UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 (Mark
One)
  ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
      the quarterly period ended September 30,
2009
 
 or
  ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
      the transition period from _____ to
_____
 Commission
file Number: 000-32891
  1ST
      CONSTITUTION BANCORP(Exact Name of
      Registrant as Specified in Its Charter)
 
 
 New
      Jersey
            
            22-3665653(State
      of Other Jurisdiction
              of
      Incorporation or Organization)
            
            (I.R.S.
      Employer Identification No.)
 
 2650
      Route 130, P.O. Box 634, Cranbury, NJ
            
            08512(Address
      of Principal Executive Offices)
            
            (Zip
      Code)
 
 (609)
      655-4500(Issuer’s Telephone
      Number, Including Area Code)
  (Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     Yes ý      No
 ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈       No
 ̈
  Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
  Large
      accelerated filer
             ̈
            Accelerated
      filer
             ̈Non-accelerated
      filer
              (Do
      not check if a smaller reporting company)
             ̈
            Smaller
      reporting company
            ý
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes   ̈  No  ý
  As of
November 6, 2009, there were 4,267,421 shares of the registrant’s common stock,
no par value, outstanding.
  
 
  1ST
CONSTITUTION BANCORP
 
 FORM
10-Q
 
 INDEX
 
 PagePART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements
              1Consolidated
      Balance Sheets(unaudited)
      at September 30, 2009and
      December 31, 2008
              1Consolidated
      Statements of Income(unaudited)
      for the Three Months and Nine Months EndedSeptember
      30, 2009 and September 30, 2008
              2Consolidated
      Statements of Changes in Shareholders’ Equity(unaudited)
      for the Nine Months EndedSeptember
      30, 2009 and September 30, 2008
              3Consolidated
      Statements of Cash Flows(unaudited)
      for the Nine Months EndedSeptember
      30, 2009 and September 30, 2008
              4Notes
      to Consolidated Financial Statements (unaudited)
              5Item
      2.
              Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
              17Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              38Item
      4.
              Controls
      and Procedures
              38PART
      II.     OTHER
      INFORMATIONItem
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              39Item
      6.
              Exhibits
              39SIGNATURES
              40
  
 PART I. FINANCIAL INFORMATION
 
 Item
1.     Financial Statements.
  1st Constitution Bancorp and Subsidiaries
 Consolidated
Balance Sheets
 (unaudited)
 September
      30, 2009
            
            
            December
      31, 2008ASSETSCASH
      AND DUE FROM BANKS
            
            $
            87,327,270
            
            
            $
            14,321,777FEDERAL
      FUNDS SOLD / SHORT-TERM INVESTMENTS
            
            
            11,380
            
            
            
            11,342Total
      cash and cash equivalents
            
            
            87,338,650
            
            
            
            14,333,119INVESTMENT
      SECURITIES:Available
      for sale, at fair value
            
            
            133,257,485
            
            
            
            93,477,023Held
      to maturity (fair value of $36,125,840 and $36,140,379 at
              September
      30, 2009 and December 31, 2008, respectively)
            
            
            36,139,266
            
            
            
            36,550,577Total
      investment securities
            
            
            169,396,751
            
            
            
            130,027,600LOANS
      HELD FOR SALE
            
            
            16,786,717
            
            
            
            5,702,082LOANS
            
            
            375,723,296
            
            
            
            377,348,416Less-
      Allowance for loan losses
            
            
            (4,111,914
            )
            
            
            (3,684,764
            )Net
      loans
            
            
            371,611,382
            
            
            
            373,663,652PREMISES
      AND EQUIPMENT, net
            
            
            2,096,904
            
            
            
            2,302,489ACCRUED
      INTEREST RECEIVABLE
            
            
            2,123,538
            
            
            
            2,192,601BANK-OWNED
      LIFE INSURANCE
            
            
            10,221,417
            
            
            
            9,929,204OTHER
      REAL ESTATE OWNED
            
            
            2,711,043
            
            
            
            4,296,536OTHER
      ASSETS
            
            
            5,354,431
            
            
            
            3,839,246Total
      assets
            
            $
            667,640,833
            
            
            $
            546,286,529LIABILITIES
      AND SHAREHOLDERS’ EQUITYLIABILITIES:DepositsNon-interest
      bearing
            
            $
            75,400,282
            
            
            $
            71,772,486Interest
      bearing
            
            
            480,772,299
            
            
            
            342,912,245Total
      deposits
            
            
            556,172,581
            
            
            
            414,684,731BORROWINGS
            
            
            27,500,000
            
            
            
            51,500,000REDEEMABLE
      SUBORDINATED DEBENTURES
            
            
            18,557,000
            
            
            
            18,557,000ACCRUED
      INTEREST PAYABLE
            
            
            1,861,907
            
            
            
            1,984,102ACCRUED
      EXPENSES AND OTHER LIABILITIES
            
            
            5,646,385
            
            
            
            3,941,044Total
      liabilities
            
            
            609,737,873
            
            
            
            490,666,877COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS’
      EQUITY:Preferred
      Stock, no par value; 5,000,000 shares authorized, of which 12,000
      shares of Series B, $1,000 liquidation preference, 5% cumulative
      increasing to 9% cumulative on February 15, 2014, were issued and
      outstanding at September 30, 2009 and December 31,
2008
            
            
            11,446,279
            
            
            
            11,387,828Common
      stock, no par value; 30,000,000 shares authorized; 4,276,764 and
      4,204,202 shares issued and 4,267,421 and 4,198,871 shares
      outstanding at September 30, 2009 and December 31, 2008,
      respectively
            
            
            35,540,270
            
            
            
            35,180,433Retained
      earnings
            
            
            10,743,839
            
            
            
            9,653,923Treasury
      Stock, at cost, 9,343 and 5,331 shares at September 30, 2009 and
      December 31, 2008,  respectively
            
            
            (65,504
            )
            
            
            (53,331
            )Accumulated
      other comprehensive income (loss)
            
            
            238,076
            
            
            
            (549,201
            )Total
      shareholders’ equity
            
            
            57,902,960
            
            
            
            55,619,652Total
      liabilities and shareholders’ equity
            
            $
            667,640,833
            
            
            $
            546,286,529
 
 See
accompanying notes to consolidated financial statements.
  1
 1stConstitution Bancorp and Subsidiaries
 Consolidated
Statements of Income
 (unaudited)
 Three months ended September
      30,
            
            
            Nine months ended September
    30,INTEREST
      INCOME
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Loans,
      including fees
            
            $
            6,094,031
            
            
            $
            6,199,531
            
            
            $
            18,395,282
            
            
            $
            18,335,949SecuritiesTaxable
            
            
            1,211,220
            
            
            
            992,777
            
            
            
            3,630,530
            
            
            
            2,884,520Tax-exempt
            
            
            120,790
            
            
            
            140,322
            
            
            
            373,308
            
            
            
            425,399Federal
      funds sold and short-term investments
            
            
            41,134
            
            
            
            56,623
            
            
            
            73,799
            
            
            
            102,571Total
      interest income
            
            
            7,467,175
            
            
            
            7,389,253
            
            
            
            22,472,919
            
            
            
            21,748,439INTEREST
      EXPENSEDeposits
            
            
            2,511,377
            
            
            
            2,563,263
            
            
            
            7,539,760
            
            
            
            7,595,593Securities
      sold under agreement to repurchase
              and
      other borrowed funds
            
            
            335,789
            
            
            
            372,555
            
            
            
            1,060,986
            
            
            
            1,151,511Redeemable
      subordinated debentures
            
            
            270,480
            
            
            
            265,745
            
            
            
            803,455
            
            
            
            799,742Total
      interest expense
            
            
            3,117,646
            
            
            
            3,201,563
            
            
            
            9,404,201
            
            
            
            9,546,846Net
      interest income
            
            
            4,349,529
            
            
            
            4,187,690
            
            
            
            13,068,718
            
            
            
            12,201,593Provision
      for loan losses
            
            
            505,000
            
            
            
            175,000
            
            
            
            1,293,000
            
            
            
            535,000Net
      interest income after provision for loan losses
            
            
            3,844,529
            
            
            
            4,012,690
            
            
            
            11,775,718
            
            
            
            11,666,593NON-INTEREST
      INCOMEService
      charges on deposit accounts
            
            
            225,772
            
            
            
            257,977
            
            
            
            680,526
            
            
            
            641,421Gain
      on sale of loans
            
            
            596,991
            
            
            
            298,342
            
            
            
            1,210,177
            
            
            
            893,945Income
      on bank-owned life insurance
            
            
            98,886
            
            
            
            97,901
            
            
            
            292,213
            
            
            
            282,546Other
      income
            
            
            311,548
            
            
            
            302,554
            
            
            
            840,134
            
            
            
            730,143Total
      non-interest income
            
            
            1,233,197
            
            
            
            956,774
            
            
            
            3,023,050
            
            
            
            2,548,055NON-INTEREST
      EXPENSESalaries
      and employee benefits
            
            
            2,595,934
            
            
            
            2,177,318
            
            
            
            7,117,329
            
            
            
            6,228,445Occupancy
      expense
            
            
            464,799
            
            
            
            459,958
            
            
            
            1,360,471
            
            
            
            1,324,396Data
      Processing expenses
            
            
            281,177
            
            
            
            230,618
            
            
            
            817,057
            
            
            
            660,210FDIC
      insurance expenses
            
            
            183,386
            
            
            
            58,941
            
            
            
            987,169
            
            
            
            130,602Other
      operating expenses
            
            
            824,810
            
            
            
            981,991
            
            
            
            2,880,259
            
            
            
            2,596,665Total
      non-interest expenses
            
            
            4,350,106
            
            
            
            3,908,826
            
            
            
            13,162,285
            
            
            
            10,940,318Income
      before income taxes
            
            
            727,620
            
            
            
            1,060,638
            
            
            
            1,636,483
            
            
            
            3,274,330INCOME
      TAXES
            
            
            106,386
            
            
            
            278,244
            
            
            
            3,949
            
            
            
            971,893Net
      income
            
            
            621,234
            
            
            
            782,394
            
            
            
            1,632,534
            
            
            
            2,302,437Dividends
      and accretion on preferred stock
            
            
            176,983
            
            
            
            -
            
            
            
            542,618
            
            
            
            -Net
      income available to common shareholders
            
            $
            444,251
            
            
            $
            782,394
            
            
            $
            1,089,916
            
            
            $
            2,302,437NET
      INCOME PER COMMON SHAREBasic
            
            $
            0.10
            
            
            $
            0.19
            
            
            $
            0.26
            
            
            $
            0.55Diluted
            
            $
            0.10
            
            
            $
            0.18
            
            
            $
            0.26
            
            
            $
            0.54
 
 See accompanying notes to consolidated
financial statements.
  2
 1st ConstitutionBancorp and Subsidiaries
 Consolidated
Statements of Changes in Shareholders’ Equity
 For
the Nine Months Ended September 30, 2009 and 2008
 (unaudited)
 
 Preferred
              Stock
            
            
            Common
              Stock
            
            
            Retained
              Earnings
            
            
            Treasury
              Stock
            
            
            Accumulated
              Other
              Comprehensive
              Income
      (loss)
            
            
            Total
              Shareholders’
              EquityBALANCE,
      January 1, 2008
            
            $
            -
            
            
            $
            32,514,936
            
            
            $
            9,009,955
            
            
            $
            (18,388
            )
            
            $
            (533,186
            )
            
            $
            40,973,317Adjustment
      to initially apply EITF 06-4
            
            
            
            
            
            
            
            
            
            
            (329,706
            )
            
            
            
            
            
            
            
            
            
            
            (329,706
            )Exercise
      of stock options, net of issuance of vested
              shares
      under benefit programs
            
            
            
            
            
            
            146,711
            
            
            
            
            
            
            
            35,584
            
            
            
            
            
            
            
            182,295Share-based
      compensation
            
            
            
            
            
            
            92,182
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            92,182Treasury
      stock, shares acquired at cost
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (46,417
            )
            
            
            
            
            
            
            (46,417
            )Comprehensive
      Income:Net
      Income for the nine months
              ended
      September 30, 2008
            
            
            
            
            
            
            
            
            
            
            2,302,437
            
            
            
            
            
            
            
            
            
            
            
            2,302,437Unrealized
      loss on securities
              available
      for sale, net of tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (19,319
            )
            
            
            (19,319
            )Unrealized
      loss on interest rate swap contract
              net
      of tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (158,355
            )
            
            
            (158,355
            )Minimum
      pension liability net of tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            72,538
            
            
            
            72,538Comprehensive
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,197,301Balance,
      September 30, 2008
            
            $
            -
            
            
            $
            32,753,829
            
            
            $
            10,982,686
            
            
            $
            (29,221
            )
            
            $
            (638,322
            )
            
            $
            43,068,972Balance,
      January 1, 2009
            
            $
            11,387,828
            
            
            $
            35,180,433
            
            
            $
            9,653,923
            
            
            $
            (53,331
            )
            
            $
            (549,201
            )
            
            $
            55,619,652Share-based
      compensation
            
            
            
            
            
            
            64,517
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            64,517Treasury
      stock, shares acquired at cost
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (70,478
            )
            
            
            
            
            
            
            (70,478
            )Exercise
      of stock options, net and issuance of vested
              shares
      under benefit programs
            
            
            
            
            
            
            295,320
            
            
            
            
            
            
            
            58,305
            
            
            
            
            
            
            
            353,625Dividends
      on preferred stock
            
            
            
            
            
            
            
            
            
            
            (461,667
            )
            
            
            
            
            
            
            
            
            
            
            (461,667
            )Preferred
      stock issuance cost
            
            
            (22,500
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (22,500
            )Accretion
      of discount on preferred stock
            
            
            80,951
            
            
            
            
            
            
            
            (80,951
            )
            
            
            
            
            
            
            
            
            
            
            0Comprehensive
      Income:Net
      Income for the nine months
              ended
      September 30, 2009
            
            
            
            
            
            
            
            
            
            
            1,632,534
            
            
            
            
            
            
            
            
            
            
            
            1,632,534Minimum
      pension liability, net of tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            51,436
            
            
            
            51,436Unrealized
      gain on securities for sale
              net
      of tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            643,735
            
            
            
            643,735Unrealized
      gain on interest rate swap contract
              net
      of tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            92,106
            
            
            
            92,106Comprehensive
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,419,811Balance,
      September 30, 2009
            
            $
            11,446,279
            
            
            $
            35,540,270
            
            
            $
            10,743,839
            
            
            $
            (65,504
            )
            
            $
            238,076
            
            
            $
            57,902,960
  See
accompanying notes to consolidated financial statements.
  3
 1st
ConstitutionBancorp and Subsidiaries
 Consolidated
Statements of Cash Flows
 (unaudited)
 
 Nine
      Months Ended September 30,2009
            
            
            2008OPERATING
      ACTIVITIES:Net income
            
            $
            1,632,534
            
            
            $
            2,302,437Adjustments to reconcile net incometo net cash used
      in operating activities-Provision for loan losses
            
            
            1,293,000
            
            
            
            535,000Depreciation and amortization
            
            
            480,488
            
            
            
            530,000Net amortization of premiums and discounts on
      securities
            
            
            24,780
            
            
            
            69,011Gains
      on sales of other real estate owned
            
            
            (27,776
            )
            
            
            -Gain on sales of loans held for sale
            
            
            (1,210,177
            )
            
            
            (893,945
            )Originations of loans held for sale
            
            
            (121,742,676
            )
            
            
            (65,535,874
            )Proceeds from sales of loans held for sale
            
            
            111,868,218
            
            
            
            63,229,572Income on Bank – owned life insurance
            
            
            (292,213
            )
            
            
            (282,546
            )Share-based
      compensation expense
            
            
            176,517
            
            
            
            243,827Decreasein accrued interest receivable
            
            
            69,063
            
            
            
            497,977(Increase) in other assets
            
            
            (2,145,550
            )
            
            
            (606,656
            )Decrease in accrued interest payable
            
            
            (122,195
            )
            
            
            (111,577
            )Increase (decrease) in accrued expenses and
      other liabilities
            
            
            1,757,356
            
            
            
            (1,042,190
            )Net
      cash used in operating activities
            
            
            (8,238,631
            )
            
            
            (1,064,964
            )INVESTING
      ACTIVITIES:Purchases of securities -Available for sale
            
            
            (78,656,269
            )
            
            
            (33,765,333
            )Held to maturity
            
            
            (1,619,834
            )
            
            
            -Proceeds from maturities and prepayments of securities -Available for sale
            
            
            40,082,916
            
            
            
            21,813,162Held to maturity
            
            
            1,950,349
            
            
            
            7,363,599Net increase in loans
            
            
            (1,069,417
            )
            
            
            (68,194,698
            )Additional investment in other real estate
    owned
            
            
            (400,991
            )
            
            
            (1,706,937
            )Proceeds from sales of other real estate
owned
            
            
            3,842,947
            
            
            
            1,049,582Capital expenditures
            
            
            (247,369
            )
            
            
            (163,611
            )Net
      cash used in investing activities
            
            
            (36,117,668
            )
            
            
            (73,604,236
            )FINANCING
      ACTIVITIES:Exercise of stock options and issuance of Treasury
      Stock
            
            
            353,625
            
            
            
            182,295Purchase of Treasury Stock
            
            
            (70,478
            )
            
            
            (46,417
            )Dividend paid on preferred stock
            
            
            (386,667
            )
            
            
            -Preferred stock issuance costs paid
            
            
            (22,500
            )
            
            
            -Net increase in demand, savings and time deposits
            
            
            141,487,850
            
            
            
            61,244,848Net (decrease) increase in borrowings
            
            
            (24,000,000
            )
            
            
            21,600,000Net
      cash provided by financing activities
            
            
            117,361,830
            
            
            
            82,980,726Increase
      in cash and cash equivalents
            
            
            73,005,531
            
            
            
            8,311,526CASH
      AND CASH EQUIVALENTSAT BEGINNING OF PERIOD
            
            
            14,333,119
            
            
            
            7,548,102CASH
      AND CASH EQUIVALENTSAT END OF PERIOD
            
            $
            87,338,650
            
            
            $
            15,859,628SUPPLEMENTAL
      DISCLOSURESOF CASH FLOW INFORMATION:Cash paid during the period for -Interest
            
            $
            9,526,396
            
            
            $
            9,658,423Income
      taxes
            
            
            329,160
            
            
            
            2,380,200Non-cash
      investing activitiesReal
      estate acquired in full satisfaction of loans in
    foreclosure
            
            
            1,828,687
            
            
            
            1,389,181
 
 See
accompanying notes to consolidated financial statements.
  4
 
 1st ConstitutionBancorp and Subsidiaries
 Notes
To Consolidated Financial Statements
 September
30, 2009 (Unaudited)
 
 (1)  Summary
of Significant Accounting Policies
  The
accompanying unaudited Consolidated Financial Statements include 1st
Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1st
Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1st
Constitution Investment Company of Delaware, Inc., 1st
Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc.
and 1st Constitution Title Agency, LLC.  1st Constitution Capital
Trust II, a subsidiary of the Company, is not included in the Company’s
consolidated financial statements, as it is a variable interest entity and the
Company is not the primary beneficiary.  All significant intercompany
accounts and transactions have been eliminated in consolidation and certain
prior period amounts have been reclassified to conform to current year
presentation.  The accounting and reporting policies of the Company
and its subsidiaries conform to accounting principles generally accepted in the
United States of America and pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”) including the instructions to
Form 10-Q and Article 8 of Regulation S-X.  Certain information and
footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to such rules and regulations.  These
Consolidated Financial Statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company’s Form 10-K for the year ended December 31, 2008, filed with the SEC on
March 27, 2009.
  In the
opinion of the Company, all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair presentation of the operating results
for the interim periods have been included. The results of operations for
periods of less than a year are not necessarily indicative of results for the
full year.
  The
Company has evaluated events and transactions occurring subsequent to the
balance sheet date of September 30, 2009 for items that should potentially be
recognized or disclosed in these financial statements.  The evaluation
was conducted through November 13, 2009, the date these financial statements
were issued.
  (2)  Net
Income Per Common Share
  Basic net
income per common share is calculated by dividing net income less dividends and
discount accretion on preferred stock by the weighted average number of common
shares outstanding during each period.
  Diluted
net income per common share is calculated by dividing net income less dividends
and discount accretion on preferred stock by the weighted average number of
common shares outstanding, as adjusted for the assumed exercise of stock options
and the vesting of unvested Stock Awards (as defined below), using the treasury
stock method. All 2008 per common share information has been adjusted for the
effect of a 5% stock dividend declared December 18, 2008 and paid on February 2,
2009 to shareholders of record on January 20, 2009.
  The
following tables illustrate the reconciliation of the numerators and
denominators of the basic and diluted earnings per common share (EPS)
calculations.  Dilutive securities in the tables below exclude common
stock options and warrants with exercise prices that exceed the average market
price of the Company’s common stock during the periods
presented.  Inclusion of these common stock options and warrants would
be anti-dilutive to the diluted earnings per common share
calculation.
  5
  Three
      Months Ended September 30, 2009Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              amountBasic
      Earnings Per Common ShareNet
      income
            
            $
            621,234Preferred
      stock dividends and accretion
            
            
            (176,983
            )Income
      available to common shareholders
            
            
            444,251
            
            
            
            4,267,614
            
            
            $
            0.10Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            
            
            
            
            21,077Diluted
      Earnings Per Common ShareIncome
      available to common shareholders
              plus
      assumed conversion
            
            $
            444,251
            
            
            
            4,288,691
            
            
            $
            0.10
  Three
      Months Ended September 30, 2008Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              AmountBasic
      Earnings Per Common ShareNet
      income
            
            $
            782,394Preferred
      stock dividends and accretion
            
            
            0Income
      available to common shareholders
            
            
            782,394
            
            
            
            4,197,078
            
            
            $
            0.19Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            
            
            
            
            37,476Diluted
      Earnings Per Common ShareNet
      income available to common shareholders
              plus
      assumed conversion
            
            $
            782,394
            
            
            
            4,234,553
            
            
            $
            0.18
  Nine
      Months Ended September 30, 2009Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              AmountBasic
      Earnings Per Common ShareNet
      income
            
            $
            1,632,534Preferred
      stock dividends and accretion
            
            
            (542,618
            )Income
      available to common shareholders
            
            
            1,089,916
            
            
            
            4,246,960
            
            
            $
            0.26Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            
            
            
            
            11,540Diluted
      Earnings Per Common ShareIncome
      available to common shareholders
              plus
      assumed conversion
            
            $
            1,089,916
            
            
            
            4,258,500
            
            
            $
            0.26
 
 6
  Nine
      Months Ended September 30, 2008Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              AmountBasic
      Earnings Per Common ShareNet
      income
            
            $
            2,302,437Preferred
      stock dividends and accretion
            
            
            -Income
      available to common shareholders
            
            
            2,302,437
            
            
            
            4,191,844
            
            
            $
            0.55Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            
            
            
            
            44,503Diluted
      Earnings Per Common ShareNet
      income available to common shareholders
              plus
      assumed conversion
            
            $
            2,302,437
            
            
            
            4,236,347
            
            
            $
            0.54
 
 (3)           Investment
Securities
 
 Amortized
cost, gross unrealized gains and losses, and the estimated fair value by
security type are as follows:
 
 Gross
            
            
            GrossAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairSeptember
      30, 2009
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            ValueAvailable
      for sale-U.
      S. Treasury securities andobligations
      of U.S. Governmentsponsored
      corporations and agencies
            
            $
            74,172,919
            
            
            $
            361,104
            
            
            $
            (28,565
            )
            
            $
            74,505,458Residential
      collateralized
              mortgage
      obligations
            
            
            5,538,737
            
            
            
            65,426
            
            
            
            (106,870
            )
            
            
            5,497,293Residential
      mortgage
              backed
      securities
            
            
            44,116,647
            
            
            
            2,674,046
            
            
            
            -
            
            
            
            46,790,693Obligations
      of State andPolitical
      subdivisions
            
            
            3,180,401
            
            
            
            60,207
            
            
            
            (87,058
            )
            
            
            3,153,550Trust
      preferred debt securities
            
            
            2,456,622
            
            
            
            -
            
            
            
            (861,031
            )
            
            
            1,595,591Restricted
      stock
            
            
            1,689,900
            
            
            
            -
            
            
            
            -
            
            
            
            1,689,900Mutual
      fund
            
            
            25,000
            
            
            
            -
            
            
            
            -
            
            
            
            25,000$
            131,180,226
            
            
            $
            3,160,783
            
            
            $
            (1,083,524
            )
            
            $
            133,257,485Held
      to maturity-U.
      S. Treasury securities andobligations
      of U.S. Government sponsored corporations and agencies
            
            $
            10,000,000
            
            
            $
            25,000
            
            
            $
            0
            
            
            $
            10,025,000Residential
      collateralized
              mortgage
      obligations
            
            
            5,915,485
            
            
            
            196,353
            
            
            
            -
            
            
            
            6,111,838Residential
      mortgage
              backed
      securities
            
            
            6,401,723
            
            
            
            96,450
            
            
            
            (17,302
            )
            
            
            6,480,871Obligations
      of State andPolitical
      subdivisions
            
            
            8,940,998
            
            
            
            320,507
            
            
            
            -
            
            
            
            9,261,505Trust
      preferred debt securities
            
            
            992,905
            
            
            
            -
            
            
            
            (756,051
            )
            
            
            236,854Corporate
      bonds
            
            
            3,888,155
            
            
            
            121,617
            
            
            
            -
            
            
            
            4,009,772$
            36,139,266
            
            
            $
            759,927
            
            
            $
            (773,353
            )
            
            $
            36,125,840
  7
  Restricted
stock at September 30, 2009 consists of $1,674,900 of Federal Home Loan Bank of
New York stock and $15,000 of Atlantic Central Bankers Bank stock.
   The
amortized cost and estimated fair value of investment securities at September
30, 2009, 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 “Available for
sale - Due in one year or less.”
 
 Amortized
                Cost
              
              
              Fair
                ValueAvailable
      for sale-Due
      in one year or less
              
              $
              3,468,637
              
              
              $
              3,485,646Due
      after one year through five years
              
              
              53,615,661
              
              
              
              53,962,705Due
      after five years through ten years
              
              
              28,711,108
              
              
              
              29,137,695Due
      after ten years
              
              
              45,384,820
              
              
              
              46,671,439Total
              
              $
              131,180,226
              
              
              $
              133,257,485Held
      to maturity-Due
      in one year or less
              
              $
              12,837,245
              
              
              $
              12,914,790Due
      after one year through five years
              
              
              4,492,703
              
              
              
              4,659,975Due
      after five years through ten years
              
              
              5,562,003
              
              
              
              5,761,873Due
      after ten years
              
              
              13,247,315
              
              
              
              12,789,202Total
              
              $
              36,139,266
              
              
              $
              36,125,840
 
 Gross
unrealized losses on securities and the estimated fair value of the related
securities aggregated by security category and length of time that individual
securities have been in a continuous unrealized loss position at September 30,
2009 are as follows:
 September
      30, 2009
            
            
            
            
            Less
      than 12 months
            
            
            12
      months or longer
            
            
            TotalNumber
              of
              Securities
            
            
            Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Fair
      Value
            
            
            Unrealized
              Losses
            
            
            Fair
      Value
            
            
            Unrealized
              LossesU.S.
      Treasury securities and obligations
              of
      U.S. Government sponsored
              corporations
      and agencies
            
            6
            
            
            $
            8,721,435
            
            
            $
            (28,565
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            8,721,435
            
            
            $
            (28,565
            )Residential
      mortgage backed securities
            
            1
            
            
            
            2,914,489
            
            
            
            (17,302
            )
            
            
            -
            
            
            
            -
            
            
            
            2,914,489
            
            
            
            (17,302
            )Residential
      collateralized mortgage obligations
            
            3
            
            
            
            583,825
            
            
            
            (848
            )
            
            
            466,163
            
            
            
            (106,022
            )
            
            
            1,049,988
            
            
            
            (106,870
            )Obligations
      of State and Political
              Subdivisions
            
            1
            
            
            
            929,225
            
            
            
            (87,058
            )
            
            
            -
            
            
            
            -
            
            
            
            929,225
            
            
            
            (87,058
            )Trust
      preferred securities
            
            5
            
            
            
            0
            
            
            
            0
            
            
            
            1,832,445
            
            
            
            (1,617,082
            )
            
            
            1,832,445
            
            
            
            (1,617,082
            )Total
      temporarily impaired securities
            
            16
            
            
            $
            13,148,974
            
            
            $
            (133,773
            )
            
            $
            2,298,608
            
            
            $
            (1,723,104
            )
            
            $
            15,447,582
            
            
            $
            (1,856,877
            )
 
 U.S. Treasury securities and
obligations of U.S. Government sponsored corporations and
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 does not intend to sell these investments and it is not more likely than
not that the Company will be required to sell these investments before a market
price recovery or maturity, these investments are not considered other-than
temporarily impaired.
  8
  Collateralized mortgage
obligations and mortgaged-backed securities:The unrealized losses on
investments in collateral mortgage obligations and 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 does not intend to sell
these investments and it is not more likely than not that the Company will be
required to sell these investments before a market price recovery or
maturity, these investments are not considered other-than-temporarily
impaired.
  Obligations of State and Political
Subdivisions:  The unrealized losses or investments in these
securities were caused by interest rate increases.  It is expected
that the securities would not be settled at a price less than the amortized cost
of the investment.  Because the decline in fair value is attributable
to changes in interest rates and not credit quality, and because the Company
does not intend to sell these investments and it is not more likely than not
that the Company will be required to sell these investments before a market
price recovery or maturity, these investments are not considered
other-than-temporarily impaired.
 
 Trust preferred
securities:  The investments in these securities with
unrealized losses are comprised of corporate trust preferred securities that
mature in 2027, all but one of which were single-issuer securities.  
The contractual terms of the trust preferred securities do not allow the issuer
to settle the securities at a price less than the face value of the trust
preferred securities, which is greater than the amortized cost of the trust
preferred securities.  None of the corporate issuers have defaulted on
interest payments.  Because the decline in fair value is attributable
to changes in interest rates and the lack of an active trading market for these
securities and to a lesser degree market concerns on the issuers’ credit
quality, and because the Company does not intend to sell these investments and
it is not more likely than not that the Company will be required to sell these
investments before a market price recovery or maturity, these investments are
not considered other-than-temporarily impaired.
 
 (4)  Share-Based
Compensation
 
 The
Company establishes fair value for its equity awards to determine its cost and
recognizes the related expense for stock options over the vesting period using
the straight-line method.  The grant date fair value for stock options
is calculated using the Black-Scholes option valuation model.
  The
Company’s stock plans authorize the issuance of an aggregate of 1,119,022 shares
of common stock pursuant to awards that may be granted in the form of stock
options to purchase common stock (“Options”) and awards of shares of common
stock (“Stock Awards”).  The purpose of the Company’s stock-based
incentive plans is to attract and retain personnel for positions of substantial
responsibility and to provide additional incentive to certain officers,
directors, employees and other persons to promote the success of the
Company.  Under the Company’s stock plans, Options expire ten years
after the date of grant.  Options are granted at the then fair market
value of the Company’s common stock.  As of September 30, 2009, there
were 255,956 shares of common stock (as adjusted for the 5% stock dividend
declared December 18, 2008 and paid February 2, 2009 to shareholders of record
on January 20, 2009) available for Options or Stock Awards under the Company’s
stock plans.
  Stock-based
compensation expense related to Options was $64,517 and $92,182 for the nine
months ended September 30, 2009 and 2008, respectively.
  9
  Option
transactions under the Company’s stock plans during the nine months ended
September 30, 2009 are summarized as follows:
  Stock
      Options
            
            Number
      of
              Shares
            
            
            Weighted
              Average
              Exercise
      Price
            
            
            Weighted
              Average
              Remaining
              Contractual
              Term
      (years)
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at January 1, 2009
            
            
            164,041
            
            
            $
            9.92Options
      Granted
            
            
            36,520
            
            
            
            9.08Options
      Exercised
            
            
            (53,218
            )
            
            
            4.70Options
      Forfeited
            
            
            -
            
            
            
            -Options
      Expired
            
            
            -
            
            
            
            -Outstanding
      at September 30, 2009
            
            
            147,343
            
            
            $
            11.60
            
            
            
            6.4
            
            
            $
            34,367Exercisable
      at September 30, 2009
            
            
            96,041
            
            
            $
            11.63
            
            
            
            5.2
            
            
            $
            34,367
 
 The total
intrinsic value (market value on date of exercise less grant price) of Options
exercised during the nine month period ended September 30, 2009 was
$83,322.
  Significant
assumptions used to calculate the fair value of the Options granted for the nine
month period ended September 30, 2009 are as follows:
  January
      2009
            
            
            August
      2009Fair
      value of Options granted
            
            $
            3.26
            
            
            $
            2.89Risk-free
      rate of return
            
            
            1.60
            %
            
            
            2.57
            %Expected
      Option life in years
            
            
            7
            
            
            
            7Expected
      volatility
            
            
            27.58
            %
            
            
            27.58
            %Expected
      dividends (1)
            
            
            -
            
            
            
            -
 
 (1)
            To
      date, the Company has not paid cash dividends on its common
      stock.
  As of
September 30, 2009, there was approximately $181,816 of unrecognized
compensation costs related to non-vested Option-based compensation arrangements
granted under the Company’s stock plans.  That cost is expected to be
recognized over the next four years.
  Stock
Awards generally vest over a four-year service period on the anniversary of the
grant date, except in the case of the Company’s highest compensated employee
(currently its chief executive officer) for Stock Awards granted on or after
June 15, 2009 which related to long term restricted stock
awards.  Such long-term restricted Stock Awards granted to the highest
compensated employee vest 50% immediately following the second anniversary of
the Award and 25% immediately following each of the next two
anniversaries.  In that instance, transferability of the stock
received pursuant to a Stock Award is generally tied to repayment of funds
received by the Company from the United States Department of the Treasury (the
“Treasury”) in exchange for preferred stock of the Company and warrants to
acquire common stock of the Company.  Also, such Stock Awards granted
to the Company’s highest compensated employee which are long term are subject to
forfeiture unless such person performs substantial services for the Company for
two years after the date of grant of the Stock Award, except in certain
circumstances and even if vested, the Stock Award is not transferable until the
Company has repaid the Treasury the funds received with respect to the preferred
stock and warrants sold to the Treasury.  The release of the
transferability restriction is 25% of the Stock Award for each repayment of 25%
of the funds originally received by the Company from the Treasury, with an
exception from the transferability restriction for the number of shares
sufficient to pay taxes arising from the vesting of the Stock Award. Once
vested, Stock Awards are irrevocable, except that such Stock Awards are subject
to clawback in certain circumstances pursuant to Section 304 of the
Sarbanes-Oxley Act of 2002 and pursuant to Section 111 of the Emergency Economic
Stabilization Act of 2008 as amended by the American Recovery and Reinvestment
Act of 2009.  The product of the number of shares granted and the
grant date market price of the Company’s common stock determine the fair value
of shares covered by the Stock Award under the Company’s stock
plans.  Management recognizes compensation expense for the fair value
of the shares covered by the Stock Award on a straight-line basis over the
requisite service period.  Stock-based compensation expense related to
Stock Awards was $112,000 and $151,645 for the nine months ended September 30,
2009 and 2008, respectively.
  10
  The
following table summarizes the non-vested portion of Stock Awards outstanding at
September 30, 2009:
  Stock
      Awards
            
            Number
      of
              Shares
            
            
            Average
      Grant Date
              Fair
      ValueNon-vested
      stock awards at January 1, 2009
            
            
            30,470
            
            
            $
            14.80Shares
      granted
            
            
            56,760
            
            
            
            8.94Shares
      vested
            
            
            (11,070
            )
            
            
            (14.19
            )Shares
      forfeited
            
            
            -
            
            
            
            -Non-vested
      stock awards at September 30, 2009
            
            
            76,160
            
            
            $
            10.24
 
 As of
September 30, 2009, there was approximately $655,691 of unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the Company’s stock plans.  That cost is expected to be
recognized over the next four years.
  (5)  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 recognizes the over
funded or under funded status of a defined benefit post-retirement 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
components of net periodic expense for the Company’s supplemental executive
retirement plan for the nine months ended September 30, 2009 and 2008 are as
follows:
 Three
      months ended

                September
      30,
              
              
              Nine
      months ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Service
      cost
              
              $
              79,544
              
              
              $
              57,637
              
              
              $
              220,182
              
              
              $
              172,911Interest
      cost
              
              
              45,630
              
              
              
              39,830
              
              
              
              136,890
              
              
              
              119,490Actuarial
      loss recognized
              
              
              21,744
              
              
              
              15,375
              
              
              
              65,232
              
              
              
              46,125Prior
      service cost recognized
              
              
              24,750
              
              
              
              24,858
              
              
              
              74,358
              
              
              
              74,574$
              171,668
              
              
              $
              137,700
              
              
              $
              496,662
              
              
              $
              413,100
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) Emerging
Issues Task Force finalized guidance on Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-dollar Life Insurance
Arrangementswhich requires that a liability be recorded during the
service period when a split-dollar life insurance agreement continues after
participants’ employment or retirement.  The required accrued
liability is based on either the post-employment benefit cost for the continuing
life insurance or based on the future death benefit depending on the contractual
terms of the underlying agreement.  The Company adopted this guidance
on January 1, 2008, and recorded a cumulative effect adjustment of $329,706 as a
reduction of retained earnings effective January 1, 2008.
  11
 
 (6)  Comprehensive
Income and Accumulated Other Comprehensive Income (Loss)
  The
components of accumulated other comprehensive income (loss) and their related
income tax effects are as follows:
  September
      30,
            
            
            December
      31,2009
            
            
            2008Unrealized
      holding gains onsecurities
      available for sale
            
            $
            2,077,259
            
            
            $
            926,166Related
      income tax effect
            
            
            (829,997
            )
            
            
            (322,639
            )1,247,262
            
            
            
            603,527Unrealized
      loss on interest rateswap
      contract
            
            
            (1,005,799
            )
            
            
            (1,159,156
            )Related
      income tax effect
            
            
            402,497
            
            
            
            463,748(603,302
            )
            
            
            (695,408
            )Pension
      liability
            
            
            (675,781
            )
            
            
            (761,439
            )Related
      income tax effect
            
            
            269,897
            
            
            
            304,119(405,884
            )
            
            
            (457,320
            )Accumulated
      other comprehensive income
              (loss)
            
            $
            238,076
            
            
            $
            (549,201
            )
 
 The
components of other comprehensive income (loss) and their related income tax
effects for the three and nine month periods ended September 30, 2009 and 2008
are as follows:
  Three
      Months Ended
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,
            
            
            September
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Unrealized
      holding gain (loss) onsecurities
      available for sale
            
            $
            1,049,862
            
            
            $
            767,537
            
            
            $
            1,151,093
            
            
            $
            (33,041
            )Related
      income tax effect
            
            
            (473,218
            )
            
            
            (258,475
            )
            
            
            (507,358
            )
            
            
            13,722576,644
            
            
            
            509,062
            
            
            
            643,735
            
            
            
            (19,319
            )Unrealized
      gain (loss) on interest rateswap
      contract
            
            
            22,877
            
            
            
            (151,326
            )
            
            
            153,357
            
            
            
            (262,763
            )Related
      income tax effect
            
            
            2,776
            
            
            
            60,441
            
            
            
            (61,251
            )
            
            
            104,40825,653
            
            
            
            (90,885
            )
            
            
            92,106
            
            
            
            (158,355
            )Pension
      liability amortization
            
            
            28,553
            
            
            
            40,300
            
            
            
            85,658
            
            
            
            120,767Related
      income tax effect
            
            
            (13,088
            )
            
            
            (16,101
            )
            
            
            (34,222
            )
            
            
            (48,229
            )15,465
            
            
            
            24,199
            
            
            
            51,436
            
            
            
            72,538Other
      comprehensive income (loss)
            
            $
            617,762
            
            
            $
            442,376
            
            
            $
            787,277
            
            
            $
            (105,136
            )
  (7)  Recent
Accounting Pronouncements
  In April
2009, the Financial Accounting Standards Board (“FASB”) issued guidance in
regard to determining fair value when the volume and level of activity for an
asset or liability have significantly decreased and identifying transactions
that are not orderly. This guidance defined fair value as the price that would
be received to sell the asset or transfer the liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions and
provided additional guidance on determining when the volume and level of
activity for the asset or liability has significantly decreased and on
identifying circumstances when a transaction may not be considered orderly. The
guidance included a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability. When the Company concludes there has been a significant
decrease in the volume and level of activity for the asset or liability, further
analysis of the information from that market is required and significant
adjustments to the related prices may be necessary to estimate fair value. This
guidance also clarifies that when there has been a significant decrease in the
volume and level of activity for the asset or liability, some transactions may
not be orderly. In those situations, the Company must evaluate the weight of the
evidence to determine whether the transaction is orderly. The guidance provides
a list of circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given
little, if any, weight when estimating fair value. The adoption of this
guidance, as required, effective June 30, 2009, did not have a material impact
on the Company’s consolidated financial statements, although additional
disclosure is now required.
  12
  In April
2009, the FASB issued guidance on the recognition and presentation of
other-than-temporary impairment which clarifies the interaction of the factors
that should be considered when determining whether a debt security is
other-than-temporarily impaired. For debt securities, management must assess
whether (a) it has the intent to sell the security and (b) it is more
likely than not that it will be required to sell the security prior to its
anticipated recovery. These steps are done before assessing whether the entity
will recover the cost basis of the investment. Previously, this assessment
required management to assert it has both the intent and the ability to hold a
security for a period of time sufficient to allow for an anticipated recovery in
fair value to avoid recognizing other-than-temporary impairment. This change
does not affect the need to forecast recovery of the value of the security
through either cash flows or market price. In instances when a determination is
made that an other-than-temporary impairment exists but the investor does not
intend to sell the debt security and it is not more likely than not that it will
be required to sell the debt security prior to its anticipated recovery, this
guidance changes the presentation and amount of the other-than-temporary
impairment recognized in the income statement. The other-than-temporary
impairment is separated into (a) the amount of the total
other-than-temporary impairment related to a decrease in cash flows expected to
be collected from the debt security (the credit loss) and (b) the amount of
the total other-than-temporary impairment related to all other factors. The
amount of the total other-than-temporary impairment related to the credit loss
is recognized in earnings. The amount of the total other-than-temporary
impairment related to all other factors is recognized in other comprehensive
income. The adoption of this guidance, as required, effective June 30, 2009, did
not have a material impact on the Company’s consolidated financial statements,
although additional disclosure is now required.
  In April
2009, the FASB issued guidance on interim disclosures about the fair value of
financial instruments whichrequired disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies in addition to the existing annual requirements. The
adoption of this guidance, as required, effective June 30, 2009, did not have a
material impact on the Company’s consolidated financial statements, although
additional disclosure is now required.
  In March
2008, the FASB issued guidance on disclosures about derivative instruments and
hedging activities that amended earlier guidance to require entities that
utilize derivative instruments to provide qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of, and gains and losses on, derivative contracts, and details of
credit-risk-related contingent features in their hedged
positions.  Entities are also required to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of the guidance have been applied, and
the impact that hedges have on an entity’s financial position, financial
performance, and cash flows.   This guidance was effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.  The adoption of this guidance did not have a
material impact on the Company’s financial statements.
  In May
2009, the FASB issued guidance establishing general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, setting forth (1)
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (2) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements and (3) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. This guidance is effective for interim or annual financial
periods ending after June 15, 2009.
  In June
2009, the FASB issued guidance regarding the accounting for transfers of
financial assets that prescribes the information that a reporting entity must
provide in its financial reports about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance and cash
flows; and a transferor’s continuing involvement in transferred financial
assets.  This guidance specifically removes the concept of a qualifying
special-purpose entity and the exception from applying otherwise applicable
consolidation requirements to variable interest entities that are qualifying
special-purpose entities.  It also modifies the financial-components
approach used in accounting for transfers. This guidance will be effective for
fiscal years beginning after November 15, 2009.  We have not determined the
effect that the adoption of this guidance will have on our consolidated
financial position or results of operations.
  13
  In June
2009, the FASB issued amended guidance to require that an enterprise determine
whether it’s variable interest or interests give it a controlling financial
interest in a variable interest entity.  The primary beneficiary of a
variable interest entity is the enterprise that has both (1) the power to
direct the activities of a variable interest entity that most significantly
impact the entity’s economic performance and (2) the obligation to absorb
losses of the entity that could potentially be significant to the variable
interest entity or the right to receive benefits from the entity that could
potentially be significant to the variable interest entity.  This guidance
requires ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity and is effective for fiscal years
beginning after November 15, 2009.  We have not determined the effect that
the adoption of this guidance will have on our consolidated financial position
or results of operations.
 
 In June
2009, the FASB issued guidance establishing the FASB Accounting Standards
Codification (the “Codification”)as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in preparation of financial statements in conformity
with generally accepted accounting principles in the United States for interim
and annual periods ending after September 15, 2009. This change did not
have an impact on our consolidated financial position or results of
operations.
 
 In August
2009, the FASB issued guidance regarding fair value measurements and disclosures
to clarify that in circumstances in which a quoted price in an active market for
the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques: (1) The quoted
price of the identical liability when traded as an asset; (2) Quoted prices for
similar liabilities or similar liabilities when traded as assets; or (3) Another
valuation technique that is consistent with the principles of Codification Topic
820. Two examples of these techniques would be an income approach, such as a
present value technique, or a market approach, such as a technique that is based
on the amount at the measurement date that the reporting entity would pay to
transfer the identical liability or would receive to enter into the identical
liability. When estimating the fair value of a liability, a reporting entity is
not required to include a separate input or adjustment to other inputs relating
to the existence of a restriction that prevents the transfer of the liability.
Both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements. This guidance is
effective for the first reporting period (including interim periods) beginning
after issuance. This guidance did not have an impact on our consolidated
financial position or results of operations.
 
 (8)  Fair
Value Disclosures
  GAAP
utilizes a fair value hierarchy that prioritizes the inputs to valuation methods
used to measure fair value.  The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements).  The three levels of the fair value
hierarchy are as follows:
  Level
1:
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities.
  Level
2:
            Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability.
  Level
3:
            Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e., supported with little
      or no market activity).
  An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
  14
  A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.  These valuation
methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value effective January 1,
2008.
  In
general, fair value is based upon quoted market prices, where
available.  If such quoted market prices are not available, fair value
is based upon internally developed models that primarily use, as inputs,
observable market-based parameters.  Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value.  These adjustments may include amounts to reflect counterparty
credit quality and counterparty creditworthiness, among other things, as well as
unobservable parameters.  Any such valuation adjustments are applied
consistently over time.  The Company’s valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable
value or reflective value or reflective of future values.  While
management believes the Company’s valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date.
  Securities Available for
Sale.  Securities classified as available for sale are reported
at fair value utilizing Level 2 Inputs.  For these securities, the
Company obtains fair value measurements from an independent pricing
service.  The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the Treasury yield curve,
live trading levels, trade execution data, market consensus prepayments speeds,
credit information and the security’s terms and conditions, among other
things.
  Impaired
loans.Loans included in the following table are those
classified as impaired for which the Company has measured impairment generally
based on the fair value of the loan’s collateral.  Fair value is
generally determined based upon independent third party appraisals of the
properties, or discounted cash flows based on the expected
proceeds.  These assets are included as Level 3 fair values, based
upon the lowest level of input that is significant to the fair value
measurements.  The fair value consists of the loan balances less
specific valuation allowances.
  Derivatives.  Derivatives
are reported at fair value utilizing Level 2 Inputs.  The Company
obtains dealer quotations to value its interest rate swap.
  The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis, segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair
value:
  Level
      1 Inputs
            
            
            Level
      2 Inputs
            
            
            Level
      3 Inputs
            
            
            Total
      Fair ValueSeptember
      30, 2009:Securities
      available for sale
            
            $
            -
            
            
            $
            133,257,485
            
            
            $
            -
            
            
            $
            133,257,485Derivative
      liabilities
            
            
            -
            
            
            
            (1,005,799
            )
            
            
            -
            
            
            
            (1,005,799
            )December
      31, 2008:Securities
      available for sale
            
            $
            -
            
            
            $
            93,477,023
            
            
            $
            -
            
            
            $
            93,477,023Derivative
      liabilities
            
            
            -
            
            
            
            (1,159,156
            )
            
            
            -
            
            
            
            (1,159,156
            )
 
 Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment).  Financial assets and financial liabilities measured at
fair value on a non-recurring basis consist of impaired loans as
follows:
 
 Level
      1 Inputs
            
            
            Level
      2 Inputs
            
            
            Level
      3 Inputs
            
            
            Total
      Fair ValueSeptember
      30, 2009:Impaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            2,331,418
            
            
            $
            2,331,418Other
      real estate owned
            
            
            -
            
            
            
            -
            
            
            
            2,711,043
            
            
            
            2,711,043December
      31, 2008:Impaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            1,427,673
            
            
            $
            1,427,673Other
      real estate owned
            
            
            -
            
            
            
            -
            
            
            
            4,296,536
            
            
            
            4,296,536
  15
  Impaired
loans measured at fair value and included in the above table consisted of 15
loans at September 30, 2009, having an aggregate principal balance of $2,719,323
and specific loan loss allowances of $387,905, and eleven loans at December 31,
2008, having an aggregate principal balance of $1,913,012 and specific loan loss
allowances of $485,339.
  The fair
value of other real estate owned was determined using appraisals, which may be
discounted based on management’s review and changes in market
conditions.
  Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test.  Certain non-financial assets measured
at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial
long-lived assets such as other real estate owned measured at fair value for
impairment assessment.
  The
following is a summary of fair value versus the carrying value of financial
instruments.  For the Company and the Bank, as for most financial
institutions, the bulk of its assets and liabilities are considered financial
instruments.  Many of the financial instruments lack an available
trading market as characterized by a willing buyer and willing seller engaging
in an exchange transaction.  Therefore, significant estimations and
present value calculations were used for the purpose of this
note.  Changes in assumptions could significantly affect these
estimates.
  Estimated
fair values have been determined by using the best available data and an
estimation methodology suitable for each category of financial
instruments.  Financial instruments, such as securities available for
sale and securities held to maturity, actively traded in the secondary market
have been valued using available market prices.  The carrying value of
cash and cash equivalents approximates fair value due to the short-term nature
of these instruments.  Other borrowings are valued on a discounted
cash flow method utilizing current market rates for instruments of similar
remaining terms.
  Financial
instruments with stated maturities have been valued using a present value
discounted cash flow with a discount rate approximating current market for
similar assets and liabilities.  For those loans and deposits with
floating interest rates, it is assumed that estimated fair values generally
approximate the recorded book balances.
  The
estimated fair values, and the recorded book balances, were as
follows:
  September
      30, 2009
            
            
            December
      31, 2008Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            EstimatedValue
            
            
            Fair
      Value
            
            
            Value
            
            
            Fair
      ValueCash
      and cash equivalents
            
            $
            87,338,650
            
            
            $
            87,338,650
            
            
            $
            14,333,119
            
            
            $
            14,333,119Securities
      available for sale
            
            
            133,257,485
            
            
            
            133,257,485
            
            
            
            93,477,023
            
            
            
            93,477,023Securities
      held to maturity
            
            
            36,139,266
            
            
            
            36,125,840
            
            
            
            36,550,577
            
            
            
            36,140,379Loans
      held for sale
            
            
            16,786,717
            
            
            
            16,786,717
            
            
            
            5,702,082
            
            
            
            5,702,082Gross
      loans
            
            
            375,723,296
            
            
            
            376,746,000
            
            
            
            377,348,416
            
            
            
            382,020,000Accrued
      interest receivable
            
            
            2,123,538
            
            
            
            2,123,538
            
            
            
            2,192,601
            
            
            
            2,192,601Deposits
            
            
            (556,172,581)
            
            
            
            (558,056,000)
            
            
            
            (414,684,731)
            
            
            
            (416,809,000)Other
      borrowings
            
            
            (27,500,000)
            
            
            
            (30,614,000)
            
            
            
            (51,500,000)
            
            
            
            (54,486,000)Redeemable
      subordinated debentures
            
            
            (18,557,000)
            
            
            
            (18,558,000)
            
            
            
            (18,557,000)
            
            
            
            (18,583,000)Interest
      rate swap contract
            
            
            (1,005,799)
            
            
            
            (1,005,799)
            
            
            
            (1,159,156)
            
            
            
            (1,159,156)Accrued
      interest payable
            
            
            (1,861,907)
            
            
            
            (1,861,907)
            
            
            
            (1,984,102)
            
            
            
            (1,984,102)
 
 Loan
commitments and standby letters of credit as of September 30, 2009 and December
31, 2008 are based on fees charged for similar agreements; accordingly, the
estimated fair value of loan commitments and standby letters of credit is
nominal.
 
 16
  (9)           Derivative
Financial Instruments
  The use
of derivative financial instruments creates exposure to credit
risk.  This credit risk relates to losses that would be recognized if
the counterparts fail to perform their obligations under the
contracts.  As part of the Company’s interest rate risk management
process, the Company entered into an interest rate derivative contract effective
November 27, 2007.  Interest rate derivative contracts are typically
used to limit the variability of the Company’s net interest income that could
result due to shifts in interest rates.  This derivative interest rate
contract was an interest rate swap used to modify the repricing characteristics
of a specific liability.  At September 30, 2009, the Company’s
position in derivative contracts consisted entirely of this interest rate
swap.
 
 Maturity
            Hedged Liability
            Notional
              Amounts
            Swap
      Fixed
              Interest Rates
            Swap
      Variable
              Interest RatesJune
      15, 2011
            Subordinated
      Debenture
            $18,000,000
            5.87%
            3
      month LIBOR plus
              165
      basis points
 
 During
2006, the Company established 1st Constitution Capital Trust II, a Delaware
business trust and wholly- owned subsidiary of the Company (“Trust II”), for the
sole purpose of issuing $18 million of trust preferred securities (the “Trust
Preferred Securities”).  The Company issued $18,557,000 in
subordinated debentures to Trust II.  The Company owns all of the
$557,000 in common equity of Trust II and the debentures are the sole asset of
Trust II. The Company issued the Trust Preferred Securities to fund loan growth
and generate liquidity.  In conjunction with the Trust Preferred
Securities issuance, the Company entered into a $18.0 million pay fixed swap
designated as fair value hedges that was used to convert floating rate quarterly
interest payments indexed to three month LIBOR, based on common notional amounts
and maturity dates.  The pay fixed swap changed the repricing
characteristics of the quarterly interest payments from floating rate to fixed
rate.   The fair value of the pay fixed swap outstanding at September
30, 2009 and December 31, 2008 was ($1,005,799) and ($1,159,156), respectively,
and was recorded in other liabilities in the consolidated balance
sheets.
  (10)         Shareholders’
Equity
  As a
result of its participation in the Troubled Asset Relief Program (“TARP”)
Capital Purchase Program (the “CPP”) under the Emergency Economic Stabilization
Act of 2008 (“EESA”) through the sale by the Company of its Fixed Rate
Cumulative Perpetual Preferred Stock, Series B (“Preferred Stock Series B”) to
the Treasury, the Company is subject to restrictions contained in the agreement
between the Treasury and the Company related to the sale of the Preferred Stock
Series B.  These restrictions include restrictions on the repurchase
of shares of common stock or other capital stock or other equity securities of
any kind of the Company or any of its or its affiliates’ trust preferred
securities until the third anniversary of the purchase of the Preferred Stock
Series B by the Treasury, with certain exceptions, without approval of the
Treasury.  See “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Shareholders’ Equity and
Dividends”.
  Item 2.    Management’s Discussion and Analysis
of Financial Condition and Results of Operations
  The
purpose of this discussion and analysis of the operating results and financial
condition at September 30, 2009 is intended to help readers analyze the
accompanying financial statements, notes and other supplemental information
contained in this document. Results of operations for the three month and nine
month periods ended September 30, 2009 are not necessarily indicative of results
to be attained for any other period.
  This
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements, notes and tables included elsewhere in this report and
Part II, Item 7 of the Company’s Form 10-K (Management’s Discussion and Analysis
of Financial Condition and Results of Operations) for the year ended December
31, 2008, as filed with the Securities and Exchange Commission (the “SEC”) on
March 27, 2009.
  17
  General
  Throughout
the following sections, the “Company” refers to 1st
Constitution Bancorp and, as the context requires, its wholly-owned
subsidiaries, 1st
Constitution Bank and 1stConstitution Capital Trust II; the “Bank” refers to 1st
Constitution Bank; “Trust II” refers to 1st
Constitution Capital Trust II.  Trust II is not included in the
Company’s consolidated financial statements as it is a variable interest entity
and the Company is not the primary beneficiary.
  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 the Bank, a full service commercial bank which began
operations in August 1989, 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 ownership interest in the Bank, the Company currently conducts no
other significant business activities.
  The Bank
operates eleven branches, and manages an investment portfolio through 1st
Constitution Investment Company of Delaware, Inc., and 1st
Constitution Investment Company of New Jersey, Inc., its
subsidiaries.  FCB Assets Holdings, Inc., a subsidiary of the Bank, is
used by the Bank to manage and dispose of repossessed real estate.
  Trust II,
a subsidiary of the Company, was created in May 2006 to issue trust preferred
securities to assist the Company to raise additional regulatory
capital.
  Forward-Looking
Statements
  This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).  The Private
Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward
looking statements.  When used in this and in future filings by the
Company with the SEC, 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.
  Factors
that may cause actual results to differ from those results expressed or implied,
include, but are not limited to, those listed under “Business”, “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Company’s Annual Report on Form 10-K filed with the SEC on
March 27, 2009, such as 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; certain interest rate risks; risks
associated with investments in mortgage-backed securities; and risks associated
with speculative construction lending. 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 could have an
adverse effect on profitability. The Company undertakes no obligation to
publicly revise any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements, except as required by law.
  Recent
Developments
  There
have been historical disruptions in the financial system during the past two
years and many lenders and financial institutions have reduced, modified or
ceased to provide certain types of funding to borrowers, including other lending
institutions.  The availability of credit and confidence in the entire
financial sector have been adversely affected and there has been increased
volatility in financial markets.  These disruptions have had and are
likely to continue to have a material impact on institutions in the U.S. banking
and financial industries.  The Federal Reserve System has been
providing vast amounts of liquidity to the banking systems to compensate for
weaknesses in short-term borrowing markets and other capital
markets.  A reduction in the Federal Reserve’s activities or capacity
could reduce liquidity in the markets, thereby potentially increasing funding
costs to the Bank or reducing the availability of funds to the Bank to finance
its existing operations.
  18
  RESULTS
OF OPERATIONS
  Three
Months Ended September 30, 2009 Compared to the Three Months Ended September 30,
2008
  Summary
  The
Company realized net income of $621,234 for the three months ended September 30,
2009, a decrease of 20.6% from the $782,394 reported for the three months ended
September 30, 2008.  The decrease is due primarily to increases in
non-interest expenses relating to FDIC insurance premiums and salaries and
employee benefits and to an increase in the loan loss provision for the three
months ended September 30, 2009, which resulted from a higher level of
non-performing assets during the three months ended September 30, 2009 compared
to the three months ended September 30, 2008.  Net income for the
three months ended September 30, 2009 benefited from increases in total interest
income and non-interest income when compared to the three months ended September
30, 2008.  Net income per diluted common share was $0.10 for the three
months ended September 30, 2009 compared to net income per diluted common share
of $0.18 for the three months ended September 30, 2008.  The reduction
in net income per diluted common share for the three months ended September 30,
2009 was also impacted by the dividends on, and discount accretion on, preferred
stock of the Company issued to the Treasury on December 23, 2008.  All
prior year per common share information has been adjusted for the effect of a 5%
stock dividend declared on December 18, 2008 and paid on February 2, 2009 to
shareholders of record on January 20, 2009.
  Key
performance ratios declined for the three months ended September 30, 2009 due to
lower net income for that period compared to the three months ended September
30, 2008.  Return on average assets and return on average equity were
0.38% and 4.34% for the three months ended September 30, 2009 compared to 0.62%
and 7.39%, respectively, for the three months ended September 30,
2008.
  A
significant factor impacting the Company’s net interest income has been the
continued low level of market interest rates on loans and the resulting
compression of the Company’s net interest margin.  The net interest
margin for the three months ended September 30, 2009 was 2.87% as compared to
the 3.61% net interest margin recorded for the three months ended September 30,
2008, a reduction of 74 basis points.  The Federal Reserve has
decreased the discount rate by 400 basis points since January 1, 2008, which has
resulted in lower market interest rates on loans.  The Company will
continue to closely monitor the mix of earning assets and funding sources to
maximize net interest income during this challenging interest rate
environment.
  The
Company has investments in federal agency-backed collateralized mortgage
obligations and trust preferred securities.  The Company does not have
any investments in private issuer collateralized mortgage
obligations.  At September 30, 2009, the Company held collateralized
mortgage obligations with an aggregate market value of $5,497,293 in the
available for sale portfolio.  These securities had an unrealized loss
of $41,444.  The Company held trust preferred securities in the
available for sale portfolio with an aggregate market value of $1,595,591 and an
unrealized loss of $861,031 at September 30, 2009.  The Company also
held trust preferred securities in the held to maturity portfolio with a cost of
$992,905 and an unrealized loss of $756,051 at September 30,
2009.  Several financial institutions have reported significant
write-downs of the value of mortgage-related and trust preferred
securities.  Management has considered the severity and duration of
the unrealized losses within the Company’s collateralized mortgage obligations
and trust preferred securities portfolios, and evaluated recent events specific
to the issuers of these securities and their industries, as well as external
credit ratings and downgrades thereto. Based on these considerations and
evaluations, management does not believe that any of the Company’s
collateralized mortgage obligations or trust preferred securities are
other-than-temporarily impaired as of September 30, 2009.  Certain of
these types of securities may also not be marketable except at significant
discounts.  While management of the Company is, as of the date of this
report, unaware of any other-than-temporarily impairment in the Company’s
portfolio of these securities, market, entity or industry conditions could
further deteriorate and result in the recognition of future impairment losses
related to these securities.
  19
  Earnings
Analysis
  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 77.9% of the Company’s net revenues for the three-month
period ended September 30, 2009 and 81.4% of net revenues for the three-month
period ended September 30, 2008. Net interest income also depends upon the
relative amount of interest-earning assets, interest-bearing liabilities, and
the interest rate earned or paid on them.
  The
Company’s net interest income increased by $161,839, or 3.9%, to $4,349,529 for
the three months ended September 30, 2009 from the $4,187,690 reported for the
three months ended September 30, 2008. The increase in net interest income was
attributable to the increase in average interest earning assets , which was more
than sufficient to offset the reduced interest spread and margin.
  Average
interest earning assets increased by $137,751,641, or 30.1%, to $594,903,969 for
the quarter ended September 30, 2009 from $457,152,328 for the quarter ended
September 30, 2008.  Overall, the yield on interest earning assets on
a tax-equivalent basis decreased 145 basis points to 5.02% for the quarter ended
September 30, 2009 when compared to 6.47% for the quarter ended September 30,
2008.
  Average
interest bearing liabilities increased by $127,994,830 or 33.3%, to $512,431,539
for the quarter ended September 30, 2009 from $384,436,709 for the quarter ended
September 30, 2008.  Overall, the cost of total interest bearing
liabilities decreased 90 basis points to 2.41% for the three months ended
September 30, 2009 compared to 3.31% for the three months ended September 30,
2008.
  The net
interest margin (on a tax-equivalent basis), which is net interest income
divided by average interest earning assets, was 2.87% for the three months ended
September 30, 2009 compared to 3.61% the three months ended September 30,
2008.
  Non-Interest
Income
  Total
non-interest income for the three months ended September 30, 2009 was
$1,233,197, an increase of $276,423, or 28.9%, over non-interest income of
$956,774 for the three months ended September 30, 2008.
  Service
charges on deposit accounts represents a significant source of non-interest
income. Service charge revenues decreased by $32,205, or 12.5%, to $225,772 for
the three months ended September 30, 2009 from the $257,977 for the three months
ended September 30, 2008. This decrease was the result of a lower volume of
uncollected funds and overdraft fees collected on deposit accounts during the
third quarter of 2009 compared to the third quarter of 2008.
  Gain on
sales of loans held for sale increased by $298,649, or 100.1%, to $596,991 for
the three months ended September 30, 2009 when compared to $298,342 for the
three months ended September 30, 2008.  The Bank sells both
residential mortgage loans and SBA loans in the secondary market.  The
volume of mortgage loan sales increased significantly for the third quarter of
2009 compared to the third quarter of 2008 due primarily to the low level of
interest rates in 2009.
  Non-interest
income also includes income from bank-owned life insurance (“BOLI”), which
amounted to $98,886 for the three months ended September 30, 2009 compared to
$97,901 for the three months ended September 30, 2008. The Bank purchased
tax-free BOLI assets to partially offset the cost of employee benefit plans and
reduced the Company’s overall effective tax rate.
  The Bank
also generates non-interest income from a variety of fee-based services. These
include safe deposit box rental, wire transfer service fees and Automated Teller
Machine fees for non-Bank customers. Increased customer demand for these
services contributed to the other income component of non-interest income
amounting to $311,548 for the three months ended September 30, 2009, compared to
$302,554 for the three months ended September 30, 2008.
  20
  Non-Interest
Expense
  Non-interest
expenses increased by $441,280, or 11.3%, to $4,350,106 for the three months
ended September 30, 2009 from $3,908,826 for the three months ended September
30, 2008. The following table presents the major components of non-interest
expenses for the three months ended September 30, 2009 and 2008.
  Non-interest
      ExpensesThree
      months ended September 30,2009
              
              
              2008Salaries
      and employee benefits
              
              $
              2,595,934
              
              
              $
              2,177,318Occupancy
      expenses
              
              
              464,799
              
              
              
              459,958Equipment
      expense
              
              
              151,080
              
              
              
              167,544Marketing
              
              
              22,938
              
              
              
              63,825Data
      processing services
              
              
              281,177
              
              
              
              230,618Regulatory,
      professional and other fees
              
              
              229,963
              
              
              
              264,122FDIC
      insurance expense
              
              
              183,386
              
              
              
              58,941Office
      expense
              
              
              134,517
              
              
              
              183,764All
      other expenses
              
              
              286,312
              
              
              
              302,736$
              4,350,106
              
              
              $
              3,908,826
 
  Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $418,616, or 19.2%, to $2,595,934 for the three months
ended September 30, 2009 compared to $2,177,318 for the three months ended
September 30, 2008. The increase in salaries and employee benefits for the three
months ended September 30, 2009 was a result of an increase in the number of
employees, regular merit increases and increased health care costs. Staffing
levels overall increased to 122 full-time equivalent employees at September 30,
2009 as compared to 112 full-time equivalent employees at September 30,
2008.
  The cost
of FDIC deposit insurance has increased from $58,941 for the three months ended
September 30, 2008 to $183,386 for the three months ended September 30,
2009.  The FDIC has recently increased significantly the assessment
rate for deposit insurance industry-wide.
  Data
processing services increased by $50,559, or 21.9%, to $281,177 for the three
months ended September 30, 2009 compared to $230,618 for the three months ended
September 30, 2008.  The increase in expense was primarily
attributable to increased costs in enhancing the Bank’s data security
systems.
  An
important financial services industry productivity measure is the efficiency
ratio. The efficiency ratio is calculated by dividing total operating expenses
by net interest income plus non-interest income. An increase in the efficiency
ratio indicates that more resources are being utilized to generate the same or
greater volume of income, while a decrease would indicate a more efficient
allocation of resources.  The Company’s efficiency ratio increased to
77.9% for the three months ended September 30, 2009, compared to 76.0% for the
three months ended September 30, 2008.  The increase in the efficiency
ratio is due to the above-noted increases in non-interest expenses.
  Income
Taxes
  Income
tax expense was $106,386 for the three months ended September 30, 2009 compared
to $278,244 for the three months ended September 30, 2008.  The third
quarter 2009 reduced tax expense as compared to the same period in 2008 was
primarily due to (1) a significantly lower level of pretax income in the third
quarter of 2009 compared with the third quarter of 2008 and (2) the reversal in
the third quarter of 2009 of an over-accrual in 2006 and 2007 of income taxes
that coincided with the completion of an Internal Revenue Service examination of
the Company’s 2006 and 2007 Federal income tax returns.
  During
June 2009, the Internal Revenue Service completed an examination of the
Company’s 2007 and 2006 Federal tax returns and issued its Revenue Agent Report
on September 30, 2009.  The Company had deferred the annual process of
adjusting the recorded Federal and State liability balances pending the
completion of the examination, which began in September 2008.  The
examination adjustments were included in this annual process of adjusting
recorded liabilities with balances per the tax returns and resulted in
over-accrued Federal and State liabilities being reversed by a credit to income
tax expense during the third quarter of 2009.
 
 21
  Nine
Months Ended September 30, 2009 Compared to the Nine Months Ended September 30,
2008
  Summary
  The
Company realized net income of $1,632,534 for the nine months ended September
30, 2009, a decrease of $669,903, or 29.1%, from the $2,302,437 reported for the
nine months ended September 30, 2008.  The decrease is due primarily
to increases in non-interest expenses relating to other operating expenses
(primarily expenses related to operating the Bank’s other real estate owned
properties), FDIC insurance premiums and salaries and employee benefits and to
an increase in the loan loss provision for the nine months ended September 30,
2009, which resulted from a higher level of non-performing assets during the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008.  Net income for the nine months ended September 30, 2009
benefited from reduced income tax expenses during the nine month period ended
September 30, 2009 compared to the nine month period ended September 30, 2008
and increases in total interest income and non-interest income when compared to
the nine months ended September 30, 2008.  Net income per diluted
common share was $0.26 for the nine months ended September 30, 2009 compared to
net income  per diluted common share of $0.54 for the nine months
ended September 30, 2008.  The reduction in net income per diluted
common share for the nine months ended September 30, 2009 was also impacted by
the dividends on, and discount accretion on, preferred stock of the Company
issued to the Treasury on December 23, 2008.  All prior year share
information has been adjusted for the effect of a 5% stock dividend declared on
December 18, 2008 and paid on February 2, 2009 to shareholders of record on
January 20, 2009.
  Key
performance ratios declined for the nine months ended September 30, 2009 due to
lower net income for that period compared to the nine months ended September 30,
2008.  Return on average assets and return on average equity were
0.36% and 3.89% for the nine months ended September 30, 2009 compared to 0.64%
and 7.36%, respectively, for the nine months ended September 30,
2008.
  A
significant factor impacting the Company’s net interest income has been the
continued low level of market interest rates on loans and the resulting
compression of the Company’s net interest margin.  The net interest
margin for the nine months ended September 30, 2009 was 3.08% as compared to the
3.69% net interest margin recorded for the nine months ended September 30, 2008,
representing a reduction of 61 basis points.  The Federal Reserve has
decreased the discount rate by 400 basis points since January 1, 2008, which has
resulted in lower market interest rates on loans.  Since the majority
of the Company’s interest earning assets earn at floating rates, these interest
rate reductions have resulted in a decreased yield.  The Company will
continue to closely monitor the mix of earning assets and funding sources to
maximize net interest income during this challenging interest rate
environment.
  The
Company has investments in federal agency-backed collateralized mortgage
obligations and trust preferred securities.  The Company does not have
any investments in private issuer collateralized mortgage
obligations.  At September 30, 2009, the Company held collateralized
mortgage obligations with an aggregate market value of $5,497,293 in the
available for sale portfolio.  These securities had an unrealized loss
of $41,444.  The Company held trust preferred securities in the
available for sale portfolio with an aggregate market value of $1,595,591 and an
unrealized loss of $861,031 at September 30, 2009.  The Company also
held trust preferred securities in the held to maturity portfolio with a cost of
$992,905 and an unrealized loss of $756,051 at September 30,
2009.  Several financial institutions have reported significant
write-downs of the value of mortgage-related and trust preferred
securities.  Management has considered the severity and duration of
the unrealized losses within the Company’s collateralized mortgage obligations
and trust preferred securities portfolios, and evaluated recent events specific
to the issuers of these securities and their industries, as well as external
credit ratings and downgrades thereto. Based on these considerations and
evaluations, management does not believe that any of the Company’s
collateralized mortgage obligations or trust preferred securities are
other-than-temporarily impaired as of September 30, 2009.  Certain of
these types of securities may also not be marketable except at significant
discounts.  While management of the Company is, as of the date of this
report, unaware of any other-than-temporarily impairment in the Company’s
portfolio of these securities, market, entity or industry conditions could
further deteriorate and result in the recognition of future impairment losses
related to these securities.
 
 22
  Earnings
Analysis
 
 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 81.2% of the Company’s net revenues for the nine month
period ended September 30, 2009 and 82.7% of net revenues for the nine-month
period ended September 30, 2008. Net interest income also depends upon the
relative amount of average interest-earning assets, average interest-bearing
liabilities, and the interest rate earned or paid on them.
  The
following table sets forth the Company’s consolidated average balances of
assets, liabilities and shareholders’ equity as well as interest income and
expense on related items, and the Company’s average yield or rate for the nine
month periods ended September 30, 2009 and 2008, respectively. The average rates
are derived by dividing interest income and expense by the average balance of
assets and liabilities, respectively.
  Average
      Balance Sheets with Resultant Interest and Rates(yields
      on a tax-equivalent basis)
              
              Nine months ended September 30,
      2009
              
              
              Nine months ended September 30,
      2008Average
                Balance
              
              
              Interest
              
              
              Average
                Rate
              
              
              Average
                Balance
              
              
              Interest
              
              
              Average
                RateAssets:Federal
      Funds Sold/Short-Term Investments
              
              $
              37,265,145
              
              
              
              73,799
              
              
              
              0.26
              %
              
              $
              5,984,401
              
              
              $
              102,571
              
              
              
              2.28
              %Investment
      Securities:Taxable
              
              
              115,326,937
              
              
              
              3,630,530
              
              
              
              4.21
              %
              
              
              77,102,296
              
              
              
              2,884,520
              
              
              
              4.98
              %Tax-exempt
              
              
              12,767,138
              
              
              
              552,495
              
              
              
              5.79
              %
              
              
              14,724,025
              
              
              
              629,592
              
              
              
              5.70
              %Total
              
              
              128,094,075
              
              
              
              4,183,025
              
              
              
              4.37
              %
              
              
              91,826,321
              
              
              
              3,514,112
              
              
              
              5.10
              %Loan
      Portfolio:Construction
              
              
              90,940,471
              
              
              
              4,114,914
              
              
              
              6.05
              %
              
              
              120,390,986
              
              
              
              6,420,158
              
              
              
              7.10
              %Residential
      real estate
              
              
              10,974,870
              
              
              
              502,757
              
              
              
              6.12
              %
              
              
              10,396,339
              
              
              
              490,967
              
              
              
              6.29
              %Home
      Equity
              
              
              14,738,216
              
              
              
              651,614
              
              
              
              5.91
              %
              
              
              15,187,852
              
              
              
              734,246
              
              
              
              6.44
              %Commercial
      and commercial real estate
              
              
              140,412,371
              
              
              
              7,302,907
              
              
              
              6.95
              %
              
              
              125,655,843
              
              
              
              6,922,897
              
              
              
              7.34
              %Mortgage
      warehouse lines
              
              
              118,247,907
              
              
              
              4,061,095
              
              
              
              4.59
              %
              
              
              51,543,319
              
              
              
              1,870,119
              
              
              
              4.83
              %Installment
              
              
              792,600
              
              
              
              47,187
              
              
              
              7.96
              %
              
              
              1,338,486
              
              
              
              79,240
              
              
              
              7.89
              %All
      Other Loans
              
              
              32,750,134
              
              
              
              1,714,808
              
              
              
              7.00
              %
              
              
              26,743,585
              
              
              
              1,818,322
              
              
              
              9.06
              %Total
              
              
              408,856,569
              
              
              
              18,395,282
              
              
              
              6.02
              %
              
              
              351,256,410
              
              
              
              18,335,949
              
              
              
              6.95
              %Total
      Interest-Earning Assets
              
              
              574,215,789
              
              
              
              22,652,106
              
              
              
              5.27
              %
              
              
              449,067,132
              
              
              
              21,952,632
              
              
              
              6.51
              %Allowance
      for Loan Losses
              
              
              (4,079,414
              )
              
              
              
              
              
              
              
              
              
              
              (3,565,315
              )Cash
      and Due From Bank
              
              
              19,400,021
              
              
              
              
              
              
              
              
              
              
              
              11,661,357Other
      Assets
              
              
              20,705,358
              
              
              
              
              
              
              
              
              
              
              
              21,976,659Total
      Assets
              
              $
              610,241,754
              
              
              
              
              
              
              
              
              
              
              $
              479,139,833Interest-Bearing
      Liabilities:Money
      Market and NOW Accounts
              
              $
              101,004,129
              
              
              $
              1,482,720
              
              
              
              2.59
              %
              
              $
              88,728,412
              
              
              $
              1,661,505
              
              
              
              2.49
              %Savings
      Accounts
              
              
              138,934,533
              
              
              
              2,104,568
              
              
              
              2.03
              %
              
              
              78,154,933
              
              
              
              1,465,495
              
              
              
              2.50
              %Certificates
      of Deposit
              
              
              180,057,804
              
              
              
              3,952,472
              
              
              
              2.93
              %
              
              
              143,165,745
              
              
              
              4,468,593
              
              
              
              4.16
              %Other
      Borrowed Funds
              
              
              31,161,905
              
              
              
              1,060,986
              
              
              
              4.55
              %
              
              
              33,553,650
              
              
              
              1,151,511
              
              
              
              4.57
              %Trust
      Preferred Securities
              
              
              18,557,000
              
              
              
              803,455
              
              
              
              5.71
              %
              
              
              18,557,000
              
              
              
              799,742
              
              
              
              5.76
              %Total
      Interest-Bearing Liabilities
              
              
              469,715,371
              
              
              
              9,404,201
              
              
              
              2.68
              %
              
              
              362,159,740
              
              
              
              9,546,846
              
              
              
              3.52
              %Net
      Interest Spread
              
              
              
              
              
              
              
              
              
              
              2.59
              %
              
              
              
              
              
              
              
              
              
              
              2.99
              %Demand
      Deposits
              
              
              77,988,666
              
              
              
              
              
              
              
              
              
              
              
              69,991,752Other
      Liabilities
              
              
              6,379,044
              
              
              
              
              
              
              
              
              
              
              
              5,194,861Total
      Liabilities
              
              
              554,083,081
              
              
              
              
              
              
              
              
              
              
              
              437,366,353Shareholders’
      Equity
              
              
              56,158,673
              
              
              
              
              
              
              
              
              
              
              
              41,773,480Total
      Liabilities and Shareholders’
                Equity
              
              $
              610,241,754
              
              
              
              
              
              
              
              
              
              
              $
              479,139,833Net
      Interest Margin
              
              
              
              
              
              $
              13,247,905
              
              
              
              3.08
              %
              
              
              
              
              
              $
              12,405,786
              
              
              
              3.69
              %
 
 23
 
 The
Company’s net interest income increased by $867,125, or 7.1%, to $13,068,718 for
the nine months ended September 30, 2009 from the $12,201,593 reported for the
nine months ended September 30, 2008. The increase in net interest income was
attributable to the increase in average interest earnings assets, which was more
than sufficient to offset the reduced interest spread and margin.
  Average
interest earning assets increased by $125,148,657, or 27.9%, to $574,215,789 for
the nine month period ended September 30, 2009 from $449,067,132 for the nine
month period ended September 30, 2008.  Overall, the yield on interest
earning assets, on a tax-equivalent basis, decreased 124 basis points to 5.27%
for the nine month period ended September 30, 2009 when compared to 6.51% for
the nine month period ended September 30, 2008.
  Average
interest bearing liabilities increased by $107,555,631 or 29.7%, to $469,715,371
for the nine month period ended September 30, 2009 from $362,159,740 for the
nine month period ended September 30, 2008.  Overall, the cost of
total interest bearing liabilities decreased 84 basis points to 2.68% for the
nine months ended September 30, 2009 compared to 3.52% for the nine months ended
September 30, 2008.
  The net
interest margin (on a tax-equivalent basis), which is net interest income
divided by average interest earning assets, was 3.08% for the nine months ended
September 30, 2009 compared to 3.69% the nine months ended September 30,
2008.
  Non-Interest
Income
  Total
non-interest income for the nine months ended September 30, 2009 was $3,023,050,
an increase of $474,995, or 18.6%, over non-interest income of $2,548,055 for
the nine months ended September 30, 2008.
  Service
charges on deposit accounts represents a significant source of non-interest
income. Service charge revenues increased by $39,105, or 6.1%, to $680,526 for
the nine months ended September 30, 2009 from the $641,421 for the nine months
ended September 30, 2008. This increase was the result of a higher volume of
uncollected funds and overdraft fees collected on deposit accounts during the
first nine months of 2009 compared to the first nine months of
2008.
  Gain on
sales of loans held for sale increased by $316,232 or 35.4%, to $1,210,177 for
the nine months ended September 30, 2009 when compared to $893,945 for the nine
months ended September 30, 2008.  The Bank sells both residential
mortgage loans and SBA loans in the secondary market.  The volume of
mortgage loan sales increased for the first nine months of 2009 compared to the
first nine months of 2008 due to the high level of mortgage refinance activity
as a result of the lower level of interest rates in the 2009
period.
  Non-interest
income also includes income from bank-owned life insurance (“BOLI”), which
amounted to $292,213 for the nine months ended September 30, 2009 compared to
$282,546 for the nine months ended September 30, 2008. The Bank purchased
tax-free BOLI assets to partially offset the cost of employee benefit plans and
reduced the Company’s overall effective tax rate.
  The Bank
also generates non-interest income from a variety of fee-based services. These
include safe deposit box rental, wire transfer service fees and Automated Teller
Machine fees for non-Bank customers. Increased customer demand for these
services contributed to the other income component of non-interest income
amounting to $840,134 for the nine months ended September 30, 2009, compared to
$730,143 for the nine months ended September 30, 2008.
 
 24
  Non-Interest
Expense
  Non-interest
expenses increased by $2,221,967, or 20.3%, to $13,162,285 for the nine months
ended September 30, 2009 from $10,940,318 for the nine months ended September
30, 2008. The following table presents the major components of non-interest
expenses for the nine months ended September 30, 2009 and 2008.
  Non-interest
      ExpensesNine
      months ended September 30,2009
              
              
              2008Salaries
      and employee benefits
              
              $
              7,117,329
              
              
              $
              6,228,445Occupancy
      expenses
              
              
              1,360,471
              
              
              
              1,324,396Equipment
      expense
              
              
              473,518
              
              
              
              458,919Marketing
              
              
              105,152
              
              
              
              203,359Data
      processing services
              
              
              817,057
              
              
              
              660,210Regulatory,
      professional and other fees
              
              
              933,566
              
              
              
              684,005FDIC
      insurance expense
              
              
              987,169
              
              
              
              130,602Office
      expense
              
              
              405,552
              
              
              
              469,461All
      other expenses
              
              
              962,471
              
              
              
              780,921$
              13,162,285
              
              
              $
              10,940,318
 
 Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $888,884, or 14.3%, to $7,117,329 for the nine months
ended September 30, 2009 compared to $6,228,445 for the nine months ended
September 30, 2008. The increase in salaries and employee benefits for the nine
months ended September 30, 2009 was a result of an increase in the number of
employees, regular merit increases and increased health care costs. Staffing
levels overall increased to 122 full-time equivalent employees at September 30,
2009 as compared to 112 full-time equivalent employees at September 30,
2008.
  Regulatory,
professional and other fees increased by $249,561, or 36.5%, to $933,566 for the
nine months ended September 30, 2009 compared to $684,005 for the nine months
ended September 30, 2008.  During the first nine months of 2009, the
Company incurred additional legal fees primarily in connection with the recovery
of non-performing asset balances.  The Bank also incurred additional
fees in connection with examinations performed by independent consultants during
2009 to assess the effectiveness of internal controls as required by the
Sarbanes-Oxley Act.
  The cost
of FDIC deposit insurance has increased to $987,169 for the nine months ended
September 30, 2009 from $130,602 for the nine months ended September 30,
2008.  The FDIC has recently increased significantly the assessment
rate for deposit insurance industry-wide.  In addition, the second
quarter of 2009, the FDIC announced that a special assessment to replenish the
deposit insurance fund which was collected on September 30, 2009.  The
special assessment was imposed on each insured institution’s total assets minus
its Tier 1 Capital and was reported in its June 30, 2009 Report of
Condition.  The special assessment was capped at 10 basis points times
the institution’s assessment base as reported on June 30, 2009.  Under
U.S. generally accepted accounting principals, the full amount of the estimated
special assessment was accrued as a liability and an expense in the second
quarter of 2009.
  Data
processing services increased by $156,847, or 23.8%, to $817,057 for the nine
months ended September 30, 2009 compared to $660,210 for the nine months ended
September 30, 2008.  The increase in expense was primarily
attributable to increased costs in enhancing the Bank’s data security
systems.
  All other
expenses increased by $181,550, or 23.2%, to $962,471 for the nine months ended
September 30, 2009 compared to $780,921 for the nine months ended September 30,
2008.  The largest cause for the current year increase was due to the
costs incurred to maintain the Bank’s other real estate owned
properties.  Other Real Estate owned expenses increased by $41,261 to
$102,427 for the nine months ended September 30, 2009 compared to $61,166 for
the nine months ended September 30, 2008.  Additional current year
increases occurred in correspondent bank fees, maintenance agreements and ATM
operating expenses, All other expenses are comprised of a variety of operating
expenses and fees as well as expenses associated with lending
activities.
 
 25
  An
important financial services industry productivity measure is the efficiency
ratio. The efficiency ratio is calculated by dividing total operating expenses
by net interest income plus non-interest income. An increase in the efficiency
ratio indicates that more resources are being utilized to generate the same or
greater volume of income, while a decrease would indicate a more efficient
allocation of resources.  The Company’s efficiency ratio increased to
81.8% for the nine months ended September 30, 2009, compared to 74.2% for the
nine months ended September 30, 2008.  The increase in the efficiency
ratio is due to the above-noted increases in non-interest expenses.
  Income
Taxes
  The
Company had income tax expense of $3,949 for the nine months ended September 30,
2009 compared to income tax expense of $971,893 for the nine months ended
September 30, 2008.  The reduced income tax expense for the nine
months ended September 30, 2009 was primarily due to (1) a significantly lower
level of pretax income in the first nine months of 2009 compared with the first
nine months of 2008 and (2) the reversal of an over-accrual of income taxes
during 2006 and 2007 that coincided with the completion of an Internal Revenue
Service examination of the Company’s 2006 and 2007 Federal income tax
returns.
  During
June 2009, the Internal Revenue Service completed an examination of the
Company’s 2006 and 2007 Federal tax returns and issued its Revenue Agent Report
on June 30, 2009.  The Company had deferred the annual process of
adjusting the recorded Federal and State liability balances pending the
completion of the examination which began in September 2008.  The
examination adjustments were included in this annual process of adjusting
recorded liabilities with balances per the tax returns and resulted in
over-accrued Federal and State liabilities being reversed by a credit to income
tax expense during the nine month period ended September 30, 2009.
  Financial
Condition
  September
30, 2009 Compared with December 31, 2008
  Total
consolidated assets at September 30, 2009 were $667,640,833, representing an
increase of $121,354,304 or 22.2%, from $546,286,529 at December 31,
2008.  The asset growth was focused in cash and cash equivalents,
loans held for sale, and in our securities portfolio.  The primary
funding for asset growth came from deposits.
  Cash
and Cash Equivalents
  Cash and
cash equivalentsat September 30, 2009
totaled $87,338,650 compared to $14,333,119 at December 31, 2008. Cash and cash
equivalents at September 30, 2009 consisted of cash and due from banks of
$87,327,270 and Federal funds sold/short term investments of $11,380. The
corresponding balances at December 31, 2008 were $14,321,777 and $11,342,
respectively.  The increase was due primarily to timing of cash flows
related to the Bank’s business activities. Management has invested this
liquidity as market rates have improved subsequent to September 30, 2009.
Aggregate investment security purchases of $45,750,000 were made in October
2009.
  Loans
Held for Sale
  Loans
held for sale at September 30, 2009 amounted to $16,786,717 compared to
$5,702,082 at December 31, 2008. The primary cause for this increase was a
significantly higher volume of mortgage loan refinance activity during the first
nine months of 2009 compared with the level of activity during the first nine
months of 2008. As indicated in the Consolidated Statement of Cash Flows, the
amount of loans originated for sale was $121,742,676 for the first nine months
of 2009 compared with $65,535,874 for the first nine months of 2008. This
increased volume has lengthened the operational processing time for the loans as
they migrate from origination to ultimate funding by investors.
 
 26
  Investment
Securities
  Investment
securities represented 25.4% of total assets at September 30, 2009 and 23.8% at
December 31, 2008. Total investment securities increased $39,369,151, or 30.3%,
to $169,396,751 at September 30, 2009 from $130,027,600 at December 31,
2008.  Due to the continued uncertain economic environment during the
first nine months of 2009, combined with strong deposit growth, funds were used
primarily to purchase investment securities at a reduced net interest spread
than was generally available if the funds were utilized by lending
activities.
  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 and mortgage-backed securities, with
smaller amounts of collateralized mortgage obligations, municipal obligations,
corporate debt and restricted stock.  Activity in this portfolio is
undertaken primarily to manage liquidity and interest rate risk and to take
advantage of market conditions that create more economically attractive
returns.  At September 30, 2009, securities available for sale totaled
$133,257,485 which is an increase of $39,780,462 or 42.6%, from securities
available for sale totaling $93,477,023 at December 31, 2008.
  At
September 30, 2009, the securities available for sale portfolio had net
unrealized gains of $2,077,259, compared to net unrealized gains of $926,166 at
December 31, 2008.  These unrealized gains are reflected, net of tax,
in shareholders’ equity as a component of Accumulated 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 U.S. Government
and Federal agency securities, mortgage-backed securities and obligations of
states and political subdivisions, with a smaller amount of corporate debt
obligations.  At September 30, 2009, securities held to maturity were
$36,139,266, a decrease of $411,311, or 1.1%, from $36,550,577 at December 31,
2008.  The fair value of the held to maturity portfolio at September
30, 2009 was $36,125,840, resulting in a net unrealized loss of
$13,426.
  During
the nine months ended September 30, 2009, the Company purchased securities in
the amounts of $78,656,269 and $1,619,834 for the available for sale portfolio
and held to maturity portfolio, respectively.  During this same
period, $42,033,265 in proceeds from maturities and repayments were
received.
  Loans
  The loan
portfolio, which represents the Company’s largest asset, is a significant source
of both interest and fee income. Elements of the loan portfolio are subject to
differing levels of credit and interest rate risk. The Company’s primary lending
focus continues to be mortgage warehouse lines, construction loans, commercial
loans, owner-occupied commercial mortgage loans and tenanted commercial real
estate loans.
  The
following table sets forth the classification of loans by major category at
September 30, 2009 and December 31, 2008.
 
 Loan
      Portfolio Composition
              
              September
      30, 2009
              
              
              December
      31, 2008Component
              
              Amount
              
              
              %
                of
      total
              
              Amount
              
              
              %
                of
      totalConstruction
      loans
              
              $
              86,083,913
              
              
              
              23
              %
              
              $
              94,163,997
              
              
              
              25
              %Residential
      real estate loans
              
              
              10,324,684
              
              
              
              3
              %
              
              
              11,078,402
              
              
              
              3
              %Commercial
      business
              
              
              53,146,183
              
              
              
              14
              %
              
              
              57,528,879
              
              
              
              15
              %Commercial
      real estate
              
              
              105,919,401
              
              
              
              28
              %
              
              
              90,904,418
              
              
              
              24
              %Mortgage
      warehouse lines
              
              
              104,123,299
              
              
              
              28
              %
              
              
              106,000,231
              
              
              
              28
              %Loans
      to individuals
              
              
              15,375,875
              
              
              
              4
              %
              
              
              16,797,194
              
              
              
              5
              %Deferred
      loan fees and costs
              
              
              530,037
              
              
              
              0
              %
              
              
              647,673
              
              
              
              0
              %All
      other loans
              
              
              219,904
              
              
              
              0
              %
              
              
              227,622
              
              
              
              0
              %$
              375,723,296
              
              
              
              100
              %
              
              $
              377,348,416
              
              
              
              100
              %
 
 The loan
portfolio decreased by $1,625,120, or 0.4%, to $375,723,296 at September 30,
2009, compared to $377,348,416 at December 31, 2008.  The construction
loan portfolio decreased by $8,080,084, or 8.6%, to $86,083,913 at September 30,
2009 compared to $94,163,997 at December 31, 2008.  This decrease at
September 30, 2009 compared to December 31, 2008 was a direct result of the
current uncertain New Jersey economic conditions and management’s actions to
allow the higher risk construction loan portfolio to run off while
simultaneously focusing efforts to building the balance of the lesser risk
mortgage warehouse lines.
 
 27
  The
commercial real estate portfolio increased by $15,014,983, or 16.5%, to
$105,919,401 at September 30, 2009 compared to $90,904,418 at December 31,
2008.  The current year increase is primarily due to six new loans
originated during the period; each of which underwent the Bank’s underwriting
procedures to ascertain the financial strength and credit worthiness of the
borrower.
  In
January 2008, the Bank’s Mortgage Warehouse Funding Group introduced a revolving
line of credit that is available to licensed mortgage banking companies (the
“Warehouse Line of Credit”) and that has been successful from
inception.  The Warehouse Line of Credit is used by mortgage bankers
to originate one-to-four family residential mortgage loans that are pre-sold to
the secondary mortgage market, which includes state and national banks, national
mortgage banking firms, insurance companies and government-sponsored
enterprises, including the Federal National Mortgage Association (“FNMA”), the
Federal Home Loan Mortgage Corporation (“FHLMC”) and others.  On
average, an advance under the Warehouse Line of Credit remains outstanding for a
period of less than 30 days, with repayment coming directly from the sale of the
loan into the secondary mortgage market.  Interest (the spread between
our borrowing cost and the rate charged to the client) and a transaction fee are
collected by the Bank at the time of repayment.  Additionally,
customers of the Warehouse Lines of Credit are required to maintain deposit
relationships with the Bank that, on average, represent 10% to 15% of the loan
balances.  The Bank had $104,123,299 and $106,000,231 in outstanding
Warehouse Line of Credit advances at September 30, 2009 and December 31, 2008,
respectively.
  The
ability of the Company to enter into larger loan relationships and management’s
philosophy of relationship banking are key factors in the Company’s strategy for
loan growth.  The ultimate collectability of the loan portfolio and
recovery of the carrying amount of real estate are subject to changes in the
Company’s market region’s economic environment and real estate
market.
  Non-Performing
Assets
  Non-performing
assets consist of non-performing loans and other real estate owned.
Non-performing loans are composed of (1) loans on a non-accrual basis, (2) loans
which are contractually past due 90 days or more as to interest and principal
payments but have not been classified as non-accrual, and (3) loans whose terms
have been restructured to provide a reduction or deferral of interest on
principal because of a deterioration in the financial position of the
borrower.
  The
Bank’s policy with regard to non-accrual loans is that generally, loans are
placed on a non-accrual status when they are 90 days past due, unless these
loans are well secured and in the process of collection or, regardless of the
past due status of the loan, when management determines that the complete
recovery of principal or interest is in doubt.  Consumer loans are
generally charged off after they become 120 days past due.  Subsequent
payments on loans in non-accrual status are credited to income only if
collection of principal is not in doubt.
  Non-performing
loans increased by $1,669,048 to $5,020,825 at September 30, 2009 from
$3,351,777 at December 31, 2008, as the disruptions in the financial system and
the real estate market during the past two years have negatively affected
certain of the Bank’s construction borrowers.  The major segments of
non-accrual loans consist of land designated for residential development where
the required approvals to begin construction have been received, commercial
loans which are in the process of collection and residential real estate which
is either in foreclosure or under contract to close after September 30,
2009.  The table below sets forth non-performing assets and risk
elements in the Bank’s portfolio for the periods indicated.  As the
table demonstrates, non-performing loans to total loans increased to 1.34% at
September 30, 2009 from 0.89% at December 31, 2008.  Loan quality is
still considered to be sound. This was accomplished through quality loan
underwriting, a proactive approach to loan monitoring and aggressive workout
strategies.
 
 28
 
 Non-Performing
      Assets and Loans
              
              September
      30,
              
              
              December
      31,2009
              
              
              2008Non-Performing
      loans:Loans
      90 days or more past due and still accruing
              
              $
              5,974
              
              
              $
              0Non-accrual
      loans
              
              
              5,014,851
              
              
              
              3,351,777Total
      non-performing loans
              
              
              5,020,825
              
              
              
              3,351,777Other
      real estate owned
              
              
              2,711,043
              
              
              
              4,296,536Total
      non-performing assets
              
              $
              7,731,868
              
              
              $
              7,648,313Non-performing
      loans to total loans
              
              
              1.34
              %
              
              
              0.89
              %Non-performing
      assets to total assets
              
              
              1.16
              %
              
              
              1.40
              %
 
 Non-performing
assets increased by $83,555 to $7,731,868 at September 30, 2009 from $7,648,313
at December 31, 2008.  Other real estate owned decreased by $1,585,493
to $2,711,043 at September 30, 2009 from $4,296,536 at December 31, 2008. During
the first nine months of 2009, the Bank acquired other real estate owned
securing loans in the principal amount of $1,828,687 in full satisfaction of
loans in foreclosure. During the first nine months of 2009, management was
successful in selling $3,815,171 of other real estate owned without incurring
any losses. The Bank continues to complete the remaining units of an 18-unit
condominium project for which it has, as of September 30, 2009, commitments from
individual buyers to purchase.
  Non-performing
assets represented 1.16% of total assets at September 30, 2009 and 1.40% at
December 31, 2008.
  The Bank
had no loans classified as restructured loans at September 30, 2009 or December
31, 2008.
  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 the estimated selling costs or the initially recorded amount. The amount,
if any, by which the recorded amount of the loan exceeds the fair market value
of the collateral is a loss which is charged to the allowance for loan losses at
the time of foreclosure or repossession. Resolution of a past-due loan can be
delayed if the borrower files a bankruptcy petition because collection action
cannot be continued unless the Company first obtains relief from the automatic
stay provided by the bankruptcy code.
  Allowance for Loan Losses and Related
Provision
  The
allowance for loan losses is maintained at a level sufficient to absorb
estimated credit losses in the loan portfolio as of the date of the financial
statements.  The allowance for loan losses is a valuation reserve
available for losses incurred or inherent in the loan portfolio and other
extensions of credit.  The determination of the adequacy of the
allowance for loan losses is a critical accounting policy of the
Company.
  The
Company’s primary lending emphasis is the origination of commercial and
commercial real estate loans.  Based on the composition of the loan
portfolio, the primary risks inherent in it are deteriorating credit quality, a
decline in the economy, and a decline in New Jersey real estate market
values.  Any one or a combination of these events may adversely affect
the loan portfolio and may result in increased delinquencies, loan losses and
increased future provision levels.
  All, or
part, of the principal balance of commercial and commercial real estate loans
and construction loans are charged off to the allowance as soon as it is
determined that the repayment of all, or part, of the principal balance is
highly unlikely.  Consumer loans are generally charged off no later
than 120 days past due on a contractual basis, earlier in the event of
bankruptcy, or if there is an amount deemed uncollectible.Because all
identified losses are immediately charged off, no portion of the allowance for
loan losses is restricted to any individual loan or groups of loans, and the
entire allowance is available to absorb any and all loan losses.
 
 29
  Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan losses has been charged against earnings in an
amount necessary to maintain the allowance at a level that is adequate based on
management’s assessment of probable estimated losses.  The Company’s
methodology for assessing the adequacy of the allowance for loan losses consists
of several key elements.  These elements may include a specific
reserve for doubtful or high risk loans, an allocated reserve, and an
unallocated portion.
  The
Company consistently applies the following comprehensive
methodology.  During the quarterly review of the allowance for loan
losses, the Company considers a variety of factors that include:
  ·
              General
      economic conditions.
 ·
              Trends
      in charge-offs.
 ·
              Trends
      and levels of delinquent loans.
 ·
              Trends
      and levels of non-performing loans, including loans over 90 days
      delinquent.
 ·
              Trends
      in volume and terms of loans.
 ·
              Levels
      of allowance for specific classified
loans.
 ·
              Credit
      concentrations.
 
 The
specific reserve for high risk loans is established for specific commercial
loans, commercial real estate loans, and construction loans which have been
identified by management as being high risk or impaired loans.  A high
risk or impaired loan is assigned a doubtful risk rating grade because the loan
has not performed according to payment terms and there is reason to believe that
repayment of the loan principal in whole, or in part, is
unlikely.  The specific portion of the allowance is the total amount
of potential unconfirmed losses for such individual doubtful
loans.  To assist in determining the fair value of loan collateral,
the Company often utilizes independent third party qualified appraisal firms
which, in turn, employ their own criteria and assumptions that may include
occupancy rates, rental rates, and property expenses, among others.
  The
second category of reserves consists of the allocated portion of the
allowance.  The allocated portion of the allowance is determined by
taking pools of loans outstanding that have similar characteristics and applying
historical loss experience for each pool.  This estimate represents
the potential unconfirmed losses within the portfolio. Individual loan pools are
created for commercial and commercial real estate loans, construction loans, and
the various types of loans to individuals.  The historical estimation
for each loan pool is then adjusted to account for current conditions, current
loan portfolio performance, loan policy or management changes, or any other
factor which may cause future losses to deviate from historical
levels.
  During
the quarterly reviews, the Company may determine that an unallocated allowance
is appropriate.  The unallocated allowance is used to cover any
factors or conditions which may cause a potential loan loss but are not
specifically identifiable.  It is prudent to maintain an unallocated
portion of the allowance because no matter how detailed an analysis of potential
loan losses is performed, these estimates inherently lack
precision.  Management must make estimates using assumptions and
information which is often subjective and changing rapidly.  At
September 30, 2009, management believed that the allowance for loan losses 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.
 
 30
  The
following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
  Allowance
      for Loan Losses
              
              Nine
      Months
                Ended
                September
      30,
                2009
              
              
              Year
      Ended
                December
      31,
                2008
              
              
              Nine
      Months
                Ended
                September
      30,
                2008Balance,
      beginning of period
              
              $
              3,684,764
              
              
              $
              3,348,080
              
              
              $
              3,348,080Provision
      charged to operating expenses
              
              
              1,293,000
              
              
              
              640,000
              
              
              
              535,000Loans
      charged off:Construction
      loans
              
              
              (536,000
              )
              
              
              (53,946
              )
              
              
              (53,946
              )Residential
      real estate loans
              
              
              -
              
              
              
              (31,865
              )
              
              
              (31,865
              )Commercial
      and commercial real estate
              
              
              (334,636
              )
              
              
              (220,565
              )
              
              
              (71,436
              )Loans
      to individuals
              
              
              (1,973
              )
              
              
              -
              
              
              
              -Lease
      financing
              
              
              -
              
              
              
              -
              
              
              
              -All
      other loans
              
              
              -
              
              
              
              -
              
              
              
              -(872,609
              )
              
              
              (306,376
              )
              
              
              (157,247
              )Recoveries:Construction
      loans
              
              
              -
              
              
              
              -
              
              
              
              -Residential
      real estate loans
              
              
              -
              
              
              
              -
              
              
              
              -Commercial
      and commercial real estate
              
              
              1,559
              
              
              
              3,060
              
              
              
              2,776Loans
      to individuals
              
              
              5,200
              
              
              
              -
              
              
              
              -Lease
      financing
              
              
              -
              
              
              
              -
              
              
              
              -All
      other loans
              
              
              -
              
              
              
              -
              
              
              
              -6,759
              
              
              
              3,060
              
              
              
              2,776Net
      (charge offs)
              
              
              (865,850
              )
              
              
              (303,316
              )
              
              
              (154,471
              )Balance,
      end of period
              
              $
              4,111,914
              
              
              $
              3,684,764
              
              
              $
              3,728,609Loans:At
      period end
              
              $
              375,723,296
              
              
              $
              377,348,416
              
              
              $
              361,411,764Average
      during the period
              
              
              389,937,715
              
              
              
              340,666,744
              
              
              
              337,257,332Net
      annualized charge offs to average loans outstanding
              
              
              (0.30
              %)
              
              
              (0.09
              %)
              
              
              (0.06
              %)Allowance
      for loan losses to:Total
      loans at period end
              
              
              1.09
              %
              
              
              0.98
              %
              
              
              1.03
              %Non-performing
      loans
              
              
              81.90
              %
              
              
              109.93
              %
              
              
              150.23
              %
 
 Management
considers a complete review of the following specific factors in determining the
provisions for loan losses: historical losses by loan category, non-accrual
loans, problem loans as identified through internal classifications, collateral
values, and the growth and size of the loan portfolio.  In addition to
these factors, management takes into consideration current economic conditions
and local real estate market conditions.  Using this evaluation
process, the Company’s provision for loan losses was $1,293,000 for the nine
months ended September 30, 2009 and $535,000 for the nine months ended September
30, 2008.  While the risk profile of the loan portfolio was reduced by
a change in its composition via a $8,080,084 reduction in higher risk
construction loans, non-performing loans increased by $1,669,048. This increase
in both portfolio and non-performing loans necessitated the increased
provision.  Also, management replenished the reserves to compensate
for the current period net charge-offs as well as to take into consideration
that the real estate market conditions remained weak.  Net
charge-offs/recoveries amounted to a net charge-off of $865,850 for the nine
months ended September 30, 2009.
 
 At
September 30, 2009, the allowance for loan losses was $4,111,914 compared to
$3,684,764 at December 31, 2008, an increase of $427,150, or
11.6%.  The ratio of the allowance for loan losses to total loans at
September 30, 2009 and December 31, 2008 was 1.09% and 0.98%,
respectively.  The allowance for loan losses as a percentage of
non-performing loans was 81.90% at September 30, 2009, compared to 109.93% at
December 31, 2008. Management believes the quality of the loan portfolio remains
sound considering the state of the New Jersey economy and that the allowance for
loan losses is adequate in relation to credit risk exposure levels.
 
 31
  Deposits
  Deposits,
which include demand deposits (interest bearing and non-interest bearing),
savings deposits and time deposits, are a fundamental and cost-effective source
of funding.  The Company offers a variety of products designed to
attract and retain customers, with the Company’s primary focus being on building
and expanding long-term relationships.
  At
September 30, 2009, total deposits were $556,172,581, an increase of
$141,487,850, or 34.1%, from $414,684,731 at December 31, 2008.  The
primary causes for this increase were the successful introduction of the Bank’s
internet bank, 1STConstitutionDirect.com, which opened in late 2008 and the
continued expansion of our mortgage warehouse line of credit
relationships.  1STConstitutionDirect.com offers competitive rates on
savings accounts and continues to facilitate growth in new accounts and deposit
balances.
  Savings
accounts increased by $102,144,594, or 122.5%, to $185,554,999 at September 30,
2009 compared to $83,410,405 at December 31, 2008.  The accounts of
1STConstitutionDirect.com are included in this component of total deposits and
increased to $78,343,581 at September 30, 2009 from $19,063,938 at December 31,
2008.
  Interest
bearing demand deposits increased by $26,322,900, or 31.8%, to $109,165,313 at
September 30, 2009, compared to $82,842,413 at December 31, 2008, as the Bank
continued to require customers of its Warehouse Line of Credit to maintain
deposit relationships with the Bank that, on average, represent 10% to 15% of
the respective loan balances.
 
 The
following table summarizes deposits at September 30, 2009 and December 31,
2008.
 
 September
      30, 2009
              
              
              December
      31, 2008DemandNon-interest
      bearing
              
              $
              75,400,282
              
              
              $
              71,772,486Interest
      bearing
              
              
              109,165,313
              
              
              
              82,842,413Savings
              
              
              185,554,999
              
              
              
              83,410,405Time
              
              
              186,051,987
              
              
              
              176,659,427$
              556,172,581
              
              
              $
              414,684,731
 
 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 balance of borrowings
was $27,500,000 at September 30, 2009, consisting of long-term FHLB borrowings
of $27,500,000.  The balance of borrowings at December 31, 2008 was
$51,500,000 and consisted of FHLB borrowings of $30,500,000 and overnight funds
purchased of $21,000,000.
  The Bank
has four ten-year fixed rate convertible advances from the FHLB that total
$22,500,000 in the aggregate.  These advances, in the amounts of
$2,500,000, $5,000,000, $5,000,000 and $10,000,000 bear interest at the rates of
5.50%, 5.34%, 5.06%, and 4.08%, respectively.  The Bank has one
two-year advance in the amount of $5,000,000 that bears interest at a 3.833%
rate.  These advances may be called by the FHLB quarterly at the
option of the FHLB if rates rise and the rate earned by the FHLB is no longer a
“market” rate.  These advances are fully secured by marketable
securities.
  Shareholders’
Equity and Dividends
  Shareholders’
equity increased by $2,283,308, or 4.1%, to $57,902,960 at September 30, 2009,
from $55,619,652 at December 31, 2008.  Book value per common share
increased by $0.19, or 1.8%, to $10.73 at September 30, 2009 from $10.54 at
December 31, 2008.  The ratio of shareholders’ equity to total assets
was 8.67% and 10.18% at September 30, 2009 and December 31, 2008,
respectively.  The increase in shareholders’ equity was primarily the
result of net income of $1,632,534 and $787,277 in other comprehensive income,
partially offset by, among other items, the $461,667 in dividends recorded on
the Company’s Preferred Stock Series B.
 
 32
  On
December 23, 2008, pursuant to the TARP CPP under the EESA (each as defined and
described under the heading “Recent Legislation and Other Regulatory
Initiatives” below), the Company entered into a Letter Agreement, including the
Securities Purchase Agreement – Standard Terms, with the Treasury pursuant to
which the Company issued and sold, and the Treasury purchased (i) 12,000 shares
of the Company’s Preferred Stock Series B and (ii) a ten-year warrant to
purchase up to 200,222 shares of the Company’s common stock, no par value, at an
initial exercise price of $8.99 per share, for aggregate cash consideration of
$12,000,000.  As a result of the 5% stock dividend paid on February 2,
2009 to holders of record as of the close of business on January 20, 2009, the
shares of common stock initially underlying the warrant were adjusted to 210,233
shares and the initial exercise price was adjusted to $8.562 per
share.
  The
Preferred Stock Series B pays quarterly cumulative dividends at a rate of 5% per
year for the first five years and thereafter at a rate of 9% per year and has a
liquidation preference of $1,000 per share. The warrant provides for the
adjustment of the exercise price and the number of shares of the Company’s
common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other
assets to holders of the Company’s common stock, and upon certain issuances of
the Company’s common stock at or below a specified price relative to the initial
exercise price.  The warrant is immediately exercisable and expires 10
years from the issuance date. If, on or prior to December 31, 2009, the Company
receives aggregate gross cash proceeds of not less than $12,000,000 from
qualified equity offerings announced after October 13, 2008, the number of
shares of common stock issuable pursuant to the Treasury’s exercise of the
warrant will be reduced by one-half of the original number of shares. In
addition, the Treasury has agreed not to exercise voting power with respect to
any shares of common stock issued upon exercise of the warrant.
  The
Company is subject to restrictions contained in the agreement between the
Treasury and the Company related to the sale of the Preferred Stock Series B
which among other things restricts the payment of cash dividends or making other
distributions by the Company on its common stock or the repurchase of its shares
of common stock or other capital stock or other equity securities of any kind of
the Company or any of its or its affiliates’ trust preferred securities until
the third anniversary of the purchase of the Preferred Stock Series B by the
Treasury with certain exceptions without approval of the Treasury and the
Company is prohibited by the terms of the Preferred Stock Series B from paying
dividends on the common stock of the Company or redeeming or otherwise acquiring
its common stock or certain other of its equity securities unless all dividends
on the Preferred Stock Series B have been declared and either paid in full or
set aside with certain limited exceptions.
  In
addition, EESA, as amended by the American Recovery and Reinvestment Act of 2009
(“ARRA”), and guidance issued by the Treasury, limit executive compensation,
require the reporting of information to the Treasury and others and limit the
deductibility for Federal income tax purposes of compensation paid to certain
executives in excess of $500,000 per year and the payment of certain severance
and change in control payments to certain executives, , provide for the clawback
of certain compensation paid to certain executives of the Company or the Bank
and impose new corporate governance requirements on the Company, including the
inclusion of a non-binding “say to pay” proposal in the Company’s annual proxy
statement.
  The Board
of Governors of the Federal Reserve System has issued a supervisory letter to
bank holding companies that contains guidance on when the board of directors of
a bank  holding company should eliminate or defer or severely limit
dividends including for example when net income available for shareholders for
the past four quarters net of previously paid dividends paid during that period
is not sufficient to fully fund the dividends. The letter also contains guidance
on the redemption of stock by bank holding companies which urges bank holding
companies to advise the Federal Reserve of any such redemption or repurchase of
common stock for cash or other value which results in the net reduction of a
bank holding company’s capital at the beginning of the quarter below the capital
outstanding at the end of the quarter.
  In lieu
of cash dividends to common shareholders, the Company (and its predecessor the
Bank) has declared a stock dividend every year since 1992 and has paid such
dividends every year since 1993.  A 5% stock dividend was declared in
2008 and paid in 2009.  A 6% stock dividend was declared in 2007 and
paid in 2008.
  The
Company’s common stock is quoted on the Nasdaq Global Market under the symbol
“FCCY”.
 
 33
  In 2005,
the Company’s board of directors authorized a common stock repurchase program
that allows for the repurchase of a limited number of the Company’s shares at
management’s discretion on the open market. The Company undertook this
repurchase program in order to increase shareholder value. A table disclosing
repurchases of Company shares, if any, made during the quarter ended September
30, 2009 is set forth under Part II, Item 2 of this report, Unregistered Sales of Equity
Securities and Use of Proceeds.
  Actual
capital amounts and ratios for the Company and the Bank as of September 30, 2009
and December 31, 2008 are as follows:
  Actual
              
              
              For
      Capital
                Adequacy
      Purposes
              
              To
      Be Well Capitalized
                Under
      Prompt
                Corrective
      Action
                ProvisionAmount
              
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              
              RatioAs
      of September 30, 2009CompanyTotal
      Capital to Risk Weighted Assets
              
              $
              77,988,331
              
              
              
              18.13
              %
              
              $
              34,411,577
              
              >8%
              
              
              N/A
              
              
              
              N/ATier
      1 Capital to Risk Weighted Assets
              
              
              73,876,417
              
              
              
              17.17
              %
              
              
              17,205,789
              
              >4%
              
              
              N/A
              
              
              
              N/ATier
      1 Capital to Average Assets
              
              
              73,876,417
              
              
              
              11.31
              %
              
              
              26,133,170
              
              >4%
              
              
              N/A
              
              
              
              N/ABankTotal
      Capital to Risk Weighted Assets
              
              $
              76,439,280
              
              
              
              17.81
              %
              
              $
              34,327,840
              
              >8%
              
              $
              42,909,800
              
              
              >10
              %Tier
      1 Capital to Risk Weighted Assets
              
              
              72,327,366
              
              
              
              16.86
              %
              
              
              17,163,920
              
              >4%
              
              
              25,745,880
              
              
              >6
              %Tier
      1 Capital to Average Assets
              
              
              72,327,366
              
              
              
              11.09
              %
              
              
              26,079,218
              
              >4%
              
              
              32,599,022
              
              
              >5
              %
 
 As
      of December 31, 2008CompanyTotal
      Capital to Risk Weighted Assets
              
              $
              76,475,124
              
              
              
              17.90
              %
              
              $
              34,184,717
              
              >8%
              
              
              N/A
              
              
              
              N/ATier
      1 Capital to Risk Weighted Assets
              
              
              72,790,360
              
              
              
              17.03
              %
              
              
              17,092,359
              
              >4%
              
              
              N/A
              
              
              
              N/ATier
      1 Capital to Average Assets
              
              
              72,790,360
              
              
              
              14.05
              %
              
              
              20,715,932
              
              >4%
              
              
              N/A
              
              
              
              N/ABankTotal
      Capital to Risk Weighted Assets
              
              $
              75,316,536
              
              
              
              17.67
              %
              
              $
              34,096,080
              
              >8%
              
              $
              42,620,100
              
              
              >10
              %Tier
      1 Capital to Risk Weighted Assets
              
              
              71,631,772
              
              
              
              16.81
              %
              
              
              17,048,040
              
              >4%
              
              
              25,572,060
              
              
              >6
              %Tier
      1 Capital to Average Assets
              
              
              71,631,772
              
              
              
              13.88
              %
              
              
              20,636,440
              
              >4%
              
              
              25,795,550
              
              
              >5
              %
 
 The
minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1
capital to risk weighted assets ratio of 4.0% and a total capital to risk
weighted assets ratio of 8.0%.  To be considered “well capitalized,”
an institution must have a minimum Tier 1 leverage ratio of 5.0%.  At
September 30, 2009, the ratios of the Company exceeded the ratios required to be
considered well capitalized. It is management’s goal to monitor and maintain
adequate capital levels to continue to support asset growth and continue its
status as a well capitalized institution.
  Recent
Legislation and Other Regulatory Initiatives
  On
October 3, 2008, the President of the United States signed the Emergency
Economic Stabilization Act of 2008 (“EESA”) into law.  This
legislation, among other things, authorized the Secretary of Treasury to
establish a Troubled Asset Relief Program (“TARP”) to purchase up to $700
billion in troubled assets from qualified financial institutions
(“QFI”).  EESA has been interpreted by the Department of Treasury (the
“Treasury”) to allow it to make direct equity investments in
QFIs.  Subsequent to the enactment of EESA, the Treasury announced the
TARP Capital Purchase Program (“CPP”) under which the Treasury was authorized to
purchase up to $250 billion in senior perpetual preferred stock of QFIs that
elect to participate in the CPP.  The Treasury’s investment in an
individual QFI could not exceed the lesser of 3% of the QFIs risk-weighted
assets or $25 billion and could not be less than 1% of risk-weighted
assets.  QFIs had until November 14, 2008 to elect to participate in
the CPP.  The CPP also requires the issuance of warrants exercisable
for a number of shares of common stock with an aggregate value equal to 15% of
the amount of the preferred stock investment.
  EESA also
increases the maximum deposit insurance amount up to $250,000 until December 31,
2009 and removes the statutory limits on the FDIC’s ability to borrow from the
Treasury during this period.  The FDIC may not take the temporary
increase in deposit insurance coverage into account when setting
assessments.
 
 34
  As a
condition to selling troubled assets to the TARP and/or participating in the
CPP, the QFI must agree to the Treasury’s standards for executive compensation
and corporate governance.  These standards generally apply to the
Chief Executive Officer, Chief Financial Officer, and next three highest
compensated officers of the QFI.  In general, these standards require
the QFI to: (1) ensure that incentive compensation for senior executives does
not encourage unnecessary and excessive risk taking; (2) recoup, or claw-back,
any bonus or incentive compensation paid to a senior executive based on
financial statements that later prove to be erroneous; (3) prohibit the QFI from
making “golden parachute” payments in connection with certain terminations of
employment; and (4) not deduct, for tax purposes, executive compensation in
excess of $500,000 for each senior executive.  Participation in the
CPP also results in certain restrictions on the QFIs dividend and stock
repurchase activities.  These restrictions remain in place until the
Treasury no longer holds any equity or debt securities of the QFI. These
restrictions were expanded by amendments to EESA included in the American
Recovery and Reinvestment Act of 2009 (the “Stimulus Act”) and interim final
regulations announced by the Treasury on June 10, 2009, which are discussed
below.
  As noted
in the “Shareholders’ Equity and Dividends” section above, the Company exceeds
the minimum regulatory capital standards.  Furthermore, management
does not currently believe that the Company has a significant exposure to
troubled assets that would warrant sale of such assets under the
TARP.
  Concurrent
with the announcement of the CPP, the FDIC also established the Temporary
Liquidity Guaranty Program (“TLGP”).  This program contains two
elements: (i) a debt guarantee program and (ii) an increase in deposit insurance
coverage for certain types of non-interest bearing accounts.  Pursuant
to the debt guarantee program, newly issued senior unsecured debt of banks,
thrifts or their holding companies issued on or before June 30, 2009 would be
protected in the event the issuing institution subsequently fails or its holding
company files for bankruptcy.  Financial institutions opting to
participate in this program would be charged an annualized fee equal to 75 basis
points multiplied by the amount of debt being guaranteed.  The amount
of debt that may be guaranteed cannot exceed 125% of the institution’s
outstanding debt at September 30, 2008 and due to mature before June 30,
2009.  The guarantee would expire by June 30, 2012 even if the debt
itself has not matured.  Pursuant to the temporary unlimited deposit
insurance coverage, a qualifying institution may elect to provide unlimited
coverage for non-interest bearing transaction deposit accounts in excess of the
$250,000 limit by paying a 10 basis point surcharge on the covered amounts in
excess of $250,000.  Institutions may choose whether to continue the
coverage and be charged the surcharge.  To opt out of the program,
institutions must have notified the FDIC by December 5, 2008.  This
coverage would expire on December 31, 2009.  The Company elected to
continue this coverage through December 31, 2009.
  The ARRA,
which was signed into law on February 17, 2009, amended EESA and imposed
extensive new restrictions applicable to the Company as a  participant
in the TARP. The new restrictions include, without limitation, additional limits
on executive compensation such as, subject to certain exceptions, prohibiting
the payment or accrual of any bonus, retention award or incentive compensation
to the Company’s most highly compensated employee except for the payment of
long-term restricted stock grants; prohibiting any compensation plan that would
encourage the manipulation of earnings; and extending the claw-back required by
EESA to certain other highly compensated employees. The ARRA also requires
compliance with new corporate governance standards including an annual “say on
pay” shareholder vote, the adoption of policies regarding excessive or luxury
expenditures, and a certification by the Company’s chief executive officer and
chief financial officer that we have complied with the standards in the EESA, as
amended by ARRA.  The full impact of ARRA is not yet certain because
it calls for additional regulatory action. The Company will continue to monitor
the effect of the ARRA and the anticipated regulations.
  On June
10, 2009, the Treasury issued an Interim Final
Rule (the “Interim Final Rule”) that
provides guidance on the executive compensation and corporate governance
provisionsof EESA, as amended by the ARRA, that apply to entities that
received financial assistance under the TARP.  In summary, the Interim
Final Rule as applied to the Company requires the
following:
  ·
              At
      least every six months, the Compensation Committee of the board of
      directors (the “Compensation Committee”)must discuss, evaluate and reviewwith the Company’s senior risk officers the
      compensation plans for senior executive officers(“SEO”)and compensation plans for other employees and
      the risks such plans pose so that they do not encourage SEOs to take
      unnecessary and excessive risks that threaten the value of the
      Company.  For this purpose, SEO is generally defined as the
      group of five individuals, including all of the Company’s named executive
      officers identified as such in the Company’s annual filings with the
      SEC;
  35
  ·
              At
      least every six months, theCompensation
      Committee must discuss, evaluate, and reviewthe employee compensation plans of the Company to
      ensure that those plans do not encourage the manipulation of reported
      earnings of the Company to enhance the compensation of any of the
      Company’s employees;
  ·
              At
      least once per fiscal year, the Compensation Committeeshall provide a narrative description of how the
      SEO compensation plans do not encourage the SEOs to take unnecessary and
      excessive risks that threaten the value of the Company including how these
      SEO compensation plans do not encourage behavior focused on short-term
      results rather than long-term value
  creation;
  ·
              The
      Compensation Committee must certify the completion of the required reviews
      of the compensation plans;
  ·
              The Company must ensure that any bonus payment
      made to an SEO or thenext 20most
      highly compensated employees during the TARP period is subject to a
      provision for recovery or “clawback” by the Company if the bonus payment
      was based on materially inaccurate financial statements or any other
      materially inaccurate performance metric
  criteria;
  ·
              The
      Company must prohibit any golden parachute payment to an SEO or any of the
      next five most highly compensated employees during the TARP
      period.  For this purpose, a golden parachute payment includes
      any payment for the departure from the Company for any reason, or any
      payment due to a change in control;
  ·
              The
      Company must prohibit the payment or accrual of any bonus, retention or
      incentive payment during the TARP period to the Company’s most highly
      compensated employee.  Exceptions exist for certain types of
      long term restricted stock, as well as payments that are required pursuant
      to binding, unchanged agreements that were in place on February 11,
      2009;
  ·
              The
      Company is required to annually disclose any perquisites whose total value
      for the fiscal year exceeds $25,000 for the most highly compensated
      employee;
  ·
              The
      Compensation Committee must provide annually a narrative description of
      whether the Company, the board of directors, or the Compensation Committee
      has engaged a compensation consultant, and all types of services provided
      by such compensation consultant in the prior three
  years;
  ·
              The
      Company is generally prohibited from providing (formally or informally)
      tax gross-ups of any kind to any of the SEOs and the next 20 most highly
      compensated employees;
  ·
              The
      board of directors of the Company must (i) adopt an excessive or luxury
      expenditures policy, (ii) provide the policy to the Treasury and the
      recipient’s primary regulatory agency, and (iii) postthe text of the policy on its own
      website;
  ·
              Any proxy or consent or authorization for an
      annual or other meeting of the Company’sshareholders must permit a
      separate shareholder vote on the compensation of executives;
      and
  ·
              The
      Company’s principal executive officer and principal financial officer must
      certify as to compliance with the Interim Final Rule for each year in
      which the TARP obligations remain outstanding.
  The
actions described above, together with additional actions announced by the
Treasury and other regulatory agencies continue to develop.  It is not
clear at this time what impact, EESA, the ARRA, interim final regulations
announced by the Treasury on June 10, 2009, TARP, other liquidity and funding
initiatives of the Treasury and other bank regulatory agencies that have been
previously announced, and any additional programs that may be initiated in the
future will have on the financial markets and the financial services
industry.  The extreme levels of volatility and limited credit
availability currently being experienced could continue to effect the U.S.
banking industry and the broader U.S. and global economies, which will have an
affect on all financial institutions, including the Company.  We
cannot predict the full effect that this wide-ranging legislation will have on
the national economy or on financial institutions.
 
 36
  Liquidity
  At
September 30, 2009, the amount of liquid assets remained at a level management
deemed adequate to ensure that contractual liabilities, depositors’ withdrawal
requirements, and other operational and customer credit needs could be
satisfied.
  Liquidity
management refers to the Company’s ability to support asset growth while
satisfying the borrowing needs and deposit withdrawal requirements of customers.
In addition to maintaining liquid assets, factors such as capital position,
profitability, asset quality and availability of funding affect a bank’s ability
to meet its liquidity needs. On the asset side, liquid funds are maintained in
the form of cash and cash equivalents, Federal funds sold, investment securities
held to maturity maturing within one year, securities available for sale and
loans held for sale. Additional asset-based liquidity is derived from scheduled
loan repayments as well as investment repayments of principal and interest from
mortgage-backed securities. On the liability side, the primary source of
liquidity is the ability to generate core deposits. Short-term borrowings are
used as supplemental funding sources when growth in the core deposit base does
not keep pace with that of earnings assets.
  The Bank
has established a borrowing relationship with the FHLB and a correspondent bank
which further supports and enhances liquidity. At September 30, 2009, the Bank
maintained an Overnight Line of Credit at the FHLB in the amount of $58,584,800
plus a One-Month Overnight Repricing Line of Credit of $58,584,800. Advances
issued under these programs are subject to FHLB stock level and collateral
requirements. Pricing of these advances may fluctuate based on existing market
conditions. The Bank also maintains an unsecured Federal funds line of
$20,000,000 with a correspondent bank.
  The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At September 30, 2009, the
balance of cash and cash equivalents was $87,338,650.
  Net cash
used in operating activities totaled $8,238,631 for the nine months ended
September 30, 2009 compared to net cash used in operating activities of
$1,064,964 for the nine months ended September 30, 2008. The primary sources of
funds are net income from operations adjusted for provision for loan losses,
depreciation expenses, and net proceeds from sales of loans held for
sale.  The primary use of funds was origination of loans held for
sale.
  Net cash
used in investing activities totaled $36,117,668 in the nine months ended
September 30, 2009, compared to $73,604,236 used in investing activities in the
nine months ended September 30, 2008. The current period amount was primarily
the result of an increase in the loan portfolio and purchases of
securities.
  Net cash
provided by financing activities amounted to $117,361,830 in the nine months
ended September 30, 2009, compared to $82,980,726 provided by financing
activities in the nine months ended September 30, 2008. The current period
amount resulted primarily from an increase in deposits, partially offset by
repaid short-term borrowings, during the nine months period ended September 30,
2009.
  The
securities portfolio is also a source of liquidity, providing cash flows from
maturities and periodic repayments of principal. During the nine months ended
September 30, 2009, maturities and prepayments of investment securities totaled
$42,033,265.  Another source of liquidity is the loan portfolio, which
provides a flow of payments and maturities.
  The
Company anticipates that cash and cash equivalents on hand, the cash flow from
assets as well as other sources of funds will provide adequate liquidity for the
Company’s future operating, investing and financing needs.  Management
will continue to monitor the Company’s liquidity and maintain it at a level that
it deems adequate and not excessive.
 
 37
  Interest
Rate Sensitivity Analysis
  The
largest component of the Company’s total income is net interest income, and the
majority of the Company’s financial instruments are composed of interest
rate-sensitive assets and liabilities with various terms and maturities. The
primary objective of management is to maximize net interest income while
minimizing interest rate risk. Interest rate risk is derived from timing
differences in the repricing of assets and liabilities, loan prepayments,
deposit withdrawals, and differences in lending and funding rates. Management
actively seeks to monitor and control the mix of interest rate-sensitive assets
and interest rate-sensitive liabilities.
  The
Company continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. Management believes that
hedging instruments currently available are not cost-effective, and therefore,
has focused its efforts on increasing the Bank’s spread by attracting lower-cost
retail deposits.
  Item 3.    Quantitative and Qualitative
Disclosures About Market Risk.
  Not
required.
  Item 4.    Controls and Procedures.
  The
Company has established disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms and is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
  The
Company’s principal executive officer and principal financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this quarterly
report.  Based upon such evaluation, the Company’s principal executive
officer and principal financial officer have concluded that the Company’s
disclosure controls and procedures are effective as of the end of the period
covered by this quarterly report.
  The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended September 30, 2009 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
 
 38
  PART
II. OTHER INFORMATION
  Item
2.    Unregistered Sales of Equity
Securities and Use of Proceeds.
  Issuer
Purchases of Equity Securities
  In 2005,
the Company’s 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
September 30, 2009.
  Issuer
Purchases of Equity Securities(1)  (2)
  Period
              
              Total
                Number
                of
      Shares
                Purchased
              
              
              Average
                Price
      Paid
                Per
      Share
              
              
              Total
      Number of
                Shares
      Purchased As
                Part
      of Publicly
                Announced
      Plan or
                Program
              
              
              Maximum
      Number of
                Shares
      That May Yet
                be
      Purchased Under
                the
      Plan or ProgramBeginning
              EndingJuly
      1, 2009
              July
      31, 2009
              
              
              301
              
              
              
              $7.40
              
              
              
              301
              
              
              
              156,625August
      1, 2009
              August
      31, 2009
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              156,625September
      1, 2009
              September
      30, 2009
              
              
              124
              
              
              
              $8.25
              
              
              
              124
              
              
              
              156,501Total
              
              
              425
              
              
              
              $7.65
              
              
              
              425
              
              
              
              156,501
 _________________
  (1)
              The
      Company’s common stock repurchase program covers a maximum of 185,787
      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 annual
      stock dividends, including the 5% stock
      dividend paid on February 2, 2009 to holders of record as of the close of
      business on January 20,
2009.
  (2)
              As
      a result of the Company’s issuance on December 23, 2008 of Preferred Stock
      Series B and a warrant to purchase common stock to the Treasury as part of
      its TARP CPP, the Company may not repurchase its common stock or other
      equity securities except under certain limited circumstances, which were
      applicable to the purchases reflected in this
  table.
  Item 6.
              Exhibits.
  31.1
              *
              Certification
      of Robert F. Mangano, principal executive officer of the Company, pursuant
      to Securities Exchange Act Rule 13a-14(a)31.2
              *
              Certification
      of Joseph M. Reardon, principal financial officer of the Company, pursuant
      to Securities Exchange Act Rule 13a-14(a)32
              *
              Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, principal
      executive officer of the Company, and Joseph M. Reardon, principal
      financial officer of the Company
 _____________________
 *           Filed
herewith.
 
  39
 
 SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  
  1ST CONSTITUTION
      BANCORPDate:
      November 13, 2009
              By:
              /s/ ROBERT
      F. MANGANORobert
      F. ManganoPresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      November 13, 2009
              By:
              /s/
      JOSEPH M. REARDONJoseph
      M. ReardonSenior
      Vice President and Treasurer(Principal
      Financial and Accounting Officer)
       40