. A longer modified
      duration of equity indicates a greater degree of risk to rising interest rates.
      Because of balance sheet optionality, an EVPE analysis is also used to
      dynamically model the present value of asset and liability cash flows, with
      rates ranging up or down 200 basis points. The economic value of equity is
      likely to be different as interest rates change. Results falling outside
      prescribed ranges require action by Management. At December 31, 2006 and 2005,
      the Company’s variance in the economic value equity as a percentage of assets
      with an instantaneous and sustained parallel shift of 200 basis points is within
      the negative 3% guideline, as shown in the tables below.




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




37


**Market
      Risk Analysis**


**December
      31, 2006**




Change
                  in Interest Rates
              
              Flat
              
              -200bp
              
              +200bpEconomic
                  Value of Portfolio Equity
              
              $
              47,670,000
              
              $
              46,869,000
              
              $
              44,183,000Change
              
              
              
              
              
              ($800,000
              )
              
              ($3,487,000
              )Change
                  as a % of assets
              
              
              
              
              
              (-0.20
              %)
              
              (-0.89
              %)




**December
      31, 2005**


Change
                in Interest Rates
            
            Flat
            
            -200bp
            
            +200bpEconomic
                Value of Portfolio Equity
            
            $
            44,923,000
            
            $
            43,305,000
            
            $
            42,049,000Change
            
            
            
            
            
            ($1,617,000
            )
            
            ($2,873,000
            )Change
                as a % of assets
            
            
            
            
            
            (-0.43
            %)
            
            (-0.77
            %)





**Item
      8. Financial Statements and Supplementary Data.**




Reference
      is made to Item 15(a)(1) and (2) to 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 on pages F-1 through F-23
      hereof.




**Item
      9. Changes In and Disagreements with Accountants on Accounting and Financial
      Disclosure.**




Not
      applicable.




**Item
      9A. Controls and Procedures.**




The
      Company’s Chief Executive Officer and Chief Financial Officer, with the
      assistance of other members of the Company’s management, have evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of the end
      of the period covered by this Annual Report on Form 10-K. Based on such
      evaluation, the Company’s Chief Executive Officer and Chief Financial Officers
      have concluded that the Company’s disclosure controls and procedures are
      effective.




The
      Company’s Chief Executive Officer and Chief Financial Officer have also
      concluded that there have not been any changes in the Company’s internal control
      over financial reporting during the quarter ended December 31, 2006 that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.




Because
      the Company is not an “Accelerated Filer” as defined in Rule 12b-2 of the
      Exchange Act, the Company is not presently required to file *Management’s
      annual report on internal control over financial reporting* and
      the *Attestation
      report of the registered public accounting firm* required
      by Item 308(a) and (b) of Regulation S-K promulgated under the Securities Act
      of
      1933, as amended. Under current rules, because the Company is neither a “large
      accelerated filer” nor an “accelerated filer”, the Company is not required to
      provide management’s report on internal control over financial reporting until
      the Company files its annual report for 2007 and compliance with the auditor’s
      attestation report requirement is not required until the Company files its
      annual report for 2008. The Company currently expects to comply with these
      requirements at such time as the Company is required to do so.




**Item
      9B. Other Information.**




None.




38




**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 2007 Annual Meeting of Shareholders under the caption
      “Directors and Executive Officers.”




**Item
      11. Executive Compensation.**




The
      information required by this item is incorporated by reference to the Company’s
      Proxy Statement for its 2007 Annual Meeting of Shareholders under the caption
      “Executive Compensation.”




**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, 2006. The information in
      the table has been adjusted for the 6% stock dividend declared December 21,
      2006
      and paid January 31, 2007 to shareholders of record on January 23,
      2007.




**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)
            70,610
            $14.20
            352,600Equity
                compensation plans not approved by security holders (2)
            62,241
            $6.49
            -**Total**
            132,851
            $10.58
            352,600





(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.




39


(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 2007 Annual Meeting of Shareholders under
      the caption “Stock Ownership of Management and Principal Shareholders.”




**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 2007 Annual Meeting of Shareholders under the
      caption “Certain Transactions With Management.”




**Item
      14. Principal Accountant 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 2007 Annual Meeting of Shareholders under the
      caption “Principal Accountant Fees and Services.”




**PART
      IV**




**Item
      15. Exhibits and 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 Sheet - December 31, 2006 and 2005.





Consolidated
                Statements of Income - For the Years Ended December 31, 2006, 2005
                and
                2004.





Consolidated
      Statements of Changes in Shareholders’ Equity - For the


Years
      Ended December 31, 2006, 2005 and 2004.





Consolidated
                Statements of Cash Flows - For the Years Ended December 31, 2006,
                2005,
                and 2004.





Notes
      to
      Consolidated Financial Statements





Report
      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, 2006.





40


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)
            
            Certificate
                of Incorporation of the Company (incorporated by reference to Exhibit
                3(i)
                to the Company’s Form 10-K filed with the SEC on March 24,
                2005).3
            (ii)
            
            Bylaws
                of the Company (incorporated by reference to Exhibit 3(ii) to the
                Company’s Form 10-QSB filed with the SEC on May 14,
                2003)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 1stConstitution 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)4.4
            
            
            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 1stConstitution 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).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)





41




Exhibit
                No.
            
            Description10.4
            
            #
            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)10.11
            
            #
            Form
                of Stock Option Agreement under the 1stConstitution 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 1stConstitution 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).




42




Exhibit
                No.
            
            Description10.16
            
            #
            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)10.24
            
            *#
            Amendment
                No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement
                Plan,
                effective January 1, 200510.25
            
            #
            1stConstitution Bancorp 2005 Supplemental Executive Retirement Plan,
                effective 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)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)21
            
            *
            Subsidiaries
                of the Company




43


Exhibit
                No.
            
            Description


23.1
            
            *
            Consent
                of Independent Registered Public Accounting Firm31.1
            
            *
            Certification
                of Robert F. Mangano, Chief Executive Officer of the Company, pursuant
                to
                Securities Exchange Act Rule 13a-14(a).31.2
            
            *
            Certification
                of Joseph M. Reardon, Chief Financial Officer of the Company, pursuant
                to
                Securities Exchange Act Rule 13a-14(a).32
            
            *
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, Chief
                Executive Officer of the Company, and Joseph M. Reardon, Chief Financial
                Officer of the Company.


_____________________


*  Filed
      herewith.


#
            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


**1** **ST** **CONSTITUTION BANCORP**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**1****ST****CONSTITUTION
                  BANCORP****INDEX
                  TO CONSOLIDATED FINANCIAL STATEMENTS****Page**Report
                  of Independent Registered Public Accounting Firm
              
              F-2Consolidated
                  Balance Sheet - December 31, 2006 and 2005
              
              F-3Consolidated
                  Statements of Income - For the Years Ended December 31, 2006, 2005
                  and
                  2004
              
              F-4Consolidated
                  Statements of Changes in Shareholders’ Equity for the Years Ended December
                  31, 2006, 2005 and 2004
              
              F-5Consolidated
                  Statements of Cash Flows - For the Years Ended December 31, 2006,
                  2005 and
                  2004
              
              F-6Notes
                  to Consolidated Financial Statements
              
              F-7





F-1







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











Board
      of
      Directors and Shareholders


1 st Constitution Bancorp:








We
      have
      audited the accompanying consolidated balance sheet of 1 st Constitution Bancorp and subsidiaries as of December 31, 2006 and 2005 and
      the
      related consolidated statements of income, changes in shareholders’ equity and
      cash flows for each of the three years in the period ended December 31, 2006.
      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 audits 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 audits provide 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 1 st Constitution Bancorp and subsidiaries as of December 31, 2006 and 2005 and
      the
      consolidated results of their operations and their consolidated cash flows
      for
      each of the three years in the period ended December 31, 2006, in conformity
      with accounting principles generally accepted in the United States of America.





As
      discussed in Note 1 to the consolidated financial statements, the Company has
      adopted Financial Accounting Standards Board Statement No. 123(R), *Share-Based
      Payments (SFAS No. 123(R))* in 2006.
      Also, as discussed in Note 1 to the consolidated financial statements, the
      Company has adopted Financial Accounting Standards Board No. 158, *Employer’s
      Accounting For Defined Benefit Pension and Other Postretirement Plans, An
      Amendment of FASB Statements No. 87, 88, 106 and 132(R)* at
      December 31, 2006.





/s/
      GRANT
      THORNTON LLP





Philadelphia,
      Pennsylvania


March
      30,
      2007











F-2


**1** **ST** **CONSTITUTION
      BANCORP**


**CONSOLIDATED
      BALANCE SHEETS**


**December
      31, 2006 and 2005**




**ASSETS**
              
              **2006**
              
              **2005**CASH
                  AND DUE FROM BANKS
              
              $
              10,336,334
              
              $
              9,394,929FEDERAL
                  FUNDS SOLD / SHORT TERM INVESTMENTS
              
              
              25,478
              
              
              2,742,821Total
                  cash and cash equivalents
              
              
              10,361,812
              
              
              12,137,750INVESTMENT
                  SECURITIESAvailable
                  for sale, at fair value
              
              
              70,421,328
              
              
              69,236,658Held
                  to maturity (fair value of $19,164,679 and $21,521,026in
                  2006 and 2005, respectively)
              
              
              19,254,476
              
              
              21,758,370Total
                  securities
              
              
              89,675,804
              
              
              90,995,028LOANS
                  HELD FOR SALE
              
              
              13,608,942
              
              
              16,757,734LOANS
              
              
              265,142,313
              
              
              240,014,349Less-
                  Allowance for loan losses
              
              
              (3,228,360
              )
              
              (2,361,375
              )Net
                  loans
              
              
              261,913,953
              
              
              237,652,974PREMISES
                  AND EQUIPMENT, net
              
              
              3,033,618
              
              
              2,596,852ACCRUED
                  INTEREST RECEIVABLE
              
              
              2,235,671
              
              
              1,905,662BANK-OWNED
                  LIFE INSURANCE
              
              
              9,179,408
              
              
              8,828,932OTHER
                  ASSETS
              
              
              2,668,338
              
              
              1,620,534Total
                  assets
              
              $
              392,677,546
              
              $
              372,495,466**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**LIABILITIES:DepositsNon-interest
                  bearing
              
              $
              64,305,445
              
              $
              62,686,802Interest
                  bearing
              
              
              248,418,977
              
              
              243,122,665Total
                  deposits
              
              
              312,724,422
              
              
              305,809,467BORROWINGS
              
              
              17,200,000
              
              
              28,500,000REDEEMABLE
                  SUBORDINATED DEBENTURES
              
              
              23,712,000
              
              
              5,155,000ACCRUED
                  INTEREST PAYABLE
              
              
              1,957,574
              
              
              1,288,040ACCRUED
                  EXPENSES AND OTHER LIABILITIES
              
              
              1,886,980
              
              
              1,946,092Total
                  liabilities
              
              
              357,480,976
              
              
              342,698,599COMMITMENTS
                  AND CONTINGENCIESSHAREHOLDERS’
                  EQUITYCommon
                  stock, no par value; 30,000,000shares
                  authorized; 3,742,860 and 3,700,254 shares issuedand
                  3,742,662 and 3,643,501 shares outstandingas
                  of December 31, 2006 and 2005, respectively
              
              
              28,886,105
              
              
              25,589,320Retained
                  earnings
              
              
              7,290,916
              
              
              5,981,803Treasury
                  Stock, at cost, 198 shares and 56,753 sharesat
                  December 31, 2006 and 2005, respectively
              
              
              (3,545
              )
              
              (1,008,998
              )Accumulated
                  other comprehensive loss
              
              
              (976,906
              )
              
              (765,258
              )Total
                  shareholders’ equity
              
              
              35,196,570
              
              
              29,796,867Total
                  liabilities and shareholders’ equity
              
              $
              392,677,546
              
              $
              372,495,466


The
        accompanying notes are an integral part of these financial
        statements


F-3


**1** **ST** **CONSTITUTION BANCORP**


**CONSOLIDATED
      STATEMENTS OF INCOME**





**For
      the Years Ended December 31, 2006, 2005 and 2004**


**2006**
              
              **2005**
              
              **2004**INTEREST
                  INCOME:Loans,
                  including fees
              
              $
              23,166,544
              
              $
              17,622,128
              
              $
              13,422,067Securities:Taxable
              
              
              3,448,780
              
              
              3,017,885
              
              
              3,196,936Tax-exempt
              
              
              604,846
              
              
              660,878
              
              
              386,088Federal
                  funds sold andshort-term
                  investments
              
              
              85,012
              
              
              27,181
              
              
              10,977Total
                  interest income
              
              
              27,305,182
              
              
              21,328,072
              
              
              17,016,068INTEREST
                  EXPENSE:Deposits
              
              
              6,688,080
              
              
              4,313,849
              
              
              3,300,523Securities
                  sold underagreements to repurchaseand
                  other borrowed funds
              
              
              1,687,749
              
              
              1,363,507
              
              
              981,689Redeemable
                  subordinated debentures
              
              
              1,141,668
              
              
              350,823
              
              
              263,083Total
                  interest expense
              
              
              9,517,497
              
              
              6,028,179
              
              
              4,545,295Net
                  interest income
              
              
              17,787,685
              
              
              15,299,893
              
              
              12,470,773PROVISION
                  FOR LOAN LOSSES
              
              
              893,500
              
              
              405,000
              
              
              240,000Net
                  interest income after provisionfor
                  loan losses
              
              
              16,894,185
              
              
              14,894,893
              
              
              12,230,773NON-INTEREST
                  INCOME:Service
                  charges on deposit accounts
              
              
              668,071
              
              
              690,104
              
              
              514,494Gain
                  on sales of loans
              
              
              1,072,731
              
              
              1,444,521
              
              
              1,373,660(Losses)
                  gains on sales of investment securities, net
              
              
              (99,714
              )
              
              (271,871
              )
              
              27,545Income
                  on Bank-owned life insurance
              
              
              350,476
              
              
              235,430
              
              
              312,496Other
                  income
              
              
              599,445
              
              
              548,677
              
              
              329,047Total
                  other income
              
              
              2,591,009
              
              
              2,646,861
              
              
              2,557,242NON-INTEREST
                  EXPENSES:Salaries
                  and employee benefits
              
              
              6,799,619
              
              
              5,894,200
              
              
              4,955,587Occupancy
                  expense
              
              
              1,434,728
              
              
              1,365,930
              
              
              1,071,463Other
                  operating expenses
              
              
              3,803,509
              
              
              3,627,095
              
              
              2,962,911Total
                  other expenses
              
              
              12,037,856
              
              
              10,887,225
              
              
              8,989,961Income
                  before income taxes
              
              
              7,447,338
              
              
              6,654,529
              
              
              5,798,054INCOME
                  TAXES
              
              
              2,114,494
              
              
              2,094,402
              
              
              1,960,340Net
                  income
              
              $
              5,332,844
              
              $
              4,560,127
              
              $
              3,837,714NET
                  INCOME PER SHAREBasic
              
              $
              1.45
              
              $
              1.25
              
              $
              1.05Diluted
              
              $
              1.41
              
              $
              1.20
              
              $
              1.02WEIGHTED
                  AVERAGE SHARESOUTSTANDINGBasic
              
              
              3,674,432
              
              
              3,659,456
              
              
              3,655,461Diluted
              
              
              3,772,182
              
              
              3,803,871
              
              
              3,799,270The
                  accompanying notes are an integral part of these financial
                  statements




F-4


**1** **ST** **CONSTITUTION BANCORP**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**





**For
      the Years Ended December 31, 2006, 2005 and 2004**





Common
              Stock
            
            RetainedEarnings
            
            Treasury
              Stock
            
            Accumulated
              Other
              Comprehensive
              (Loss)
                Income
            
            Total
              Shareholders’
              EquityBALANCE,
                January 1, 2004
            
            $
            19,694,828
            
            $
            3,745,784
            
            
            ($5,517
            )
            $
            150,161
            
            $
            23,585,256Exercise
                of stock options, net and issuance of vested
              shares
                under employee benefit programs
            
            
            (290,277
            )
            
            
            
            
            468,176
            
            
            
            
            
            177,899Treasury
                Stock, 16,661 shares at cost
            
            
            
            
            
            
            
            
            (549,555
            )
            
            
            
            
            (549,555
            )5%
                stock dividend declared December 2004,
              including
                fractional share cash payments
            
            
            2,850,851
            
            
            (2,858,241
            )
            
            
            
            
            
            
            
            (7,390
            )Comprehensive
                Income:Net
                income - 2004
            
            
            
            
            
            3,837,714
            
            
            
            
            
            
            
            
            3,837,714Unrealized
                losses on securities available
              for
                sale, net of tax benefit of ($151,962)
            
            
            
            
            
            
            
            
            
            
            
            (253,540
            )
            
            (253,540
            )Comprehensive
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,584,174BALANCE,
                December 31, 2004
            
            $
            22,255,402
            
            $
            4,725,257
            
            
            ($86,896
            )
            
            ($103,379
            )
            $
            26,790,384Exercise
                of stock options, net and issuance of vested
              shares
                under employee benefit programs
            
            
            30,336
            
            
            
            
            
            338,837
            
            
            
            
            
            369,173Treasury
                Stock, 66,699 shares at cost
            
            
            
            
            
            
            
            
            (1,260,939
            )
            
            
            
            
            (1,260,939
            )5%
                stock dividend declared December 2005,
              including
                fractional share cash payments
            
            
            3,303,582
            
            
            (3,303,582
            )
            
            
            
            
            
            
            
            -Comprehensive
                Income:Net
                income - 2005
            
            
            
            
            
            4,560,127
            
            
            
            
            
            
            
            
            4,560,127Unrealized
                losses on securities available for sale
              net
                of tax benefit of $503,290
            
            
            
            
            
            
            
            
            
            
            
            (662,631
            )
            
            (662,631
            )Comprehensive
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,897,496BALANCE,
                December 31, 2005
            
            $
            25,589,320
            
            $
            5,981,802
            
            
            ($1,008,998
            )
            
            ($765,258
            )
            $
            29,796,867Exercise
                of stock options, net and issuance of vested
              shares
                under employee benefit programs
            
            
            (822,175
            )
            
            
            
            
            1,418,000
            
            
            
            
            
            595,825Treasury
                Stock, 21,749 shares at cost
            
            
            
            
            
            
            
            
            (412,547
            )
            
            
            
            
            (412,547
            )FAS
                123R share-based compensation
            
            
            95,230
            
            
            
            
            
            
            
            
            
            
            
            95,2306%
                stock dividend declared December 2006,
              including
                fractional share cash payments
            
            
            4,023,730
            
            
            (4,023,730
            )
            
            
            
            
            
            
            
            -Adjustment
                to initially apply FASB Statement No. 158
              (net
                of tax benefit of $257,160)
            
            
            
            
            
            
            
            
            
            
            
            (499,194
            )
            
            (499,194
            )Comprehensive
                Income:Net
                income - 2006
            
            
            
            
            
            5,332,844
            
            
            
            
            
            
            
            
            5,332,844Unrealized
                gains on securities available for sale
              net
                of tax benefit of $241,421
            
            
            
            
            
            
            
            
            
            
            
            287,546
            
            
            287,546Comprehensive
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,620,390BALANCE,
                December 31, 2006
            
            $
            28,886,105
            
            $
            7,290,916
            
            
            ($3,545
            )
            
            ($976,906
            )
            $
            35,196,570


The
      accompanying notes are an integral part of these financial
      statements




F-5


**1** **ST** **CONSTITUTION BANCORP**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the Years Ended December 31, 2006, 2005 and 2004**




**2006**
              
              **2005**
              
              **2004**OPERATING
                  ACTIVITIES:Net
                  income
              
              $
              5,332,844
              
              $
              4,560,127
              
              $
              3,837,714Adjustments
                  to reconcile net incometo
                  net cash provided by operating activities-Provision
                  for loan losses
              
              
              893,500
              
              
              405,000
              
              
              240,000Depreciation
                  and amortization
              
              
              627,833
              
              
              523,441
              
              
              385,106Net
                  amortization of premiums on securities
              
              
              41,405
              
              
              139,507
              
              
              350,168Gains
                  on sales of loans
              
              
              (1,072,731
              )
              
              (1,444,521
              )
              
              (1,373,660
              )Losses
                  (gains) on sale of investment securities, net
              
              
              99,714
              
              
              271,871
              
              
              (27,545
              )Originations
                  of loans held for sale
              
              
              (58,696,245
              )
              
              (73,491,347
              )
              
              (75,514,197
              )Income
                  on Bank-owned life insurance
              
              
              (350,476
              )
              
              (235,430
              )
              
              (312,496
              )Proceeds
                  from sales of loans held for sale
              
              
              62,917,768
              
              
              68,106,015
              
              
              82,365,958Deferred
                  tax benefit
              
              
              (471,367
              )
              
              (233,589
              )
              
              (149,400
              )Increase
                  in accrued interest receivable
              
              
              (330,009
              )
              
              (461,169
              )
              
              (275,478
              )(Increase)
                  decrease in other assets
              
              
              (1,370,830
              )
              
              216,727
              
              
              289,628Increase
                  (decrease) increase in accrued interest payable
              
              
              669,534
              
              
              306,020
              
              
              75,444Decrease
                  (increase) increase in accruedexpenses
                  and other liabilities
              
              
              64,073
              
              
              1,130,089
              
              
              (245,600
              )Net
                  cash provided by (used in) operating activities
              
              
              8,355,013
              
              
              (207,259
              )
              
              9,645,642INVESTING
                  ACTIVITIES:Purchases
                  of securities -Available
                  for sale
              
              
              (17,386,472
              )
              
              (15,511,405
              )
              
              (34,116,716
              )Held
                  to maturity
              
              
              -
              
              
              (9,969,659
              )
              
              (6,883,726
              )Proceeds
                  from maturities and prepaymentsof
                  securities -Available
                  for sale
              
              
              13,736,214
              
              
              17,074,576
              
              
              29,011,317Held
                  to maturity
              
              
              2,483,768
              
              
              360,173
              
              
              894,985Proceeds
                  from sales of securities available for sale
              
              
              2,899,385
              
              
              13,292,413
              
              
              3,801,399Purchase
                  of Bank owned life insurance
              
              
              -
              
              
              (1,950,000
              )
              
              -Net
                  increase in loans
              
              
              (25,154,480
              )
              
              (29,410,092
              )
              
              (46,724,208
              )Capital
                  expenditures
              
              
              (1,064,599
              )
              
              (796,074
              )
              
              (1,347,808
              )Net
                  cash used in investing activities
              
              
              (24,486,184
              )
              
              (26,910,068
              )
              
              (55,364,757
              )FINANCING
                  ACTIVITIES:Issuance
                  of common stock, net
              
              
              595,825
              
              
              369,173
              
              
              177,899Purchase
                  of Treasury Stock
              
              
              (412,547
              )
              
              (1,260,939
              )
              
              (549,555
              )Net
                  increase in demand, savings and time deposits
              
              
              6,914,955
              
              
              28,922,434
              
              
              31,533,309Net
                  decrease in securitiessold
                  under agreements to repurchase
              
              
              -
              
              
              -
              
              
              (1,921,015
              )Net
                  advances (repayments) in short-term borrowings
              
              
              (11,300,000
              )
              
              3,300,000
              
              
              9,700,000Proceeds
                  from issuance of trust preferred securities
              
              
              18,557,000
              
              
              -
              
              
              -Net
                  cash provided by financing activities
              
              
              14,355,233
              
              
              31,330,668
              
              
              38,940,638(Decrease)
                  increase in cash and(Decrease)
                  increase in cash andcash
                  equivalents
              
              
              (1,775,938
              )
              
              4,213,341
              
              
              (6,778,477
              )CASH
                  AND CASH EQUIVALENTSAT
                  BEGINNING OF YEAR
              
              
              12,137,750
              
              
              7,924,409
              
              
              14,702,886CASH
                  AND CASH EQUIVALENTSAT
                  END OF YEAR
              
              $
              10,361,812
              
              $
              12,137,750
              
              $
              7,924,409SUPPLEMENTAL
                  DISCLOSURESOF
                  CASH FLOW INFORMATION:Cash
                  paid during the year for -Interest
              
              $
              8,847,963
              
              $
              5,722,159
              
              $
              4,469,851Income
                  taxes
              
              
              3,563,872
              
              
              2,040,016
              
              
              2,429,565


The
      accompanying notes are an integral part of these financial
      statements


F-6


**1** **ST** **CONSTITUTION BANCORP**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**December
      31, 2006, 2005 and 2004**





**1.
      Summary of Significant Accounting Policies**


1 ST 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 nine additional branch offices in downtown
      Cranbury, Fort Lee, Hamilton Square, 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 accounts of the
      Company and its wholly-owned subsidiaries, 1 ST Constitution Capital Trust I, 1 ST Constitution Capital Trust II (the “Trusts”) (for periods prior to December 31,
      2003) and the Bank and the Bank’s wholly-owned subsidiaries, 1 ST Constitution Investment Company of Delaware, Inc., FCB Assets Holdings, Inc
      and
      1 ST Constitution Title Agency, LLC. All significant inter-company accounts and
      transactions have been eliminated. In accordance with the Company’s adoption of
      Financial Accounting Interpretation No. 46, Consolidation of Variable Interest
      Entities, as revised December 2003, the Company de-consolidated the accounts
      and
      related activity of 1 st Constitution Capital Trust I as of December 31, 2003.





*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.





*Investment
      Securities*





Investment
      Securities which the Bank 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 Federal
      Home Loan Bank stock, which is 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.




In
      November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS
      124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to
      Certain Investments.” This FSP provides guidance on determining if an investment
      is considered to be impaired, if the impairment is other-than-temporary and
      the
      measurement of an impairment loss. It also includes accounting considerations
      subsequent to the recognition of an other-than-temporary impairment and requires
      certain disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. This FSP was effective for reporting periods
      beginning after December 15, 2005. Adoption of this FSP did not have a material
      impact on the Company’s results of operations or financial
      position.




*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-7


*Loans
      And Loans Held For Sale*





Loans
      that management intended 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.
      Income from direct financing leases is recorded over the life of the lease
      under
      the financing method of accounting. The investment includes the sum of aggregate
      rentals receivable and the estimated residual value of leased equipment, less
      deferred income. 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 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 financial assets in accordance with
      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 or securitize those loans and service the loans owned
      by
      the investor. Upon the transfer of the mortgage loans in a sale or a
      securitization, the Bank records the servicing assets retained in accordance
      with SFAS No. 140. The Bank records mortgage servicing rights and the loans
      based on relative fair values at the date of origination.





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
      engage 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
      enteres 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.





*Allowance
      for Loan Losses*





The
      allowance for loan losses is a valuation reserve available for losses or
      expected 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.





F-8


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 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 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 assets. 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.
      Maintenance and repairs are charged to expense as incurred.





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, 2006 and 2005.





*Income
      Taxes*





Income
      taxes are accounted for under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases and operating
      loss and tax credit carry forwards. 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 tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment
      date.





F-9


*Other
      Real Estate*





Other
      real estate 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.





*Share-Based
      Compensation*





The
      Company maintains the 2006 Directors Stock Plan and the 2005 Equity Incentive
      Plan. The 2006 Plan allows the Company to grant participants stock options
      or
      shares of restricted stock up to an aggregate of 53,000 shares of common stock
      to non-employee directors of the Company or directors of any of the Company’s
      subsidiaries. The exercise price of each option is the market price of the
      Company’s stock on the date of grant. Under this Plan, options may be granted in
      such amounts and at such times and upon such terms as deemed prudent and
      reasonable and such grants need not be uniform as to all
      participants.





The
      2005
      Equity Incentive Plan allows the Company to grant stock options or restricted
      stock up to an aggregate of 333,900 shares of the Company’s common stock. The
      options have a term of up to ten years when they are issued and vest over a
      four-year period. The exercise price of each option is the market price of
      the
      Company’s stock on the date of grant.





Effective
      January 1, 2006, the Company has adopted FASB Statement No. 123 (R),
“Share-Based Payment”. Statement 123 (R) requires that compensation cost
      relating to share-based payment transactions be recognized in financial
      statements. The cost is measured based on the fair value of the equity or
      liability instruments issued.





Statement
      123 (R) covers a wide range of share-based compensation arrangements including
      share options, restricted share plans, performance-based awards, share
      appreciation rights, and employee share purchase plans.




In
      addition to the accounting standard that sets forth the financial reporting
      objectives and related accounting principles, Statement 123 (R) includes an
      appendix of implementation guidance that provides expanded guidance on measuring
      the fair value of share-based payment awards.




Statement
      123 (R) replaces FASB Statement No. 123, “Accounting for Stock-Based
      Compensation” and supersedes APB Opinion No. 25, “Accounting For Stock Issued to
      Employees”. Statement 123, as originally issued in 1995, established as
      preferable a fair-value-based method of accounting for share-based payment
      transactions with employees. However, that Statement permitted entities the
      option of continuing to apply the guidance in Opinion 25, as long as the
      footnotes to financial statements disclosed what net income would have been
      had
      the preferable fair-value-based method been used.




Because
      the Company adopted Statement 123 (R) using the modified prospective transition
      method, prior periods have not been restated. Under this method, the Company
      is
      required to record compensation expense for all awards granted after the date
      of
      adoption and for the unvested portion of previously granted awards that remain
      outstanding as of the beginning of the period of adoption. The Company measures
      share-based compensation cost using the Black-Scholes option pricing model
      for
      stock option grants. The assumptions used in the option-pricing model in 2006
      were: dividend yield of 0%; expected volatility of 26.6%; risk-free interest
      rate of 4.53% and expected term of 7 years. Although the initial fair value
      of
      stock options is not adjusted after the grant date, changes in the Company’s
      assumptions may change the value of, and therefore the expense related to,
      future stock option grants. Forfeitures did not affect the calculated expense
      based upon historical activities of option grantees.




Prior
      to
      2006, stock-based compensation was accounted for under the intrinsic value
      based
      method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees.” Included in the table below are the pro forma
      disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation,”
as amended by SFAS No. 148, “Accounting for Stock-Based Compensation -
      Transaction and Disclosure,” which assumes the fair value based method of
      accounting had been adopted.




2005
            
            2004Net
                income -As
                reported
            
            $
            4,560,127
            
            $
            3,837,714Deduct:
                Stock-based
              employee
                compensation determined under fair
              value
                based method for stock options, net
              of
                related tax effects
            
            
            40,277
            
            
            25,538Pro
                forma
            
            $
            4,519,850
            
            $
            3,812,175Net
                income per share -As
                reported -Basic
            
            $
            1.25
            
            $
            1.05Diluted
            
            $
            1.20
            
            $
            1.02Pro
                forma -Basic
            
            $
            1.24
            
            $
            1.04Diluted
            
            $
            1.19
            
            $
            1.01





F-10




The
      fair
      value of each option grant was estimated on the date of grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions used for grants in 2005 and 2004; dividend yield of 0%; expected
      volatility of 35% in 2005 and 2004; risk-free interest rates of 4.39%, and
      3.60%, respectively; and expected lives of 5 years.




Share-based
      compensation of $95,230 was recognized for the year ended December 31, 2006,
      which related to the unvested portion of options to acquire shares of Company
      common stock granted prior to January 1, 2006. Reported net income, adjusting
      for share-based compensation that would have been recognized in the adoption
      of
      Statement 123 (R) did not change the way that the Company has accounted for
      stock awards in prior periods and therefore no such change is reflected in
      the
      pro forma table above. The Company expenses the fair value of stock awards
      determined at the grant date on a straight-line basis over the vesting period
      of
      the award.





*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.





The
      incremental effect of apply SFAS No. 158 on individual line items in the
      Consolidated Balance Sheets is as follows (In Thousands):


Before
              Application
                of Statement 158
            
            Adjustments
            
            After
                Application of Statement 158Deferred
                income taxes
            
            $
            1,905
            
            $
            257
            
            $
            2,162Total
                Assets
            
            
            392,421
            
            
            257
            
            
            392,678Other
                liabilities
            
            
            1,131
            
            
            756
            
            
            1,887Total
                liabilities
            
            
            356,725
            
            
            756
            
            
            357,481Accumulated
                other comprehensive loss
            
            
            (478
            )
            
            (499
            )
            
            (977
            )Total
                shareholders’ equity
            
            $
            35,696
            
            
            ($499
            )
            $
            35,197





*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.





*Reclassifications*





Certain
      reclassifications have been made to the prior period amounts to conform with
      the
      current period presentation.





F-11


*Earnings
      Per Share*





Basic
      net
      income per common share is calculated by dividing net income 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, using the treasury stock method. All share
      information has been restated for the effect of a 6% stock dividend declared
      on
      December 21, 2006 and paid on January 31, 2007 to shareholders of record on
      January 23, 2007.





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, 2006Income
            
            Weighted-
              average
              shares
            
            Per
                share
              AmountBasic
                EPSNet
                income available to common shareholders
            
            $
            5,332,844
            
            
            3,674,432
            
            $
            1.45Effect
                of dilutive securitiesOptions
                and Grants
            
            
            -
            
            
            103,750
            
            
            (0.04
            )Diluted
                EPSNet
                income available to common shareholders plus assumed
                conversion
            
            $
            5,332,844
            
            
            3,772,182
            
            $
            1.41All
                options have been included in the computation of diluted earnings
                per
                share.





Year
                Ended December 31, 2005Income
            
            Weighted-
              average
              shares
            
            Per
                share
              AmountBasic
                EPSNet
                income available to common stockholders
            
            $
            4,560,127
            
            
            3,659,456
            
            $
            1.25Effect
                of dilutive securitiesOptions
                and Grants
            
            
            -
            
            
            144,415
            
            
            (0.05
            )Diluted
                EPSNet
                income available to common stockholders plus assumed
                conversion
            
            $
            4,560,127
            
            
            3,803,871
            
            $
            1.20All
                options have been included in the computation of diluted earnings
                per
                share.




Year
                Ended December 31, 2004Income
            
            Weighted-
              average
              shares
            
            Per
                share
              AmountBasic
                EPSNet
                income available to common stockholders
            
            $
            3,837,714
            
            
            3,655,461
            
            $
            1.05Effect
                of dilutive securitiesOptions
                and Grants
            
            
            -
            
            
            143,809
            
            
            (0.03
            )Diluted
                EPSNet
                income available to common stockholders plus assumed
                conversion
            
            $
            3,837,714
            
            
            3,799,270
            
            $
            1.02All
                options have been included in the computation of diluted earnings
                per
                share.


F-12


*Comprehensive
      Income*





SFAS
      No.
      130, “Reporting Comprehensive Income” requires the reporting of comprehensive
      income, which includes net income as well as certain other items, which results
      in a charge in equity during the period.





The
      income tax effects allocated to comprehensive income (loss) are as follows
      :





December
                31, 2006
            
            December
                31, 2005
            
            December
                31, 2004Before
                Tax
              Amount
            Tax
                Benefit
              (Expense)
            Net
                of Tax
              Amount
            
            Before
                Tax
              Amount
            Tax
                Benefit
              (Expense)
            Net
                of Tax
              Amount
            
            Before
                Tax
              Amount
            Tax
                Benefit
              (Expense)
            Net
                of Tax
              AmountUnrealized
                (losses)
              gains
                during the
              period
            $455,076
            (233,341)
            $221,735
            
            ($1,375,153)
            $549,399
            ($825,754)
            
            ($377,957)
            $141,696
            ($236,261)Reclassification
              Adjustment
            (99,714)
            33,903
            (65,811)
            
            (271,871)
            108,748
            (163,123)
            
            27,545
            (10,266)
            17,279Other
              Comprehensive
              Income
                (loss)
            $554,790
            ($267,244)
            $287,546
            
            ($1,103,282)
            $440,651
            ($662,631)
            
            ($405,502)
            $152,962
            ($253,540)





*Variable
      Interest Entities*





Management
      has determined that the 1 ST Constitution Capital Trust I and 1 ST Constitution Capital Trust II (together 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. Each of the Trusts holds, as its sole asset, subordinated
      debentures issued by the Company. 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.




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 $23.7
      million in trust preferred securities in Tier 1 capital at December 31, 2006.




*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
      February, 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140: (“SFAS
      155”), to simplify and make more consistent the accounting for certain financial
      instruments. SFAF 155 amends SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities” (“SFAS 133”) and permits fair value
      re-measurement for any hybrid financial instrument with an embedded derivative
      that otherwise would require bifurcation, provided that the whole instrument
      is
      accounted for on a fair value basis. Prior to fair value measurement, interests
      in securitized financial assets must be evaluated to identify interests
      containing embedded derivatives requiring bifurcation. The amendments to SFAS
      133 also clarify which interest-only and principal-only strips are not subject
      to the requirements of SFAS 133, and that concentration of credit risk in the
      form of subordination are not embedded derivatives. SFAS 155 amends SFAS 140
      to
      allow a qualifying special-purpose entity to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS 155 applies to all financial instruments acquired
      or
      issued after the beginning of an entity’s first fiscal year that begins after
      September 15, 2006, with earlier application allowed. SFAS 155 is not expected
      to have a material impact on the Company’s results of operations or financial
      condition.




F-13


In
      March
      2006, the Financial Accounting Standards Board (FASB) issued Statement No.
      156
      (SFAS 156), Amending “Accounting for separately Recognized Assets and Servicing
      Liabilities”. SFAS 156 amends SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156
      permits, but does not require, an entity to choose either the amortization
      method or the fair value measurement method for measuring each class of
      separately recognized servicing assets and servicing liabilities. SFAS 156
      is
      effective for fiscal years beginning after September 15, 2006 and is not
      expected to have a material impact on the Company’s consolidated financial
      statements.




In
      July
      2006, FASB issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in
      Income Taxes: an interpretation of FASB Statement No. 109, “Accounting for
      Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes
      recognized in an entity’s financial statements in accordance with Statement of
      SFAS No. 109. FIN 48 prescribes a **** recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a **** tax
      return. FIN 48 also provides guidance on derecognition, classification, interest
      and penalties, **** accounting
      in interim periods, disclosure and transition. FIN 48 is effective for fiscal
      years beginning after December 15 **,** 2006
      and
      is currently under evaluation by the Company to determine the impact on the
      Company’s consolidated financial statements.




In
      September 2006, FASB Issued Statement No. 157 (SFAS 157), **“** Fair **** Value
      Measurements” which is effective for **** fiscal
      years beginning after November 15, 2007 and for interim **** periods
      within those years. This statement defines fair value, establishes a
      framework **** for
      measuring fair value and expands the related disclosure requirements. The
      Company is **** currently
      evaluating the impact the adoption of **** SFAS
      No.
      157 will have on its consolidated **** financial
      statements.




In
      September 2006, FASB Issued Statement No. 158 (SFAS 158), **“** Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans—an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires an
      employer to recognize the overfunded or underfunded 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.
      This
      Statement also improves financial reporting by requiring an employer to measure
      the funded status of a **** plan
      as
      of the **** date
      of
      its year-end statement of **** financial
      position, with limited exceptions. An employer with publicly traded equity
      securities is required to initially recognize the funded status of a defined
      benefit postretirement plan and to provide the required disclosures as of the
      end of the **** fiscal
      year ending after December 15, 2006. See the table on Page F-11 for the effect
      the adoption of **** SFAS
      No.
      158 **** had
      on **** the
      consolidated financial statements.




In
      September 2006, the SEC staff issued Staff Accounting Bulletin No.
      108 **** “Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements
      in **** Current
      Year Financial Statements.” SAB 108 was issued to **** provide
      consistency among registrants in the quantification of **** financial
      statement misstatements. SAB 108 **** established
      an approach **** that
      requires quantification of financial statement misstatements based on the
      effects of the misstatement on each of the **** company’s
      financial statements and the related **** disclosures.
      SAB 108 **** allows
      registrants **** to
      initially apply the approach either by (1) retroactively adjusting prior
      financial statements as if the approach had always been used or (2) recording
      the cumulative effect of initially applying the approach as adjustments to
      the
      carrying values of assets and liabilities as of January 1, 2006 with the related
      offset recorded to the opening balance of retained earnings. Use of the
“cumulative effect” transition requires full disclosure as to the nature and
      amount of each individual error being corrected. The Company adopted SAB No.
      108
      as of December 31, 2006. The adoption of SAB No. 108 by the Company did not
      have
      a material effect on the Company’s consolidated financial statements.





At
      its
      September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final
      consensus on Issue 06-04, “ *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements.”* In
      accordance with the EITF consensus, an agreement by an employer to share a
      portion of the proceeds of a life insurance policy with an employee during
      the
      postretirement period is a postretirement benefit arrangement required to be
      accounted for under SFAS No. 106 and, therefore, a liability for the
      postretirement obligation must be recognized under SFAS No. 106 if the benefit
      is offered under an arrangement that constitutes a plan or under APB No. 12
      if
      it is not part of a plan. The provisions of Issue 06-04 are to be applied
      through either a cumulative -effect adjustment to retained earnings as of the
      beginning of the year of adoption or retrospective application. Issue 06-04
      is
      effective for annual or interim reporting periods beginning after December
      15,
      2007. The application of Issue 06-04 is not expected to have a material effect
      on the Company’s financial position or results of operations.




F-14


At
      its
      September 2006 meeting, the EITF reached a final consensus on Issue 06-05,
      “ *Accounting
      for Purchases of Life Insurance -Determining the Amount That Could be Realized
      in Accordance with FASB Technical Bulletin No. 85-4.* ”
Issue
      06-05 concludes that in determining the amount that could be realized under
      an
      insurance contract accounted fro under FASB Technical Bulletin No. 85-4,
“ *Accounting
      for Purchases of Life Insurance,* ”
the
      policyholder should (1) consider any additional amounts included in the
      contractual terms of the policy; (2) assume the surrender value on an individual
      life-by individual-life policy basis; and (3) not discount the cash surrender
      value component of the amount that could be realized when contractual
      restrictions on the ability to surrender a policy exist. Issue 06-05 should
      be
      adopted through either (1) a change in accounting principle through a
      cumulative-effect adjustment to retained earnings as of the beginning of the
      year of adoption or (2) a change in accounting principle through retrospective
      application to all prior periods. Issue 06-05 is effective for fiscal years
      beginning after December 15, 2006. The application of Issue 06-05 is not
      expected to have a material effect on the Company’s financial position or
      results of operations.




**2.
      Investment Securities**


Gross
              
              GrossAmortized
              
              Unrealized
              
              Unrealized
              
              Fair2006
              
              Cost
              
              Gains
              
              Losses
              
              ValueAvailable
                  for sale-U.
                  S. Treasury securities andobligations
                  of U.S. Governmentsponsored
                  corporations and agencies
              
              $
              35,625,182
              
              $
              124,144
              
              
              ($694,261
              )
              $
              35,055,065Mortgage
                  backed securities
              
              
              28,305,557
              
              
              113,353
              
              
              (216,111
              )
              
              28,202,799Obligations
                  of State andPolitical
                  subdivisions
              
              
              3,655,197
              
              
              15,902
              
              
              (31,749
              )
              
              3,639,350FHLB
                  stock and other securities
              
              
              3,554,759
              
              
              304
              
              
              (30,949
              )
              
              3,524,114$
              71,140,695
              
              $
              253,703
              
              
              ($973,070
              )
              $
              70,421,328Held
                  to maturity-Mortgage
                  backed securities
              
              $
              5,540,670
              
              $
              2,015
              
              
              ($175,826
              )
              $
              5,366,859Obligations
                  of State andPolitical
                  subdivisions
              
              
              13,713,806
              
              
              131,955
              
              
              (47,941
              )
              
              13,797,820$
              19,254,476
              
              $
              133,970
              
              
              ($223,767
              )
              $
              19,164,679Gross
              
              
              
              
              
              GrossAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair2005
              
              
              Cost
              
              
              Gains
              
              
              Losses
              
              
              ValueAvailable
                  for sale-U.
                  S. Treasury securities andobligations
                  of U.S. Governmentsponsored
                  corporations and agencies
              
              $
              34,032,814
              
              $
              7,198
              
              
              ($977,560
              )
              $
              33,062,452Mortgage
                  backed securities
              
              
              29,250,341
              
              
              90,286
              
              
              (302,193
              )
              
              29,038,434Obligations
                  of State andPolitical
                  subdivisions
              
              
              3,855,987
              
              
              1,333
              
              
              (65,063
              )
              
              3,792,257FHLB
                  stock and other securities
              
              
              3,371,673
              
              
              -
              
              
              (28,158
              )
              
              3,343,515$
              70,510,815
              
              $
              98,817
              
              
              ($1,372,974
              )
              $
              69,236,658Held
                  to maturity-Mortgage
                  backed securities
              
              $
              5,807,730
              
              $
              7,233
              
              
              ($206,275
              )
              $
              5,608,688Obligations
                  of State andPolitical
                  subdivisions
              
              
              15,950,640
              
              
              108,525
              
              
              (146,827
              )
              
              15,912,338$
              21,758,370
              
              $
              115,758
              
              
              ($353,102
              )
              $
              21,521,026




The
      amortized cost, estimated fair value and weighted average yield of investment
      securities at December 31, 2006, 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.”




F-15


Amortized
              Cost
            
            Fair
              Value
            
            Weighted
              Average
              Yield*Available
                for sale-Due
                in one year or less
            
            $
            1,301,989
            
            $
            1,301,354
            
            
            5.27
            %Due
                after one year through five years
            
            
            17,420,177
            
            
            17,352,325
            
            
            4.67
            %Due
                after five years through ten years
            
            
            15,836,536
            
            
            15,698,842
            
            
            4.22
            %Due
                after ten years
            
            
            36,581,993
            
            
            36,068,807
            
            
            4.73
            %Total
            
            $
            71,140,695
            
            $
            70,421,328
            
            
            5.01
            %Held
                to maturity-Due
                in one year or less
            
            $
            2,363,612
            
            $
            2,351,783
            
            
            3.47
            %Due
                after one year through five years
            
            
            2,839,631
            
            
            2,838,985
            
            
            5.38
            %Due
                after five years through ten years
            
            
            3,615,640
            
            
            3,625,656
            
            
            5.52
            %Due
                after ten years
            
            
            10,435,593
            
            
            10,348,255
            
            
            5.59
            %Total
            
            $
            19,254,476
            
            $
            19,164,679
            
            
            5.41
            %


***** computed
      on a tax equivalent basis.





Gross
      unrealized losses on securities and the estimated market 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,
      2006 and December 31, 2005 are as follows:





**2006**
            
            Less
                than 12 months
            
            12
                months or longer
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Losses
            
            Value
            
            Losses
            
            Value
            
            LossesU.S.
                Treasury securities and obligations
              of
                U.S. Government sponsored
              corporations
                and agencies
            
            $
            83,506
            
            
            ($22
            )
            $
            22,760,194
            
            
            ($694,238
            )
            $
            22,843,700
            
            
            ($694,261
            )Mortgage
                backed securities
            
            
            6,274,180
            
            
            (26,241
            )
            
            13,608,019
            
            
            (365,697
            )
            
            19,882,199
            
            
            (391,937
            )Obligations
                of State and PoliticalSubdivisions
            
            
            2,395,099
            
            
            (12,271
            )
            
            7,274,761
            
            
            (67,419
            )
            
            9,669,860
            
            
            (79,690
            )FHLB
                stock and other securities
            
            
            967,328
            
            
            (13,411
            )
            
            967,960
            
            
            (17,538
            )
            
            1,935,288
            
            
            (30,949
            )Total
                temporarily impaired securities
            
            $
            9,720,113
            
            
            ($51,945
            )
            $
            44,610,934
            
            
            ($1,144,892
            )
            $
            54,331,047
            
            
            ($1,196,837
            )**2005**
            
            Less
                than 12 months
            12
                months or longer
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
                Treasury securities and obligations
              of
                U.S. Government sponsored
              corporations
                and agencies
            
            $
            16,355,981
            
            
            ($335,803
            )
            $
            13,395,221
            
            
            ($641,757
            )
            $
            29,751,202
            
            
            ($977,560
            )Mortgage
                backed securities
            
            
            25,099,031
            
            
            (333,369
            )
            
            3,905,417
            
            
            (175,099
            )
            
            29,004,448
            
            
            (508,468
            )Obligations
                of State and PoliticalSubdivisions
            
            
            9,849,588
            
            
            (88,838
            )
            
            4,597,019
            
            
            (123,052
            )
            
            14,446,607
            
            
            (211,890
            )FHLB
                stock and other securities
            
            
            0
            
            
            0
            
            
            1,435,715
            
            
            (28,158
            )
            
            1,435,715
            
            
            (28,158
            )Total
                temporarily impaired securities
            
            $
            51,304,600
            
            
            ($758,010
            )
            $
            23,333,372
            
            
            ($968,066
            )
            $
            74,637,972
            
            
            ($1,726,076
            )





*U.S.
      Treasury obligations and direct obligations of U.S. Government
      agencies* :
      The
      unrealized losses on investments in these securities were caused by interest
      rate increases. The contractual terms of these investments do not permit the
      issuer to settle the securities at a price less than the amortized cost of
      the
      investment. Because the Company 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.





F-16


*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.





*FHLB
      stock and other securities* :
      The
      investments in these securities with unrealized losses are comprised of
      corporate trust preferred securities that mature in 2027. The unrealized losses
      on these securities were caused by interest rate increases. The contractual
      terms of the bonds do not allow the issuer to settle the securities at a price
      less than the face value of the bonds, which is greater than the amortized
      cost
      of the bonds. Because the decline in fair value is attributable to changes
      in
      interest rates and not 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.





The
      Company recorded gross losses on sales of securities available for sale of
      $99,714 in 2006 and $271,871 in 2005 and gross gains on sales of $27,545 in
      2004.




As
      of
      December 31, 2006 and 2005, securities having a book value of $28,824,981 and
      $32,388,166, respectively, were pledged to secure public deposits, other
      borrowings and for other purposes required by law.




**3.
      Loans and Loans Held for Sale**





Loans
      are
      as follows:


2006
              
              2005Construction
                  loans
              
              $
              125,268,871
              
              $
              109,862,614Residential
                  real estate loans
              
              
              7,670,370
              
              
              8,602,975Commercial
                  and commercial real estate
              
              
              114,897,040
              
              
              104,448,196Loans
                  to individuals
              
              
              16,728,025
              
              
              16,441,994Lease
                  financing
              
              
              -
              
              
              21,073Deferred
                  loan fees
              
              
              404,074
              
              
              466,678All
                  other
              
              
              173,933
              
              
              170,819$
              265,142,313
              
              $
              240,014,349




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 $13,608,942 at December 31,
      2006
      and $16,757,734 at December 31, 2005. 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, 2006 and 2005 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, 2006, 2005, and 2004.





**4.
      Allowance for Loan Losses**





A
      summary
      of the allowance for loan losses is as follows:


2006
                
                2005
                
                2004Balance,
                    beginning of year
                
                $
                2,361,375
                
                $
                2,005,169
                
                $
                1,786,632Provision
                    charged to operations
                
                
                893,500
                
                
                405,000
                
                
                240,000Loans
                    charged off
                
                
                (29,468
                )
                
                (52,803
                )
                
                (22,273
                )Recoveries
                    of loans charged off
                
                
                2,953
                
                
                4,009
                
                
                810Balance,
                    end of year
                
                $
                3,228,360
                
                $
                2,361,375
                
                $
                2,005,169
   F-17





The
      amount of loans which were not accruing interest amounted to $4,193,209 and
      $833,150 at December 31, 2006 and 2005, respectively. Impaired loans totaled
      $4,193,209 and $833,150 at December 31, 2006 and 2005, respectively. There
      was a
      valuation allowance of $553,748 on impaired loans at December 31, 2006. There
      was no valuation allowance on impaired loans at December 31, 2005. Loans 90
      days
      or more past due and still accruing totaled zero at December 31, 2006, $209
      at
      December 31, 2005 and $63,130 at December 31, 2004.




Additional
      income before taxes amounting to $348,344, $111,340 and $80,698 would have
      been
      recognized in 2006, 2005 and 2004, respectively, if interest on all loans had
      been recorded based upon original contract terms. No interest was recognized
      on
      non-accrual loans in 2006, 2005 or 2004.  The
      average recorded investment in impaired loans for the years ended December
      31,
      2006, 2005 and 2004, was approximately $2,513,180, $941,280, and $690,097,
      respectively.




**5.**  **Loans
      to Related Parties**





Activity
      related to loans to directors, executive officers and their affiliated interests
      during 2006 is as follows :





2006
            
            2005Balance,
                beginning of year
            
            $
            2,632,162
            
            $
            4,491,192Loans
                granted
            
            
            3,154,202
            
            
            1,201,426Repayments
                of loans
            
            
            (662,304
            )
            
            (3,060,456
            )Balance,
                end of year
            
            $
            5,124,060
            
            $
            2,632,162




All
      such
      loans were made under customary terms and conditions and were current as to
      principal and interest payments as of December 31, 2006 and 2005.





**6.
      Premises And Equipment**





Premises
      and equipment consist of the following:


Estimated
              Useful
                Lives
            
            2006
            
            2005Land
            
            
            
            
            $
            241,784
            
            $
            241,784Building
            
            
            40
                Years
            
            
            735,579
            
            
            735,579Leasehold
                improvements
            
            
            10
                Years
            
            
            2,011,056
            
            
            1,379,023Furniture
                and equipment
            
            
            3
                - 15 Years
            
            
            2,364,917
            
            
            2,845,9595,353,336
            
            
            5,202,345Less

                Accumulated depreciation
            
            
            
            
            
            (2,319,718
            )
            
            (2,605,493
            )$
            3,033,618
            
            $
            2,596,852




**7.
      Deposits**





Deposits
      consist of the following:


2006
              
              2005DemandNon-interest
                  bearing
              
              $
              64,305,445
              
              $
              62,686,802Interest
                  bearing
              
              
              82,113,165
              
              
              102,479,894Savings
              
              
              53,630,726
              
              
              49,547,438Time
              
              
              112,675,086
              
              
              91,095,333$
              312,724,422
              
              $
              305,809,467









Individual
      time deposits $100,000 or greater amounted to $48,074,279 and $3,385,000 at
      December 31, 2006 and 2005, respectively. As of December 31, 2006, time
      certificates of deposit in amounts of $100,000 or more have remaining maturity
      time as follows:




F-18





Maturity
                Range
            
            AmountThree
                months or less
            
            $
            15,367,321Over
                three months through six months
            
            
            15,526,982Over
                six months through twelve months
            
            
            11,850,558Over
                twelve months
            
            
            5,329,418$
            48,074,279





**8.
      Borrowings**





The
      balance of borrowings was $17,200,000 at December 31, 2006, consisting of
      long-term FHLB borrowings of $15,500,000 and overnight funds purchased of
      $1,700,000. The balance of borrowings at December 31, 2005 consisted of FHLB
      borrowings of $23,500,000 and overnight funds purchased of $5,000,000.




At
      December 31, 2006, the Bank maintained an Overnight Line of Credit at the FHLB
      in the amount of $16,176,500 and a One Month Overnight Repricing Line of Credit
      of $10,176,500. 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 $13,500,000 with a correspondent bank.




The
      Bank
      purchased four ten-year fixed rate convertible advances from the FHLB that
      total
      $15,500,000 in the aggregate. These advances, in the amounts of $3,000,000,
      $2,500,000, $5,000,000, and $5,000,000 bear interest at the rates of 5.50%,
      5.34%, and 5.06%, respectively. 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:




20062007
            
            
            -2008
            
            
            -2009
            
            $
            3,000,0002010
            
            
            12,500,0002011
            
            
            -Thereafter
            
            
            -$
            15,500,000





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.





Securities
      sold under agreements to repurchase are summarized as follows:




2006
            
            2005
            
            2004Balance
                outstanding at year end
            
            
            -
            
            
            -
            
            
            -Weighted
                average interest rate at year end
            
            
            -
            
            
            -
            
            
            1.27
            %Average
                daily balance outstanding during year
            
            
            -
            
            
            -
            
            $
            1,674,172Weighted
                average interest rate during year
            
            
            -
            
            
            -
            
            
            1.28
            %Highest
                month-end outstanding balance
            
            
            -
            
            
            -
            
            $
            1,941,042




**9.
      Redeemable Subordinated Debentures**





On
      April
      10, 2002, 1 ST 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 in a pooled institutional placement transaction
      maturing April 22, 2032. These Subordinated Debentures constitute the sole
      assets of Trust I. These Subordinated Debentures are redeemable in whole or
      part
      prior to maturity after April 22, 2007. Trust I is 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, provides 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 on April 22, 2007 the debt securities issued by the Company
      to Trust I.




F-19


On
      May
      30, 2006, 1 ST Constitution Bancorp established 1 ST Constitution
      Capital Trust II, a Delaware business trust subsidiary (“Trust II”), for the
      sole purpose of issuing $18 million of trust preferred securities (the “Capital
      Securities”). 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 proceeds from the sale of the Capital Securities were loaned to the Company
      under 30-year floating rate junior subordinated debentures issued to Trust
      II by
      the Company. The debentures are the only asset of Trust II. Interest payments
      on
      the debentures flow through Trust II to the pooling vehicle. Payments of
      distributions by Trust II to the pooling vehicle are guaranteed by the
      Company.




Management
      has determined that the Trust I and Trust II (together 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. Each of the Trusts holds, as its sole asset,
      subordinated debentures issued by the Company. 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.




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 $23.7
      million in trust preferred securities in Tier 1 capital at December 31, 2006.








**10.
      Income Taxes**





The
      components of income tax expense (benefit) are summarized as follows:




2006
              
              2005
              
              2004Federal-Current
              
              $
              2,109,541
              
              $
              1,955,941
              
              $
              1,836,439
              )Deferred
              
              
              (401,229
              )
              
              (198,849
              )
              
              (127,181
              )1,708,312
              
              
              1,757,092
              
              
              1,709,258State-Current
              
              
              476,320
              
              
              372,050
              
              
              273,301Deferred
              
              
              (70,138
              )
              
              (34,740
              )
              
              (22,219
              )406,182
              
              
              337,310
              
              
              251,082$
              2,114,494
              
              $
              2,094,402
              
              $
              1,960,340




A
        comparison of income tax expense at the Federal statutory rate in 2006, 2005
        and
        2004 to the Company’s provision for income taxes is as
        follows:




2006
              
              2005
              
              2004Federal
                  income tax
              
              $
              2,532,095
              
              $
              2,262,540
              
              $
              1,971,338Add
                  (deduct) effect of:State
                  income taxes net of federal income tax effect
              
              
              268,080
              
              
              213,276
              
              
              165,714Tax-exempt
                  interest income
              
              
              (205,648
              )
              
              (224,699
              )
              
              (131,270
              )Bank-owned
                  life insurance
              
              
              (119,162
              )
              
              (80,046
              )
              
              (106,249
              )Other
                  items, net
              
              
              (360,871
              )
              
              (76,669
              )
              
              60,807Provision
                  for income taxes
              
              $
              2,114,494
              
              $
              2,094,402
              
              $
              1,960,340





F-20


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:


2006
              
              2005Deferred
                  tax assets-Allowance
                  for loan losses
              
              $
              1,138,234
              
              $
              943,133Employee
                  Benefits
              
              
              541,133
              
              
              327,718Unrealized
                  loss on securities available for sale
              
              
              241,655
              
              
              508,899Unfunded
                  SERP Liability
              
              
              257,160
              
              
              -Other
              
              
              41,117
              
              
              8,221Total
                  deferred tax assets
              
              
              2,219,299
              
              
              1,787,971Deferred
                  tax liabilities-Other
              
              
              57,016
              
              
              86,971Total
                  deferred tax liabilities
              
              
              57,016
              
              
              86,971Net
                  deferred tax asset
              
              $
              2,162,283
              
              $
              1,701,000


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.





**11.
      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 2006, 2005 and 2004 up to 6%
      of
      base compensation. Employer contributions to the plan amounted to $85,899 in
      2006, $78,899 in 2005, and $67,864 in 2004.





*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, 2006 and 2005 is approximately $1,249,934 and $825,943,
      respectively, and is included in other liabilities in the accompanying
      consolidated balance sheet. Compensation expense of $423,991, $339,516 and
      $420,921 is included in the accompanying consolidated statement of income for
      the years ended December 31, 2006, 2005 and 2004, 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. During 2005, the Bank purchased an additional $2.0 million. The Bank
      is the owner and beneficiary of the policies. The cash surrender values of
      the
      policies are approximately $9.2 million and $8.8 million as of December 31,
      2006
      and 2005, respectively.





The
      following table sets forth the changes in benefit obligations and plan assets
      of
      the Company’s supplemental executive retirement plan.





F-21


2006
            
            2005**Change
                in Benefit Obligation**Benefit
                obligation, beginning
            
            $
            1,536,624
            
            $
            486,427Service
                cost
            
            
            210,773
            
            
            164,871Interest
                cost
            
            
            101,633
            
            
            85,147Actuarial
                (gain) loss
            
            
            -
            
            
            115,315Benefits
                paid
            
            
            -
            
            
            -Plan
                amendments
            
            
            157,258
            
            
            648,864Benefit
                obligation, ending
            
            $
            2,006,288
            
            $
            1,536,624Funded
                status
            
            
            ($2,006,288
            )
            
            ($1,536,624
            )Unrecognized
                net actuarial loss
            
            
            151,315
            
            
            151,315Unrecognized
                prior service cost
            
            
            605,039
            
            
            557,366(Accrued
                liability) prepaid benefit costincluded
                in balance sheet
            
            
            ($1,249,934
            )
            
            ($825,943
            )**Amount
                Recognized in Consolidated Balance Sheets**Accrued
                benefit liability
            
            
            ($2,006,288
            )
            
            ($1,245,962
            )Accumulated
                other comprehensiveexpense,
                net
            
            
            756,354
            
            
            -Net
                amount recognized
            
            
            ($1,249,934
            )
            
            ($825,943
            )**Information
                for pension plans with an accumulated****benefit
                obligation in excess of plan assets**Projected
                benefit obligation
            
            $
            2,006,288
            
            $
            1,536,624Accumulated
                benefit obligation
            
            
            1,684,094
            
            
            1,245,962Fair
                value of plan assets
            
            
            -
            
            
            -**Components
                of Net Periodic Benefit Cost**
            
            
            **2006**
            
            
            **2005**Service
                cost
            
            $
            210,773
            
            $
            164,871Interest
                cost
            
            
            101,633
            
            
            85,147Expected
                return on plan assets
            
            
            -
            
            
            -Amortization
                of prior service cost
            
            
            111,585
            
            
            89,498Recognized
                net actuarial gain
            
            
            -
            
            
            -Net
                periodic benefit cost
            
            $
            423,991
            
            $
            339,516





The
      net
      periodic benefit cost for the year ended December 31, 2007 is projected to
      be
      $455,381.


No
      amounts were recognized in other comprehensive income during the year ended
      December 31, 2006.





**Weighted-Average
                Assumptions, December 31**
            **2006**
            
            **2005**Discount
                Rate
            
            6.00%
            
            6.00%Expected
                Return on Plan Assets
            
            N/A
            
            N/ASalary
                Scale
            
            4.00%
            
            4.00%





**Projected
                Annual Benefit Payments**2007
            
            $
            02008
            
            $
            02009
            
            $
            35,0002010
            
            $
            256,0002011
            
            $
            256,0002012-2016
            
            $
            1,439,000





**12.
      Share Based Compensation**





The
      Company’s shareholders have approved stock option plans and stock grant plans
      for directors and key employees. The Company has also entered into an employment
      agreement pursuant to which additional options and stock grants were awarded
      to
      its President.





On
      January 1, 2006, the Company adopted SFAS No. 123(R) (revised 2004),
“Share-Based Payment.” Statement 123(R) replaces SFAS No. 123, “Accounting for
      Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”)
      Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R)
      established accounting and disclosure requirements using a fair-value based
      method of accounting for stock-based employee compensation plans. Prior to
      January 1, 2006, the Company accounted for stock options using APB Opinion
      No.
      25 and included disclosures of pro forma net income and earnings per share,
      as
      if the fair-based method of accounting defined in SFAS No. 123 had been used.
      The Company elected the modified transition method for adopting SFAS No. 123
      (R)
      through December 31, 2005. Under SFAS No. 123(R), all forms of share-based
      payments to employees, including stock options, are treated the same as other
      forms of compensation by recognizing the related cost in the income statement.
      The provisions apply to all awards granted after the required effective date
      (January 1, 2006) including existing awards not vested, or which are modified,
      repurchased, or canceled after that date.




F-22




Aggregated
                information regarding the Company's stock option plans as of December
                31,
                2006 is presented below :Weighted
              Average
              Remaining
              Contractual
              Term
                (years)Weighted
              Average
              Exercise
                Price
            
            
            Aggregate
              Intrinsic
              ValueStock
                Options
            
            SharesOutstanding
                at January 1, 2006
            
            206,683
            
            $5.19
            
            
            
            $1,260,863Granted
            
            
            
            
            16,536
            
            17.91Exercised
            
            
            
            (88,880)
            
            3.36Forfeited
            
            
            
            
            (1,488)
            
            11.45Expired
            
            
            
            
            -
            
            -Outstanding
                at December 31, 2006
            
            132,851
            
            $10.58
            
            5.6
            
            $1,096,245Exercisable
                at December 31, 2006
            
            101,435
            
            $8.54
            
            4.6
            
            $1,039,114The
                Company granted a total of 16,536 stock options during the year ended
                December 31, 2006. The total intrinsic value (market value on date
                of
                exercise less grant price) of options exercised during the year ended
                December 31, 2006 was $1,266,532.
              
              Cash
                received from option exercises under the plans for the twelve months
                ended
                December 31, 2006 was $ 81,847. The impact of these cash receipts
                is
                included in financing activities in the accompanying consolidated
                statements of cash flows.





The
      following table summarizes nonvested restricted shares outstanding as of
      December 31, 2006 and the related activity during the year:





Nonvested
                Shares
            
            Number
                of Shares
            
            Weighted-Average
              Grant-Date
              Fair
                Value
            
            Total
                Intrinsic
              ValueNonvested
                at January 1, 2006
            
            
            42,209
            
            $
            14.45
            
            $
            183,916Granted
            
            
            17,278
            
            
            17.75
            
            
            -Vested
            
            
            (15,669
            )
            
            17.74
            
            
            96,823Forfeited
            
            
            (1,038
            )
            
            13.09
            
            
            -Nonvested
                at December 31, 2006
            
            
            42,780
            
            
            16.07
            
            $
            115,964




**13.
      Commitments and Contingencies**




As
      of
      December 31, 2006, future minimum rental payments under non-cancelable operating
      leases are as follows:


2007
              
              $
              663,5262008
              
              
              614,5302009
              
              
              610,8232010
              
              
              611,0632011
              
              
              430,206Thereafter
              
              
              2,651,224$
              5,581,372




Rent
      expense aggregated $876,983, $762,725, and $694,997 for the years ended December
      31, 2006, 2005 and 2004, respectively.





*Commitments
      With Off-Balance Sheet Risk*





The
      statement of condition 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.


F-23




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 $104,050,000 and $124,136,000 to its borrowers as
      of
      December 31, 2006 and December 31, 2005, 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 $5,999,658 at December 31,
      2006 and $3,848,473 at December 31, 2005.




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
      $13.6 million at December 31, 2006 and $16.8 million at December 31, 2005.
      Changes in fair value of the forward sales contracts, and the related loan
      origination commitments and closed loans, were not significant at December
      31,
      2006 and 2005.





*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.




**14.
      Other Operating Expenses**




The
      components of other operating expenses for the years ended December 31, 2006,
      2005 and 2004 are as follows:


2006
              
              2005
              
              2004Equipment
                  expense
              
              $
              507,402
              
              $
              491,735
              
              $
              464,928Marketing
              
              
              258,012
              
              
              292,352
              
              
              274,095Computer
                  services
              
              
              733,954
              
              
              623,001
              
              
              636,076Regulatory,
                  professional and other fees
              
              
              802,309
              
              
              1,102,691
              
              
              542,001Office
                  expense
              
              
              470,211
              
              
              401,490
              
              
              462,586All
                  other expenses
              
              
              1,031,621
              
              
              715,826
              
              
              583,225$
              3,803,509
              
              $
              3,627,095
              
              $
              2,962,911




**15.
      Regulatory Requirements**




The
      Bank
      is 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 Bank must meet
      specific capital guidelines that involve quantitative measures of the Bank’s
      assets, liabilities, and certain off-balance sheet items as calculated under
      regulatory accounting practices. 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 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, 2006, the Bank met all
      capital adequacy requirements to which it is subject.




F-24


To
      be
      categorized as adequately capitalized, 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, 2006, 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,
      2006
      and 2005 are as follows:


Actual
                
                For
                    CapitalAdequacy
                    Purposes
                
                To
                    Be Well CapitalizedUnder
                    Prompt
                  CorrectiveAction
                    ProvisionsActualAmount
                
                Ratio
                
                Amount
                
                Ratio
                
                Amount
                
                RatioAs
                    of December 31, 2006 -CompanyTotal
                    Capital (to Risk Weighted Assets)
                
                $
                62,614,642
                
                
                20.23
                %
                $
                24,751,678
                
                
                8
                %
                $
                30,939,598
                
                
                N/ATier
                    I Capital (to Risk Weighted Assets)
                
                
                47,720,050
                
                
                15.42
                %
                
                12,375,839
                
                
                4
                %
                
                18,563,759
                
                
                N/ATier
                    I Capital (to Average Assets)
                
                
                47,720,050
                
                
                12.18
                %
                
                15,752,046
                
                
                4
                %
                
                19,690,058
                
                
                N/ABankTotal
                    Capital (to Risk Weighted Assets)
                
                $
                53,871,072
                
                
                17.38
                %
                $
                24,751,040
                
                
                8
                %
                $
                30,938,800
                
                
                10
                %Tier
                    I Capital (to Risk Weighted Assets)
                
                
                50,542,712
                
                
                16.34
                %
                
                12,375,520
                
                
                4
                %
                
                18,563,280
                
                
                6
                %Tier
                    I Capital (to Average Assets)
                
                
                50,542,712
                
                
                12.87
                %
                
                15,710,320
                
                
                4
                %
                
                19,637,900
                
                
                5
                %As
                    of December 31, 2005 -CompanyTotal
                    Capital (to Risk Weighted Assets)
                
                $
                37,923,500
                
                
                13.30
                %
                $
                22,817,040
                
                
                8
                %
                $
                28,521,300
                
                
                N/ATier
                    I Capital (to Risk Weighted Assets)
                
                
                35,562,125
                
                
                12.47
                %
                
                11,408,520
                
                
                4
                %
                
                17,112,780
                
                
                N/ATier
                    I Capital (to Average Assets)
                
                
                35,562,125
                
                
                9.76
                %
                
                14,580,112
                
                
                4
                %
                
                18,225,140
                
                
                N/ABankTotal
                    Capital (to Risk Weighted Assets)
                
                $
                37,493,600
                
                
                13.15
                %
                $
                22,817,040
                
                
                8
                %
                $
                28,521,300
                
                
                10
                %Tier
                    I Capital (to Risk Weighted Assets)
                
                
                35,132,225
                
                
                12.32
                %
                
                11,408,520
                
                
                4
                %
                
                17,112,780
                
                
                6
                %Tier
                    I Capital (to Average Assets)
                
                
                35,132,225
                
                
                9.64
                %
                
                14,578,280
                
                
                4
                %
                
                18,222,850
                
                
                5
                %




The
      primary source of dividends paid to the Company’s shareholders 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.




**16.
      Stock Repurchase Program**




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 175,271 shares, adjusted for stock
      dividends, of its common shares. The Company established this repurchase program
      in order to increase shareholder value. As of December 31, 2006, the Company
      had
      repurchased 12,848 shares for an aggregate price of approximately
      $243,700.




**17.
      Estimated Fair Value Of Financial Instruments**




The
      following is a summary of fair value versus the carrying value of the Bank’s
      financial instruments. For the Bank, as for most financial institutions, the
      bulk of its assets and liabilities are considered financial instruments. Many
      of
      the Bank’s 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 by the Bank for the purpose of this note. Changes in assumptions
      could
      significantly affect these estimates.




Estimated
      fair values have been determined by the Bank 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. Carrying values of cash and cash equivalents and
      securities sold under agreements to repurchase approximate fair value due to
      the
      short-term nature of these instruments. Other borrowings are valued on a
      discounted cash flow method utilizing current discount rates for instruments
      of
      similar remaining terms.





F-25


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, 2006
              
              December
                  31, 2005Carrying
              
              Estimated
              
              Carrying
              
              EstimatedValue
              
              Fair
                  Value
              
              Value
              
              Fair
                  ValueSecurities
                  available for sale
              
              $
              70,421,328
              
              $
              70,421,328
              
              $
              69,236,658
              
              $
              69,236,658Securities
                  held to maturity
              
              
              19,254,476
              
              
              19,164,679
              
              
              21,758,370
              
              
              21,521,026Loans
                  held for sale
              
              
              13,608,942
              
              
              13,608,942
              
              
              16,757,734
              
              
              16,757,734Gross
                  loans
              
              
              265,142,313
              
              
              264,695,000
              
              
              240,014,349
              
              
              241,109,000Deposits
              
              
              312,724,422
              
              
              312,154,000
              
              
              305,809,467
              
              
              304,865,000Other
                  borrowings
              
              
              17,200,000
              
              
              17,224,000
              
              
              28,500,000
              
              
              28,584,000




Loan
      commitments and standby letters of credit as of December 31, 2006 and 2005
      are
      based on fees charged for similar agreements; accordingly, the estimated fair
      value of loan commitments and standby letters of credit is nominal.





**18.
      Condensed Financial Statements of 1** **st** **Constitution Bancorp (Parent Company Only)**





The
      following financial statements of the Company should be read in conjunction
      with
      the notes to the consolidated financial statements.





**CONDENSED**  **STATEMENTS
      OF CONDITION**


December
                31,
              2006
            
            December
                31,
              2005**Assets**:Cash
            
            $
            7,449,167
            
            $
            31,328Investment
                securities available for sale
            
            
            712,000
            
            
            155,000Investment
                in subsidiaries
            
            
            50,065,064
            
            
            34,361,360Other
                assets
            
            
            682,339
            
            
            404,179Total
                Assets
            
            $
            58,908,570
            
            $
            34,951,867**Liabilities
                And Shareholders’ Equity**Subordinated
                debentures
            
            
            23,712,000
            
            $
            5,155,000Shareholders’
                equity
            
            
            35,196,570
            
            
            29,796,867Total
                Liabilities and Shareholder’s Equity
            
            $
            58,908,570
            
            $
            34,951,867





**CONDENSED
      STATEMENTS OF INCOME**


Year
                ended December 31,2006
            
            2005
            
            2004Income:Interest
            
            $
            79,744
            
            $
            10,875
            
            $
            8,156Total
                Income
            
            
            79,744
            
            
            10,875
            
            
            8,156Expense:Interest
            
            
            1,177,020
            
            
            361,699
            
            
            271,239Other
            
            
            32,004
            
            
            32,004
            
            
            32,004Total
                Expense
            
            
            1,209,024
            
            
            393,703
            
            
            303,243Loss
                before income taxes and equity in undistributed income of
              Subsidiaries
            
            
            (1,129,280
            )
            
            (382,828
            )
            
            (295,087
            )Federal
                income tax benefit
            
            
            (382,988
            )
            
            (137,819
            )
            
            (106,231
            )Loss
                before equity in undistributed income of subsidiaries
            
            
            (746,292
            )
            
            (245,009
            )
            
            (188,856
            )Equity
                in undistributed income of subsidiaries
            
            
            6,079,136
            
            
            4,805,136
            
            
            4,026,569Net
                Income
            
            $
            5,332,844
            
            $
            4,560,127
            
            $
            3,837,714





F-26


**CONDENSED
      STATEMENTS OF CASH FLOWS**


Year
                ended December 31,2006
            
            2005
            
            2004Operating
                Activities:Net
                Income
            
            $
            5,332,844
            
            $
            4,560,127
            
            $
            3,837,714Adjustments:Increase
                in investment securities available for sale
            
            
            (557,000
            )
            
            -
            
            
            -(Increase)
                decrease in other assets
            
            
            (467,045
            )
            
            804,301
            
            
            306,689Equity
                in undistributed income of subsidiaries
            
            
            (6,079,136
            )
            
            (4,805,136
            )
            
            (4,026,569
            )Net
                cash used In Operating Activities
            
            
            (1,770,337
            )
            
            559,292
            
            
            117,834Investing
                Activities:Investment
                in subsidiaries
            
            
            (10,000,000
            )
            
            -
            
            
            -Repayment
                of investments in subsidiaries
            
            
            447,898
            
            
            342,781
            
            
            261,693Net
                cash (used in) provided by Investing Activities
            
            
            (9,552,102
            )
            
            342,781
            
            
            261,693Financing
                Activities:Issuance
                of common stock, net
            
            
            595,825
            
            
            369,173
            
            
            177,899Purchase
                of treasury stock
            
            
            (412,547
            )
            
            (1,260,939
            )
            
            (549,555
            )Proceeds
                from issuance of subordinated debentures
            
            
            18,557,000
            
            
            -
            
            
            -Net
                cash provided by financing activities
            
            
            18,740,278
            
            
            (891,766
            )
            
            (371,656
            )Net
                increase in cash
            
            
            7,417,839
            
            
            10,307
            
            
            7,871Cash
                as of beginning of year
            
            
            31,328
            
            
            21,021
            
            
            13,150Cash
                as of end of year
            
            $
            7,449,167
            
            $
            31,328
            
            $
            21,021





**19.**  **Unaudited
      Quarterly Financial Data**





2006Dec.
                31
            
            Sept.
                30
            
            June
                30
            
            March
                31**Summary
                of Operations**Interest
                income
            
            $
            7,199,650
            
            $
            7,163,273
            
            $
            6,789,622
            
            $
            6,152,637Interest
                expense
            
            
            2,764,720
            
            
            2,653,753
            
            
            2,180,513
            
            
            1,918,511Net
                interest income
            
            
            4,434,930
            
            
            4,509,520
            
            
            4,609,109
            
            
            4,234,126Provision
                for loan losses
            
            
            453,500
            
            
            100,000
            
            
            170,000
            
            
            170,000Net
                interest income after provisionfor
                loan losses
            
            
            3,981,430
            
            
            4,409,520
            
            
            4,439,109
            
            
            4,064,126Non-interest
                income
            
            
            629,029
            
            
            757,685
            
            
            474,709
            
            
            729,586Non-interest
                expense
            
            
            2,695,853
            
            
            3,143,672
            
            
            3,108,303
            
            
            3,090,028Income
                before income taxes
            
            
            1,914,606
            
            
            2,023,533
            
            
            1,805,515
            
            
            1,703,684Income
                taxes
            
            
            572,900
            
            
            644,417
            
            
            448,251
            
            
            448,926Net
                income
            
            $
            1,341,706
            
            $
            1,379,116
            
            $
            1,357,264
            
            $
            1,254,758Net
                income per share :Basic
            
            $
            0.36
            
            $
            0.38
            
            $
            0.37
            
            $
            0.34Diluted
            
            $
            0.35
            
            $
            0.36
            
            $
            0.36
            
            $
            0.33




F-27




2005Dec.
                31
            
            
            Sept.
                30
            
            
            June
                30
            
            
            March
                31**Summary
                of Operations**Interest
                income
            
            $
            5,952,682
            
            $
            5,518,301
            
            $
            5,036,307
            
            $
            4,820,782Interest
                expense
            
            
            1,750,817
            
            
            1,591,652
            
            
            1,405,594
            
            
            1,280,116Net
                interest income
            
            
            4,201,865
            
            
            3,926,649
            
            
            3,630,713
            
            
            3,540,666Provision
                for loan losses
            
            
            125,000
            
            
            85,000
            
            
            135,000
            
            
            60,000Net
                interest income after provisionfor
                loan losses
            
            
            4,076,865
            
            
            3,841,649
            
            
            3,495,713
            
            
            3,480,666Non-interest
                income
            
            
            445,694
            
            
            769,751
            
            
            809,614
            
            
            621,802Non-interest
                expense
            
            
            2,840,482
            
            
            2,855,005
            
            
            2,621,529
            
            
            2,570,209Income
                before income taxes
            
            
            1,682,077
            
            
            1,756,395
            
            
            1,683,798
            
            
            1,532,259Income
                taxes
            
            
            487,721
            
            
            567,529
            
            
            552,424
            
            
            486,726Net
                income
            
            $
            1,194,356
            
            $
            1,188,866
            
            $
            1,131,374
            
            $
            1,045,531Net
                income per share :Basic
            
            $
            0.34
            
            $
            0.32
            
            $
            0.30
            
            $
            0.28Diluted
            
            $
            0.32
            
            $
            0.31
            
            $
            0.29
            
            $
            0.27


**20.**  **Subsequent
      Events**





On
      February 23, 2007, the Company delivered a notice of redemption effective April
      22, 2007 of all of its outstanding floating rate debentures due to mature on
      April 22, 2032 (the “Debentures”). The redemption price will be 100% of the
      aggregate $5,155,000 principal amount of the Debentures, plus approximately
      $233,786 of accrued interest thereon through the redemption date. As a result
      of
      the redemption of the Debentures, a like amount of capital securities issued
      by
      1 ST Constitution Capital Trust I will also be redeemed under the same terms and
      conditions. This redemption does not impact the Trust Preferred securities
      issued by the Company’s wholly-owned subsidiary 1 ST Constitution Capital Trust I on May 30, 2006.





On
      February 27, 2007, the Company announced that the Bank has closed on a
      transaction to acquire all of the deposit liabilities and related assets of
      the
      Hightstown, New Jersey branch banking office of another institution. The
      acquisition adds approximately $20 million in new deposits and provides the
      Bank
      with a full service facility to serve its customer base within Hightstown,
      NJ as
      well as the surrounding Mercer County area.




F-28


**SIGNATURES**





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




**1****ST****CONSTITUTION BANCORP**Date: April
              2, 2007
            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
              
              Robert
                F. Mangano
            President,
                Chief Executive Officer and Director
              (Principal
                Executive Officer)
            April
                2, 2007/s/
                CHARLES S. CROW, III
              Charles
                S. Crow, III
            Chairman
                of the Board
            April
                2, 2007/s/
                DAVID C. REED
              David
                C. Reed
            Director
            April
                2, 2007/s/
                WILLIAM M. RUE
              
              William
                M. Rue
            Director
            April
                2, 2007/s/
                FRANK E. WALSH, III
              Frank
                E. Walsh, III
            Director
            April
                2, 2007/s/
                JOSEPH M. REARDON
              
              Joseph
                M. Reardon
            Senior
                Vice President and Treasurer
              (Principal
                Accounting Officer)
            April
                2, 2007







45


1 ST CONSTITUTION BANCORP


INDEX
      TO
      EXHIBITS


Exhibit
              No.
            
            Description3
            (i)
            
            Certificate
                of Incorporation of the Company (incorporated by reference to Exhibit
                3(i)
                to the Company’s Form 10-K filed with the SEC on March 24,
                2005).3
            (ii)
            
            Bylaws
                of the Company (incorporated by reference to Exhibit 3(ii) to the
                Company’s Form 10-QSB filed with the SEC on May 14,
                2003)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 1stConstitution 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)4.4
            
            
            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 1stConstitution 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).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) 
 
  Exhibit
                  No.
              
              Description10.4
              
              #
              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)10.11
              
              #
              Form
                  of Stock Option Agreement under the 1stConstitution 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 1stConstitution 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).
  
  Exhibit
                  No.
              
              Description10.16
              
              #
              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)10.24
              
              *#
              Amendment
                  No. 2 to 1st Constitution Bancorp Supplemental Executive Retirement
                  Plan,
                  effective December 31, 20410.25
              
              #
              1stConstitution Bancorp 2005 Supplemental Executive Retirement Plan,
                  effective December 31, 2004, (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)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)21
              
              *
              Subsidiaries
                  of the Company
  
 Exhibit
                  No.
              
              Description
 23.1
              
              *
              Consent
                  of Independent Registered Public Accounting Firm - Grant Thornton
                  LLP31.1
              
              *
              Certification
                  of Robert F. Mangano, Chief Executive Officer of the Company, pursuant
                  to
                  Securities Exchange Act Rule 13a-14(a).31.2
              
              *
              Certification
                  of Joseph M. Reardon, Chief Financial Officer of the Company, pursuant
                  to
                  Securities Exchange Act Rule 13a-14(a).32
              
              *
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, Chief
                  Executive Officer of the Company, and Joseph M. Reardon, Chief
                  Financial
                  Officer of the Company.
 _____________________
 *  Filed
        herewith.
 #
              Management
                  contract or compensatory plan or
                  arrangement.