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
March 31, 2005  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 is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934).    Yes ̈No  ý  As of
May 11, 2005, there were 3,310,340
shares of the registrants common stock, no par value, outstanding.    1ST CONSTITUTION BANCORPFORM 10-QINDEXPagePART I.
 
 FINANCIAL INFORMATIONItem 1.
 
 Financial Statements...............................................................................................
 1Consolidated Balance Sheetsas of March 31, 2005 (unaudited)and December 31, 2004...........................................................................................
 1Consolidated Statements of Incomefor the Three Months EndedMarch 31, 2005 (unaudited) and March 31, 2004 (unaudited).........................................
 2Consolidated Statements of Cash Flowsfor the Three Months EndedMarch 31, 2005 (unaudited) and March 31, 2004 (unaudited).........................................
 3Notes to Consolidated Financial Statements (unaudited)................................................
 4Item 2.
 
 Managements Discussion and Analysis of Financial Condition and Results ofOperations...........................................................................................................
 7Item 3.
 
 Quantitative and Qualitative Disclosures About Market Risk.........................................
 19Item 4.
 
 Controls and Procedures ........................................................................................
 20PART II
 
 OTHER INFORMATIONItem 2.
 
 Unregistered Sales of Equity Securities and Use of Proceeds..........................................
 21Item 6.
 
 Exhibits................................................................................................................
 22SIGNATURES............................................................................................................................
 23PART I. FINANCIAL INFORMATIONItem 1.
 
 Financial Statements1st Constitution Bancorp and SubsidiariesConsolidated Balance Sheets(unaudited)March 31, 2005
 
 
 
 
 December 31, 2004ASSETSCASH AND DUE FROM BANKS
 
 
 
 $6,288,268
 
 
 
 
 $7,898,395FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS
 
 
 
 1,331,254
 
 
 
 
 26,014Total cash and cash equivalents
 
 
 
 7,619,522
 
 
 
 
 7,924,409INVESTMENT SECURITIES:Available for sale, at fair value
 
 
 
 79,979,541
 
 
 
 
 85,588,649Held to maturity (fair value of $16,258,665 and $12,292,250 in 2005 and 2004,respectively)
 
 
 
 16,281,774
 
 
 
 
 12,167,137Total investment securities
 
 
 
 96,261,315
 
 
 
 
 97,755,786LOANS HELD FOR SALE
 
 
 
 6,146,368
 
 
 
 
 9,927,881LOANS
 
 
 
 
 
 213,953,752
 
 
 
 
 210,653,051Less- Allowance for loan losses
 
 
 
 (2,065,169
 )
 
 
 
 (2,005,169
 )Net loans
 
 
 
 211,888,583
 
 
 
 
 208,647,882PREMISES AND EQUIPMENT, net
 
 
 
 2,260,188
 
 
 
 
 2,324,219ACCRUED INTEREST RECEIVABLE
 
 
 
 1,741,678
 
 
 
 
 1,444,493BANK OWNED LIFE INSURANCE
 
 
 
 6,709,616
 
 
 
 
 6,643,502OTHER ASSETS
 
 
 
 1,614,853
 
 
 
 
 1,162,268Total assets
 
 
 
 $334,242,123
 
 
 
 
 $335,830,440LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:DepositsNon-interest bearing
 
 
 
 $50,616,638
 
 
 
 
 $50,794,581Interest bearing
 
 
 
 225,319,211
 
 
 
 
 226,092,452Total deposits
 
 
 
 275,935,849
 
 
 
 
 276,887,033OTHER BORROWINGS
 
 
 
 23,800,000
 
 
 
 
 25,200,000REDEEMABLE SUBORDINATED DEBENTURES
 
 
 
 5,155,000
 
 
 
 
 5,155,000ACCRUED INTEREST PAYABLE
 
 
 
 958,626
 
 
 
 
 982,020ACCRUED EXPENSES AND OTHER LIABILITIES
 
 
 
 1,447,124
 
 
 
 
 816,003Total liabilities
 
 
 
 307,296,599
 
 
 
 
 309,040,056COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, no par value; 30,000,000 shares authorized; 3,324,578 and 3,311,621shares issued and 3,311,332 and 3,306,422 outstanding as of March 31, 2005 andDecember 31, 2004, respectively
 
 
 
 22,324,471
 
 
 
 
 22,255,402Retained earnings
 
 
 
 5,770,789
 
 
 
 
 4,725,257Treasury Stock, shares at cost (13,246 shares at March 31, 2005 and 5,199 shares atDecember 31, 2004, respectively)
 
 
 
 (363,931
 )
 
 
 
 (86,896
 )Accumulated other comprehensive income
 
 
 
 (785,805
 )
 
 
 
 (103,379
 )Total shareholders equity
 
 
 
 26,945,524
 
 
 
 
 26,790,384Total liabilities and shareholders equity
 
 
 
 $334,242,123
 
 
 
 
 $335,830,440See accompanying notes to consolidated financial statements.1

1st Constitution Bancorp and SubsidiariesConsolidated Statements of Income(unaudited)Three Months Ended March 31,2005
 
 
 
 2004INTEREST INCOME:Interest and fees on loans
 
 
 
 $3,911,938
 
 
 
 $3,084,598Interest on securities:Taxable
 
 
 
 748,259
 
 
 
 813,514Tax-exempt
 
 
 
 155,371
 
 
 
 83,999Interest on Federal funds sold and short-term investments
 
 
 
 5,214
 
 
 
 6,211Total interest income
 
 
 
 4,820,782
 
 
 
 3,988,322INTEREST EXPENSE:Interest on deposits
 
 
 
 953,190
 
 
 
 747,327Interest on securities soldunder
	agreements to repurchase and other borrowed funds
 
 
 
 251,926
 
 
 
 223,724Interest on redeemable subordinated debentures
 
 
 
 75,000
 
 
 
 62,183Total interest expense
 
 
 
 1,280,116
 
 
 
 1,033,234Net interest income
 
 
 
 3,540,666
 
 
 
 2,955,088PROVISION FOR LOAN LOSSES
 
 
 
 60,000
 
 
 
 60,000Net interest income after provision for loan losses
 
 
 
 3,480,666
 
 
 
 2,895,088NON-INTEREST INCOME:Service charges on deposit accounts
 
 
 
 158,860
 
 
 
 126,632Gain on sale of loans held for sale
 
 
 
 289,963
 
 
 
 262,436Income on Bank-owned life insurance
 
 
 
 66,114
 
 
 
 59,250Other income
 
 
 
 106,865
 
 
 
 63,641Total other income
 
 
 
 621,802
 
 
 
 511,959NON-INTEREST EXPENSE:Salaries and employee benefits
 
 
 
 1,353,996
 
 
 
 1,193,865Occupancy expense
 
 
 
 468,420
 
 
 
 245,856Other operating expenses
 
 
 
 747,793
 
 
 
 680,191Total other expense
 
 
 
 2,570,209
 
 
 
 2,119,912Income before income taxes
 
 
 
 1,532,259
 
 
 
 1,287,135INCOME TAXES
 
 
 
 486,728
 
 
 
 411,328Net income
 
 
 
 $1,045,531
 
 
 
 $875,807NET INCOME PER SHARE:Basic
 
 
 
 $0.32
 
 
 
 $0.27Diluted
 
 
 
 $0.30
 
 
 
 $0.25See accompanying notes to consolidated financial statements.2

1st Constitution Bancorp and SubsidiariesConsolidated Statements of Cash Flows(unaudited)Three months ended March 31,2005
 
 
 
 
 2004OPERATING ACTIVITIES:Net income
 
 
 
 $1,045,531
 
 
 
 
 $875,807Adjustments to reconcile net incometo net cash provided by operating activities-Provision for loan losses
 
 
 
 60,000
 
 
 
 
 60,000Depreciation and amortization
 
 
 
 127,940
 
 
 
 
 79,678Net amortization on securities
 
 
 
 48,617
 
 
 
 
 118,919Gain on sale of loans held for sale
 
 
 
 (289,963
 )
 
 
 
 (262,436
 )Originations of loans held for sale
 
 
 
 (10,236,037
 )
 
 
 
 (12,306,322
 )Proceeds from sales of loans held for sale
 
 
 
 14,307,513
 
 
 
 
 19,480,186(Increase) in accrued interest receivable
 
 
 
 (297,185
 )
 
 
 
 (191,438
 )Income on Bank  owned life insurance
 
 
 
 (66,114
 )
 
 
 
 (59,250
 )Decrease (Increase) decrease in other assets
 
 
 
 (7,037
 )
 
 
 
 314,748Decrease in accrued interest payable
 
 
 
 (23,394
 )
 
 
 
 42,031Increase in accrued expenses and other liabilities
 
 
 
 631,121
 
 
 
 
 1,572,844Net cash provided by operating activities
 
 
 
 5,300,992
 
 
 
 
 9,724,767INVESTING ACTIVITIES:Purchases of securities -Available for sale
 
 
 
 --
 
 
 
 
 (14,236,640
 )Held to maturity
 
 
 
 (4,169,000
 )
 
 
 
 --Proceeds from maturities and prepayments of securities -Available for sale
 
 
 
 4,436,471
 
 
 
 
 7,773,173Held to maturity
 
 
 
 50,407
 
 
 
 
 128,019Net increase in loans
 
 
 
 (3,300,701
 )
 
 
 
 (5,602,424
 )Capital expenditures
 
 
 
 (63,909
 )
 
 
 
 (173,179
 )Net cash used in investing activities
 
 
 
 (3,046,732
 )
 
 
 
 (12,111,051
 )FINANCING ACTIVITIES:Issuance of common stock, net
 
 
 
 69,070
 
 
 
 
 --Purchase of treasury stock
 
 
 
 (277,033
 )
 
 
 
 (86,866
 )Net decrease in demand, savings and time deposits
 
 
 
 (951,184
 )
 
 
 
 (1,453,398
 )Net increase in securities sold under agreements to repurchase
 
 
 
 --
 
 
 
 
 5,087Net decrease in other borrowings
 
 
 
 (1,400,000
 )
 
 
 
 --Net cash used in financing activities
 
 
 
 (2,559,147
 )
 
 
 
 (1,535,177
 )Decrease in cash and cash equivalents
 
 
 
 (304,887
 )
 
 
 
 (3,921,461
 )CASH AND CASH EQUIVALENTSAT BEGINNING OF PERIOD
 
 
 
 7,924,409
 
 
 
 
 14,702,886CASH AND CASH EQUIVALENTSAT END OF PERIOD
 
 
 
 $7,619,522
 
 
 
 
 $10,781,425SUPPLEMENTAL DISCLOSURESOF CASH FLOW INFORMATION:Cash paid during the period for -Interest
 
 
 
 $1,303,510
 
 
 
 
 $991,203Income taxes
 
 
 
 -
 
 
 
 
 -See accompanying notes to consolidated financial statements.3

1st Constitution Bancorp and SubsidiariesNotes To Consolidated Financial StatementsMarch 31, 2005 (Unaudited)



(1)Summary of Significant Accounting Policies
The accompanying unaudited Consolidated Financial Statements herein have been prepared by 1st Constitution Bancorp (the Company), in accordance with accounting principles generally accepted in the United States
of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to
such rules and regulations. These consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto included in the Companys Form 10-K for the year ended December 31, 2004, filed with
the SEC on March 24, 2005.
In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the operating results for the interim periods have been included.  The results of
operations for periods of less than a year are not necessarily indicative of results for the full year.
Net Income Per Common ShareBasic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income by the weighted average number of shares outstanding, as adjusted for the assumed exercise of potential common stock options, using the treasury stock
method. All share information has been restated for the effect of a (i) 5% stock dividend declared on December 17, 2004 and paid on January 31, 2005 to shareholders of record on January 18, 2005, and (ii) a two-for-one stock split in the form of a
stock dividend declared on January 20, 2005 and paid on February 28, 2005 to shareholders of record on February 10, 2005.
The following tables illustrate the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations.
Three Months Ended March 31, 2005Weighted-average
 
 
 
 Per shareIncome
 
 shares
 
 
 
 amountBasic EPSNet income available to common stockholders
 
 
 
 $1,045,531
 
 $3,306,806
 
 
 
 $0.32Effect of dilutive securitiesOptions and Grants
 
 
 
 -
 
 127,817
 
 
 
 (0.02
 )Diluted EPSNet income available to common stockholdersplus assumed conversion
 
 
 
 $1,045,531
 
 $3,434,623
 
 
 
 $0.30All options have been included in the computation of diluted earnings per share.4

Three Months Ended March 31, 2004Weighted-average
 
 
 
 Per shareIncome
 
 shares
 
 
 
 AmountBasic EPSNet income available to common stockholders
 
 
 
 $875,807
 
 3,286,241
 
 
 
 $0.27Effect of dilutive securitiesOptions and Grants
 
 
 
 -
 
 168,399
 
 
 
 (0.02
 )Diluted EPSNet income available to common stockholdersplus assumed conversion
 
 
 
 $875,807
 
 3,454,640
 
 
 
 $0.25All options have been included in the computation of diluted earnings per share.Stock-Based CompensationStock-based compensation is accounted for under the intrinsic value based method as prescribed by Accounting Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  Included
below are the pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transaction and Disclosure which assumes the fair
value based method of accounting had been adopted.
Three months ended March 31,2005
 
 
 
 
 2004Net income -As reported
 
 
 
 $1,045,531
 
 
 
 
 $875,807Deduct: Stock-based employee compensationdetermined under fair value based method forstock options, net of related tax effects
 
 
 
 (6,385
 )
 
 
 
 (6,357
 )Pro forma
 
 
 
 $1,039,146
 
 
 
 
 $869,450Net income per share -As reported -Basic
 
 
 
 $0.32
 
 
 
 
 $0.27Diluted
 
 
 
 $0.30
 
 
 
 
 $0.25Pro forma -Basic
 
 
 
 $0.31
 
 
 
 
 $0.27Diluted
 
 
 
 $0.30
 
 
 
 
 $0.25FASB Statement No. 123 (revised 2004),Share-Based Payment(Statement 123(R)). Statement 123(R) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments.  Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement.  Statement 123(R) generally requires
that an entity account for those transactions using the fair-value-based method; and eliminates an entitys
ability
5

to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25,Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. Statement 123(R) requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the
financial statements. Statement 123(R) is effective for the Company beginning January 1, 2006.  The Company must use either the modified prospective or the modified retrospective transition method.  Early adoption of Statement 123(R) for interim or
annual periods for which financial statements or interim reports have not been issued is permitted.  The adoption of Statement 123(R) is expected to reduce reported net income and earnings per share. Management is evaluating Statement 123(R) and has
not yet determined its full impact on the consolidated financial statements of the Company.
Variable Interest EntitiesManagement has determined that the 1stConstitution Capital Trust I (the Trust) qualifies as a variable interest entity under FASB
Interpretation 46 (FIN 46). In 2002, the Trust issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trust holds, as its sole asset, subordinated debentures issued by the Company in 2002.
Prior to December 31, 2003, the Trust was included in the Companys consolidated balance sheet and statements of income. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions of which were
required to be applied to certain variable interest entities, including the Trust, by March 31, 2004. The Company adopted the provisions under FIN 46, as interpreted by FIN 46(R), and accordingly deconsolidated the Trust as of December 31, 2003.
In March 2005, the Federal Reserve Board adopted a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a
five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other
elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the final rule, the Company expects to include all of its $5.2 million in trust preferred securities in Tier 1 capital.
Segment InformationSFAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes standards for the way public business enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic
areas, and major customers.  Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and
assess performance.  The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets.  It also requires that information be reported about revenues derived
from the enterprises products or services, or about the countries in which
the enterprises earn revenues and hold assets, and about major customers, regardless of whether the information is used in making operating decisions.
6

Item 2.
 Managements Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion of the operating results and financial condition at March 31, 2005 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in
this document. Results of operations for the three month period ended March 31, 2005 are not necessarily indicative of results to be attained for any other period.
This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Companys Form 10-K
(Managements Discussion and Analysis of Financial Condition and Results of Operations) for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 24, 2005.
General
Throughout the following sections, the Company refers to 1stConstitution Bancorp and its wholly owned subsidiaries, 1st Constitution Bank and
1stConstitution Capital Trust I, the Bank refers to
1st Constitution Bank, and the Trust refers to 1st Constitution Capital Trust I.
The purpose of this discussion and analysis is to assist in the understanding and evaluation of the Companys financial condition, changes in financial condition, and results of operations.
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws 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 nine branches and manages an investment portfolio through two subsidiaries. FCB Assets Holdings, Inc., a third subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.
The Trust, a subsidiary of the Company, was created to issue trust preferred securities to assist the Company to raise additional regulatory capital.
7

Forward-Looking Statements
This report contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about our confidence and
strategies and our expectations about new and existing programs and products, relationships, opportunities, technology and market conditions. These statements may be identified by such forward-looking terminology as expect,
believe, anticipate, or by expressions of confidence such as continuing or strong or similar statements or variations of such terms.  Such forward-looking statements involve certain risks and
uncertainties.  These include, but are not limited to, expected cost savings not being realized or not being realized within the expected time frame; income or revenues being lower than expected or operating costs higher; competitive pressures in
the banking or financial services industries increasing significantly; business disruption related to program implementation or methodologies; weakening of general economic conditions nationally or in New Jersey; changes in legal and regulatory
barriers and structures; and unanticipated occurrences delaying planned programs or initiatives or increasing their costs or decreasing their benefits, as well as other risks and uncertainties detailed from time to time in filings of the Company
with the U.S. Securities and Exchange Commission.  Actual results may differ materially from such forward-looking statements. These forward-looking statements speak only as of the date of this document.
RESULTS OF OPERATIONS
Summary
The Company reported net income of $1,045,531 for the three months ended March 31, 2005, an increase of 19.4% over the $875,807 for the same period in 2004. Diluted net income per share was $0.30 for the three
months ended March 31, 2005 compared to $0.25 reported for the three months ended March 31, 2004. All prior year share information has been restated for the effect of a 5% stock dividend declared on December 17, 2004 and paid on January 31, 2005
to shareholders of record on January 18, 2005, and the Companys two-for-one stock split in the form of a stock dividend declared on January 20, 2005 and paid on February 28, 2005 to shareholders of record on February 10, 2005.
Key performance ratios continued to improve in the three months ended March 31, 2005 as compared to the corresponding prior year period. Return on average assets and return on average equity were 1.27% and 15.8%,
respectively, for the three months ended March 31, 2005, compared to 1.21% and 14.68%, respectively, for the corresponding prior year period.
A significant factor impacting the Companys net interest income has been the rising level of market interest rates that evolved during the latter half of 2004 and continued through the first quarter of 2005. The
Federal Reserve Banks Open Market Committee (FOMC) held eight meetings in 2004 and held two meetings in the first quarter of 2005. Beginning with the June 30, 2004 meeting, the FOMC increased short-term interest rates by 25 basis
points and continued with a series of 25 basis point increases in each of the next four meetings in 2004 and in each of the two meetings in 2005.  The immediate benefit of these interest rate increases to the Companys investment security
purchases and floating rate assets resulted in a 42 basis point increase in the
8

yield on total interest-earning assets. In addition, managements ability to lag the interest rate increases on deposits coupled with a tight discipline in deposit pricing resulting in a 28 basis point
increase to the Companys net interest margin. Management expects the FOMC to continue its program of increasing the targeted Federal Funds rate over the next few months and has structured the Companys balance sheet to an asset sensitive
position in order to continue to benefit from this rising market rates environment.
Earnings Analysis
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 85.1% of the Companys net revenues for the three-month period ended March 31, 2005 and 85.2% of net revenues for the three-month period ended March 31, 2004. Net interest income also depends upon the
relative amount of interest-earning assets, interest-bearing liabilities, and the interest rate earned or paid on them.
The following 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
rates for the three month periods ended March 31, 2005 and 2004, respectively.
9

Average Balance Sheets with Resultant Interest and Rates(yields on a tax-equivalent basis)
 
 
 Three months ended March 31, 2005
 
 
 
 
 Three months ended March 31, 2004Average
 
 
 
 
 
 
 Average
 
 
 
 
 Average
 
 
 
 
 
 
 AverageBalance
 
 
 
 
 Interest
 
 Rate
 
 
 
 
 Balance
 
 
 
 
 Interest
 
 RateAssets:Federal Funds Sold/Short-Term Investments
 
 
 $873,811
 
 
 
 
 $5,214
 
 2.42
 %
 
 
 
 $2,596,661
 
 
 
 
 $6,211
 
 0.96
 %Securities:Collateralized Mortgage Obligations/Mortgage Backed Securities
 
 
 80,003,438
 
 
 
 
 748,259
 
 3.74
 %
 
 
 
 84,564,653
 
 
 
 
 813,514
 
 3.85
 %States and Political Subdivisions
 
 
 17,123,571
 
 
 
 
 229,949
 
 5.37
 %
 
 
 
 8,875,453
 
 
 
 
 124,319
 
 5.60
 %Total
 
 
 97,127,009
 
 
 
 
 978,208
 
 4.03
 %
 
 
 
 93,440,106
 
 
 
 
 937,833
 
 4.01
 %Loan Portfolio:Commercial
 
 
 33,696,372
 
 
 
 
 592,970
 
 7.14
 %
 
 
 
 27,917,525
 
 
 
 
 541,850
 
 7.78
 %Installment
 
 
 2,288,152
 
 
 
 
 48,041
 
 8.51
 %
 
 
 
 5,284,206
 
 
 
 
 101,141
 
 7.68
 %Commercial Mortgages
 
 
 54,991,486
 
 
 
 
 939,639
 
 6.93
 %
 
 
 
 53,005,191
 
 
 
 
 959,621
 
 7.26
 %Construction Wholesale
 
 
 83,460,274
 
 
 
 
 1,367,074
 
 6.64
 %
 
 
 
 56,119,098
 
 
 
 
 691,370
 
 4.94
 %Residential Mortgages
 
 
 9,615,717
 
 
 
 
 145,230
 
 6.13
 %
 
 
 
 8,605,523
 
 
 
 
 185,525
 
 8.65
 %Construction Retail
 
 
 5,926,870
 
 
 
 
 98,805
 
 6.76
 %
 
 
 
 5,381,127
 
 
 
 
 76,653
 
 5.71
 %Home Equity
 
 
 13,226,758
 
 
 
 
 190,893
 
 5.85
 %
 
 
 
 8,385,086
 
 
 
 
 97,633
 
 4.67
 %SBA Loans
 
 
 4,929,217
 
 
 
 
 93,071
 
 7.66
 %
 
 
 
 1,769,253
 
 
 
 
 28,107
 
 6.37
 %All Other Loans
 
 
 8,881,296
 
 
 
 
 436,215
 
 19.92
 %
 
 
 
 12,491,989
 
 
 
 
 402,698
 
 12.96
 %Total
 
 
 217,016,142
 
 
 
 
 3,911,938
 
 7.31
 %
 
 
 
 178,958,998
 
 
 
 
 3,084,598
 
 6.91
 %Total Interest-Earning Assets
 
 
 315,016,962
 
 
 
 
 4,895,359
 
 6.30
 %
 
 
 
 274,995,765
 
 
 
 
 4,028,642
 
 5.88
 %Allowance for Loan Losses
 
 
 (2,045,169
 )
 
 
 
 
 
 
 
 
 
 
 (1,824,435
 )Cash and Due From Bank
 
 
 8,390,866
 
 
 
 
 
 
 
 
 
 
 
 7,107,225Other Assets
 
 
 11,546,526
 
 
 
 
 
 
 
 
 
 
 
 9,986,198Total Assets
 
 
 $332,909,185
 
 
 
 
 
 
 
 
 
 
 
 290,264,753Interest-Bearing Liabilities:Money Market and NOW Accounts
 
 
 $109,285,655
 
 
 
 
 $313,403
 
 1.16
 %
 
 
 
 $83,086,862
 
 
 
 
 $187,085
 
 0.90
 %Savings Accounts
 
 
 25,588,967
 
 
 
 
 34,469
 
 0.55
 %
 
 
 
 26,418,860
 
 
 
 
 33,766
 
 0.51
 %Certificates of Deposit
 
 
 75,947,198
 
 
 
 
 520,178
 
 2.78
 %
 
 
 
 72,913,970
 
 
 
 
 454,628
 
 2.50
 %Certificates of Deposit of $100,000and Over
 
 
 12,088,531
 
 
 
 
 85,140
 
 2.86
 %
 
 
 
 11,730,726
 
 
 
 
 71,848
 
 2.46
 %Federal Funds Purchased/OtherBorrowed Funds
 
 
 23,180,000
 
 
 
 
 251,926
 
 4.41
 %
 
 
 
 19,330,958
 
 
 
 
 223,724
 
 4.64
 %Redeemable Subordinated Debentures
 
 
 5,000,000
 
 
 
 
 75,000
 
 6.00
 %
 
 
 
 5,000,000
 
 
 
 
 62,183
 
 4.97
 %Total Interest-Bearing Liabilities
 
 
 251,090,351
 
 
 
 
 1,280,116
 
 2.07
 %
 
 
 
 218,481,376
 
 
 
 
 1,033,234
 
 1.90
 %Net Interest Spread
 
 
 
 
 
 
 
 
 
 4.23
 %
 
 
 
 
 
 
 
 
 
 
 3.98
 %Demand Deposits
 
 
 52,599,650
 
 
 
 
 
 
 
 
 
 
 
 45,436,807Other Liabilities
 
 
 2,417,331
 
 
 
 
 
 
 
 
 
 
 
 2,351,948Total Liabilities
 
 
 306,107,332
 
 
 
 
 
 
 
 
 
 
 
 266,270,131Shareholders' Equity
 
 
 26,801,853
 
 
 
 
 
 
 
 
 
 
 
 23,994,622Total Liabilities and Shareholders'Equity
 
 
 332,909,185
 
 
 
 
 
 
 
 
 
 
 
 290,264,753Net Interest Margin
 
 
 
 
 
 $
 
 3,615,243
 
 4.65
 %
 
 
 
 
 
 
 
 $
 2,995,407
 
 4.37
 %The Companys net interest income increased by $585,578, or 19.8%, to $3,540,666 for the three months ended March 31, 2004 from the $2,955,088 reported for the three months ended March 31, 2004.
10

Average interest earning assets increased by $40,021,197, or 14.6%, to $315,016,962 for the quarter ended March 31, 2005 from $274,995,765 for the quarter ended March 31, 2004, with increases in 2005 of
$38,057,114 in loans and $3,686,903 in investment securities compared to 2004. Led by construction loans and commercial loans, the Banks average loan portfolio grew by 21.3% and loan yields averaged 7.31% for the first quarter of 2005,
increasing 40 basis points over the 6.91% yield for the first quarter of 2004.  The Banks average investment securities portfolio grew by 3.9% and the yield on that portfolio increased by 2 basis points for the quarter ended March 31, 2005
compared to the quarter ended March 31, 2004. Overall, the yield on interest earning assets increased 42 basis points to 6.30% for the quarter ended March 31, 2005 compared to 5.88% for the quarter ended March 31, 2004.
Average interest bearing liabilities increased by $32,608,975, or 14.9%, to $251,090,351 for the quarter ended March 31, 2005 from $218,481,376 for the quarter ended March 31, 2004. Money market and NOW accounts
increased on average by $26,198,793 for the three months ended March 31, 2005 compared to the three months ended March 31, 2004, contributing to the funding of loan portfolio growth. The cost of these deposits increased 26 basis points to 1.16%
for the first quarter of 2005 compared to 0.90% for the first quarter of 2004. Overall, the cost of total interest bearing liabilities increased 17 basis points to 2.07% for the three months ended March 31, 2005 compared to 1.90% for the three
months ended March 31, 2004.
The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 4.65% for the first three months of 2005 compared to 4.37% for the first three months of
2004.
Provision for Loan LossesFor each of the three months ended March 31, 2005 and March 31, 2004, the provision for loan losses was $60,000. The amount of the loan loss provisions and the level of the allowance for loan losses are critical
accounting polices of the Company and are based upon a number of factors including managements evaluation of potential losses in the portfolio after consideration of appraised collateral values, financial conditions and past credit history of
the borrowers as well as prevailing economic conditions in the Companys marketplace.
Non-Interest IncomeTotal non-interest income for the three months ended March 31, 2005 was $621,802, an increase of $109,843, or 21.5%, over non-interest income of $511,959 for the three months ended March 31, 2004. Service
charges on deposit accounts amounted to $158,860 for the three months ended March 31, 2005 compared to $126,632 for the three months ended March 31, 2004. In early 2005, the Bank performed a comparative study of competitors service
charges throughout its marketplace and, based on the studys findings, increased the service charge components and structure to be more consistent with those competitors.  This comparative study of fees and charges has also resulted in the
current period increase in other income to $106,865 for the three months ended March 31, 2005 compared to $63,641 for the three months ended March 31, 2004. Included in this component are fees assessed for ATM usage, wire transfer execution,
lock box services and other branch network services.
11

Non-Interest ExpenseTotal non-interest expense for the three months ended March 31, 2005 was $2,570,209, an increase of $450,297, or 21.2%, compared to non-interest expense of $2,119,912 for the three months ended March 31,
2004.
During the second half of 2004, the Company increased the number of branch offices in its target markets and introduced its products and services to an expanded geographic region. During June 2004, new branch offices opened
in Jamesburg (Middlesex County) and West Windsor (Mercer County), New Jersey.  In August 2004, the Perth Amboy (Middlesex County), New Jersey branch office was relocated to its expanded permanent location.  This expansion program has resulted in
significant incremental non-interest expenses as a result of branch leases, facilities maintenance and personnel staffing.
The following table presents the major components of non-interest expenses for the three months ended March 31, 2005 and 2004. The branch expansion in late 2004 accounts for essentially all of the increase in first quarter
2005 expense compared with the first quarter of 2004.
Non-interest ExpensesThree months ended March 31,2005
 
 
 
 2004Salaries and employee benefits
 
 
 
 $1,353,996
 
 
 
 $1,193,865Occupancy expenses
 
 
 
 350,215
 
 
 
 245,856Equipment expense
 
 
 
 118,205
 
 
 
 114,098Marketing
 
 
 
 88,060
 
 
 
 59,843Computer services
 
 
 
 144,179
 
 
 
 145,968Regulatory, professional and other fees
 
 
 
 210,868
 
 
 
 116,099Office expense
 
 
 
 93,869
 
 
 
 90,515All other expenses
 
 
 
 210,817
 
 
 
 153,668$2,570,209
 
 
 
 $2,119,912Financial ConditionMarch 31, 2005 Compared with December 31, 2004
Total consolidated assets at March 31, 2004 totaled $334,242,123, decreasing modestly by 0.47% from $335,830,440 at December 31, 2004.
Cash and Cash EquivalentsCash and Cash Equivalentsat March 31, 2005 totaled $7,619,522 compared to $7,924,409 at December 31, 2004. Cash and cash equivalents at March
31, 2005 consisted of cash and due from banks of $6,288,268 and Federal funds sold/short term investments of $1,331,254.  The corresponding balances at December 31, 2004 were $7,898,395 and $26,014, respectively.
12

Investment SecuritiesInvestment Securities represented 28.8% of total assets at March 31, 2005 and 29.1% at December 31, 2004.  Total securities decreased $1,494,471, or 1.5%, at March 31, 2005 to $96,261,315 from $97,755,786 at
December 31, 2004.
Investment Securities available for sale totaled $79,979,541 at March 31, 2005, a decrease of $5,609,108, or 6.6%, from $85,588,649 at December 31, 2004. During the first three months of 2005, $4,436,471 of
securities available for sale matured (predominantly U.S. government agency securities) and, among other uses, assisted in funding the growth in the loan portfolio.
Investment Securities held to maturity totaled $16,281,774 at March 31, 2005, an increase of $4,114,637, or 33.8%, from $12,167,137 at December 31, 2004.
LoansThe loan portfolio, which represents the Companys largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate
risk. The Companys primary lending focus continues to be commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans.
The following table sets forth the classification of loans by major category at March 31, 2005 and December 31, 2004.
Loan Portfolio Composition
 
 
 
 March 31, 2005
 
 
 
 
 December 31, 2004%
 
 
 
 
 
 
 %Component
 
 
 
 Amount
 
 of total
 
 
 
 
 Amount
 
 of totalConstruction loans
 
 
 
 $90,632,152
 
 42.4
 %
 
 
 
 $88,027,024
 
 41.8
 %Residential real estate loans
 
 
 
 9,520,391
 
 4.4
 %
 
 
 
 9,815,366
 
 4.7
 %Commercial and industrial loans
 
 
 
 97,780,548
 
 45.7
 %
 
 
 
 96,021,077
 
 45.6
 %Loans to individuals
 
 
 
 15,267,807
 
 7.1
 %
 
 
 
 16,002,619
 
 7.6
 %Lease financing
 
 
 
 60,935
 
 0.0
 %
 
 
 
 74,543
 
 0.0
 %All other loans
 
 
 
 691,919
 
 0.3
 %
 
 
 
 712,534
 
 0.3
 %$213,953,752
 
 100.0
 %
 
 
 
 $210,653,163
 
 100.0
 %The loan portfolio increased $3,300,701, or 1.6%, at March 31, 2005 to $213,953,752 from $210,653,051 at December 31, 2004.  The ability of the Company to enter into larger loan relationships and
managements philosophy of relationship banking are key factors in the Companys strategy for loan growth.  Strong competition from both bank and non-bank competitors could result in comparatively lower yields on new and established
lending relationships. The ultimate collectability of the loan portfolio and the recovery of the carrying amount of real estate are subject to changes in the Companys market region's economic environment and real estate market.
13

Non-Performing AssetsNon-performing assets consist of non-performing loans and other real estate owned.  Non-performing loans are composed of (1) loans on a non-accrual basis, (2) loans which are contractually past due 90 days or more as to
interest and principal payments but have not been classified as non-accrual, and (3) loans whose terms have been restructured to provide a reduction or deferral of interest on principal because of a deterioration in the financial position of the
borrower.
The Companys policy with regard to non-accrual loans varies by the type of loan involved. Generally, commercial loans are placed on a non-accrual status when they are 90 days past due unless these loans are well
secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or interest is in doubt. Consumer loans are generally charged off after they become 90
days past due. Residential mortgage loans are not generally placed on a non-accrual status unless the value of the real estate has deteriorated to the point that a potential loss of principal or interest exists. Subsequent payments are credited to
income only if collection of principal is not in doubt.
Nonaccrual loans amounted to $1,118,008 at March 31, 2005, compared to $1,049,411 at December 31, 2004. As the table demonstrates, despite the amount of non-performing assets at March 31, 2005, loan quality and
ratios remain strong. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.
Non-Performing Assets and Loans
 
 March 31
 
 December 312005
 
 2004Non-Performing loans:Loans 90 days or more past due and still accruing
 
 $0
 
 $68,130Non-accrual loans
 
 1,118,008
 
 1,049,411Total non-performing loans
 
 1,118,008
 
 1,112,541Other real estate owned
 
 0
 
 0Total non-performing assets
 
 $1,118,008
 
 $1,112,541Non-performing loans to total loans
 
 0.52
 %
 0.50
 %Non-performing assets to total assets
 
 0.33
 %
 0.33
 %The Company had no restructured loans at March 31, 2005 and December 31, 2004. Impaired loans totaled $1,118,008 at March 31, 2005 and $1,049,411 at December 31, 2004.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve
available for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.
14

Management utilizes a systematic and documented allowance adequacy methodology for loan losses that requires specific allowance assessment for all loans, including real estate mortgages and consumer loans. This methodology
assigns reserves based upon credit risk ratings for all loans.  The reserves are based upon various factors, including historical performance, and the current economic environment. Management continually reviews the process used to determine the
adequacy of the allowance for loan losses. Allocations to the allowance for loan losses, both specific and general, are determined after this review.  Loans are classified based on internal reviews and evaluations performed by the lending staff.
These evaluations are, in turn, examined by the Companys internal loan review specialist. A formal loan review function, independent of loan origination, is used to identify and monitor risk classifications.
The allowance for loan losses amounted to $2,065,169 at March 31, 2005, an increase of $60,000 from December 31, 2004. The ratio of the allowance for loan losses to total loans was 0.97% at March 31, 2005 and 0.91%
at December 31, 2004, respectively. The quality of the loan portfolio remained strong and it is managements belief that the allowance for loan losses is adequate in relation to credit risk exposure levels.
The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
Allowance for Loan Losses
 
 
 
 March 31,
 
 
 
 
 March 31,2005
 
 
 
 
 2004Balance, beginning of period
 
 
 
 $2,005,169
 
 
 
 
 $1,786,632Provision charged to operating expenses
 
 
 
 60,000
 
 
 
 
 60,000Loans charged off
 
 
 
 0
 
 
 
 
 0Recoveries
 
 
 
 0
 
 
 
 
 0Net (charge offs) / recoveries
 
 
 
 0
 
 
 
 
 0Balance, end of period
 
 
 
 $2,065,169
 
 
 
 
 $1,846,632Loans:At period end
 
 
 
 $213,953,752
 
 
 
 
 $169,552,730Average during the period
 
 
 
 217,016,142
 
 
 
 
 178,958,998Net charge offs to average loans outstanding
 
 
 
 0.00
 %
 
 
 
 0.00
 %Allowance for loan losses to:Total loans at period end
 
 
 
 0.97
 %
 
 
 
 1.09
 %Non-performing loans
 
 
 
 184.72
 %
 
 
 
 559.26
 %DepositsDeposits, which include demand deposits (interest bearing and non-interest bearing), savings and time deposits, are a fundamental and cost-effective source of funding. The Company offers a variety of products designed to
attract and retain customers, with the Companys primary focus being on building and expanding long-term relationships.
Total deposits decreased $951,184, or 0.3%, to $275,935,849 at March 31, 2005 from $276,887,033 at December 31, 2004. This decrease in total deposits was primarily the result of a $773,241 decrease in
interest bearing deposits to $225,319,211, as management believes that depositors with maturing time deposits migrated from the Company in searching for higher rates during the current period of economic volatility.
15

Other BorrowingsOther Borrowings are mainly comprised of fixed rate convertible advances from the Federal Home Loan Bank (FHLB) and federal funds purchased. These borrowings are primarily used to fund asset growth not supported
by deposit generation. The balance of other borrowings at March 31, 2005 consisted of long-term FHLB borrowings of $15,500,000 and overnight funds purchases of $8,300,000. The balance of other borrowings at December 31, 2004 consisted of
long-term FHLB borrowings of $15,500,000 and overnight funds purchased of $9,700,000. FHLB advances are fully secured by marketable securities and qualifying one-to-four family mortgage loans.
Shareholders Equity And DividendsShareholders equity at March 31, 2005 totaled $26,945,524, an increase of $155,140, or 0.6%, from $26,790,384 at December 31, 2004. Book value per common share rose to $8.14 at March 31, 2005 from
$8.11 at December 31, 2004.
The increase in shareholders equity and book value per share resulted primarily from net income of $875,807 less the combined effects of stock buybacks and the increase in unrealized holding losses on available
for sale securities.
The Companys stock is listed for trading on the Nasdaq National Market System, under the symbol FCCY.
In 2000, the Board of Directors authorized a 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 made during the first quarter ended March 31, 2005 is set forth under Part II, Item 2 of this report,Unregistered Sales of Equity Securities and Use of Proceeds.
16

The table below presents the actual capital amounts and ratios of the Company for the periods indicated:
Capital RatiosAmount
 
 RatioAs of March 31, 2005 -Total capital to risk weighted assets
 
 $34,796,498
 
 13.94
 %Tier 1 capital to risk weighted assets
 
 32,731,329
 
 13.11
 %Tier 1 capital to average assets
 
 32,731,329
 
 9.83
 %As of December 31, 2004 -Total capital to risk weighted assets
 
 $33,898,932
 
 13.99
 %Tier 1 capital to risk weighted assets
 
 31,893,763
 
 13.17
 %Tier 1 capital to average assets
 
 31,893,763
 
 10.16
 %The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1 capital to risk weighted assets ratio of 4.0% and a total
capital to risk weighted assets ratio of 8.0%.  To be considered well capitalized, an institution must have a minimum Tier 1 leverage ratio of 5.0%. At March 31, 2005 the ratios of the Company exceeded the ratios required to be
considered well capitalized. It is managements goal to monitor and maintain adequate capital levels to continue to support asset growth and continue its status as a well-capitalized institution.
LiquidityAt March 31, 2005, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors withdrawal requirements, and other operational and customer credit needs could
be satisfied.
Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Liquidity management refers to the Companys ability to support asset growth while satisfying the borrowing needs and
deposit withdrawal requirements of customers.  In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a banks ability to meet its liquidity needs. On the
asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based
liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities.  On the liability side, the primary source of liquidity is the ability to generate core deposits.
Short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earnings assets.
The Company has established a borrowing relationship with the FHLB which further supports and enhances liquidity.
17

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At March 31, 2005, the balance of cash and cash equivalents was $7,619,522.
Net cash provided by operating activities totaled $5,300,992 in the three months ended March 31, 2005 compared to $9,724,767 in the three months ended March 31, 2004.  The primary sources of funds are net income
from operations adjusted for provision for loan losses, depreciation expenses, and net proceeds from sales of loans held for sale. During 2005, a lower volume of originations of loans held for sale required less cash be used in this operating
activity.
Net cash used in investing activities totaled $3,046,732 in the three months ended March 31, 2005 compared to $12,111,051 used in investing activities in the three months ended March 31, 2004. The current period
amount was the result of a lower volume of securities purchases for the three months ended March 31, 2005.
Net cash used in financing activities amounted to $2,559,147 in the three months ended March 31, 2005 compared to $1,535,177 used in financing activities in the three months ended March 31, 2004. The current period
amount resulted primarily from a decrease in deposits combined with a decrease in other borrowings during the three months period ended March 31, 2005 compared to the corresponding prior year period.
The securities portfolio is also a source of liquidity, providing cash flows from maturities and periodic repayments of principal. During the three months ended March 31, 2005, maturities and prepayments of investment
securities totaled $4,486,878. Another source of liquidity is the loan portfolio, which provides a steady flow of payments and maturities.
Interest Rate Sensitivity AnalysisThe largest component of the Companys total income is net interest income, and the majority of the Companys financial instruments are composed of interest rate-sensitive assets and liabilities with various terms
and maturities.  The primary objective of management is to maximize net interest income while minimizing interest rate risk.  Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit
withdrawals, and differences in lending and funding rates. Management actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities.
The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost-effective,
and therefore, has focused its efforts on increasing the Companys spread by attracting lower-cost retail deposits.
18

Item 3.     Quantitative and Qualitative Disclosures About Market Risk
To measure the impacts of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (EVPE) models. The modified duration
of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used
to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The economic value of equity is likely to be different as interest rates change. Results falling outside prescribed ranges
require action by management. At March 31, 2005 and December 31, 2004, the Companys variance in the economic value equity as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points is within the negative
3% guideline, as shown in the tables below.
The market capitalization of the Company should not be equated to the EVPE, which only deals with the valuation of balance sheet cash flows using conservative assumptions. Calculated core deposit premiums may be less than
what is available in an outright sale. The model does not consider potential premiums on floating rate loan sales, the impact of overhead expense, non-interest income, taxes, industry market price multiples and other factors reflected in the market
capitalization of a company.
The following tables set forth certain information relating to the Companys financial instruments that are sensitive to changes in interest rates, categorized by expected maturity or repricing and the instruments fair
value at March 31, 2005 and December 31, 2004.
Market Risk AnalysisMarch 31, 2005Change in Interest Rates
 
 
 Flat
 
 -200bp
 
 
 +200bpEconomic Value of Portfolio Equity
 
 
 $40,651,000
 
 $38,316,000
 
 
 $38,510,000Change
 
 
 
 
 (2,335,000
 )
 
 (2,142,000
 )Change as a Percentage of Assets
 
 
 
 
 (-0.70%
 )
 
 (-0.64%
 )December 31, 2004Change in Interest Rates
 
 
 Flat
 
 -200bp
 
 
 +200bpEconomic Value of Portfolio Equity
 
 
 $38,221,000
 
 $34,681,000
 
 
 $35,641,000Change
 
 
 
 
 (3,540,000
 )
 
 (2,580,000
 )Change as a Percentage of Assets
 
 
 
 
 (-1.05%
 )
 
 (-0.77%
 )19

Item 4.     Controls and Procedures.The Companys chief executive officer and chief financial officer, with the assistance of other members of the Companys management, have evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Companys chief executive officer and chief financial officer have concluded that the Companys disclosure controls and
procedures are effective.
The Companys chief executive officer and chief financial officer have also concluded that there have not been any changes in the Companys internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect, the Companys internal control over financial reporting.
20

PART II. OTHER INFORMATION
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity SecuritiesIn 2000, the Board of Directors authorized a 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. The following table discloses repurchases of Company shares made during the quarter ended March 31, 2005.
Issuer Purchases of Equity Securities(1)MaximumNumber ofTotal Number of
 
 Shares ThatTotal
 
 
 
 
 
 Shares Purchased
 
 May Yet beNumber
 
 
 
 Average
 
 As Part of Publicly
 
 Purchasedof Shares
 
 
 
 Price Paid
 
 Announced Plan or
 
 Under the PlanPeriod
 
 Purchased
 
 
 
 Per Share
 
 Program
 
 or ProgramBeginning
 
 EndingJanuary 1, 2005
 
 January 31, 2005
 
 
 
 
 
 $17.09
 
 182
 
 65,828February 1, 2005
 
 February 29, 2005
 
 
 
 
 
 $20.34
 
 4,000
 
 61,828March 1, 2005
 
 March 31, 2005
 
 
 
 
 
 $19.98
 
 11,000
 
 50,328Total
 
 
 
 
 
 $20.04
 
 15,682________________(1)
 The stock repurchase program, which was announced on March 12, 2001, covers a maximum of 140,290 shares of common stock of the Company, representing 5% of the outstanding common stock of the Company on December 31, 2000.
Unless terminated earlier by resolution of the Board of Directors, the stock repurchase program will expire when the Company has repurchased all shares authorized for repurchase under the program.21

Item 6.
 
 Exhibits.3(i)
 
 
 
 Certificate of Incorporation of the Company (incorporated byreference to Exhibit 3(i) to the Companys Form 10-K filed with theSEC on March 24, 2005)3(ii)
 
 
 
 Bylaws of the Company (incorporated by reference to Exhibit 3(ii)to the Companys Form 10-QSB filed with the SEC on May 14,2003)10.16
 
 
 
 Employment Agreement between the Company and Robert F.Mangano dated February 22, 2005 (incorporated by
referenceto Exhibit No. 10.16 to the Company's Form 8-K filed
with theSEC on February 24, 2005)31.1
 
 *
 
 Certification of Robert F. Mangano, chief executive officer of theCompany, pursuant to Securities Exchange Act Rule 13a-14(a)31.2
 
 *
 
 Certification of Joseph M. Reardon, chief financial
officer of theCompany, pursuant to Securities Exchange Act Rule
13a-14(a)32
 
 *
 
 Certifications pursuant to 18 U.S.C. Section 1350, as
adoptedpursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signedby Robert F. Mangano, chief executive officer of the
Company,and Joseph M. Reardon, chief financial officer of the Company*
 Filed herewith22

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.
1STCONSTITUTION BANCORPDate: May 16, 2005
 By:
 /s/ ROBERT F. MANGANORobert F. ManganoPresident and Chief Executive Officer(Principal Executive Officer)Date: May 16, 2005
 By:
 /s/ JOSEPH M. REARDONJoseph M. ReardonSenior Vice President and Treasurer(Principal Accounting Officer)23