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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2004



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



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1ST CONSTITUTION BANCORP

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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  x    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  x



As of November 9, 2004, there were 1,575,328
shares of the registrants common stock, no par value, outstanding.



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##### Table of Contents

1ST CONSTITUTION BANCORP

FORM 10-Q



INDEX



|           |  |                                                                                                                                                |  |     
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                                                |  | Page
|PART I.    |  | FINANCIAL INFORMATION                                                                                                                          |  |     
|           |  |                                                                                                                                               
|Item 1.    |  | Financial Statements                                                                                                                           |  | 1   
|           |  |                                                                                                                                               
|           |  | Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003                                                         |  | 1   
|           |  |                                                                                                                                               
|           |  | Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited) |  | 2   
|           |  |                                                                                                                                               
|           |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited)              |  | 3   
|           |  |                                                                                                                                               
|           |  | Notes to Consolidated Financial Statements (unaudited)                                                                                         |  | 4   
|           |  |                                                                                                                                               
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                          |  | 9   
|           |  |                                                                                                                                               
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                     |  | 23  
|           |  |                                                                                                                                               
|Item 4.    |  | Controls and Procedures                                                                                                                        |  | 24  
|           |  |                                                                                                                                               
|PART II    |  | OTHER INFORMATION                                                                                                                              |  |     
|           |  |                                                                                                                                               
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                                               |  | 25  
|           |  |                                                                                                                                               
|Item 6.    |  | Exhibits                                                                                                                                       |  | 26  
|           | 
|SIGNATURES |  | 27                                                                                                                                            



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



1st Constitution Bancorp and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                                                       |  | September 30, 2004 |             |   | December 31, 2003 |  
|                                                                                                                                                                                       |  | (unaudited)        |             |   |                   |  
|ASSETS                                                                                                                                                                                 |  |                    |             |   |                   |   |             |  
|CASH AND DUE FROM BANKS                                                                                                                                                                |  | $                  | 11,124,936  |   |                   | $ | 6,987,850   |  
|                                                                                                                                                                                       |  |                   
|FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS                                                                                                                                            |  |                    | 722,527     |   |                   |   | 7,715,036   |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total cash and cash equivalents                                                                                                                                                        |  |                    | 11,847,463  |   |                   |   | 14,702,886  |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|INVESTMENT SECURITIES:                                                                                                                                                                 |  |                    |             |   |                   |   |             |  
|Available for sale, at fair value                                                                                                                                                      |  |                    | 90,458,599  |   |                   |   | 84,999,973  |  
|Held to maturity (fair value of $9,010,114 and $6,516,652 in 2004 and 2003, respectively)                                                                                              |  |                    | 8,791,459   |   |                   |   | 6,191,197   |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total investment securities                                                                                                                                                            |  |                    | 99,250,058  |   |                   |   | 91,191,170  |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|LOANS HELD FOR SALE                                                                                                                                                                    |  |                    | 9,444,112   |   |                   |   | 15,405,982  |  
|                                                                                                                                                                                       |  |                   
|LOANS                                                                                                                                                                                  |  |                    | 199,886,500 |   |                   |   | 163,950,306 |  
|Less - Allowance for loan losses                                                                                                                                                       |  |                    | (1,945,109  | ) |                   |   | (1,786,632  | )
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Net loans                                                                                                                                                                              |  |                    | 197,941,391 |   |                   |   | 162,163,674 |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|PREMISES AND EQUIPMENT, net                                                                                                                                                            |  |                    | 2,187,916   |   |                   |   | 1,361,517   |  
|                                                                                                                                                                                       |  |                   
|ACCRUED INTEREST RECEIVABLE                                                                                                                                                            |  |                    | 1,487,668   |   |                   |   | 1,169,015   |  
|                                                                                                                                                                                       |  |                   
|BANK OWNED LIFE INSURANCE                                                                                                                                                              |  |                    | 6,529,361   |   |                   |   | 6,331,006   |  
|                                                                                                                                                                                       |  |                   
|OTHER ASSETS                                                                                                                                                                           |  |                    | 1,200,430   |   |                   |   | 1,157,924   |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total assets                                                                                                                                                                           |  | $                  | 329,888,399 |   |                   | $ | 293,483,174 |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                   |  |                    |             |   |                   |   |             |  
|                                                                                                                                                                                       |  |                   
|LIABILITIES:                                                                                                                                                                           |  |                    |             |   |                   |   |             |  
|Deposits                                                                                                                                                                               |  |                    |             |   |                   |   |             |  
|Non-interest bearing                                                                                                                                                                   |  | $                  | 52,850,885  |   |                   | $ | 42,661,432  |  
|Interest bearing                                                                                                                                                                       |  |                    | 225,062,839 |   |                   |   | 202,692,292 |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total deposits                                                                                                                                                                         |  |                    | 277,913,724 |   |                   |   | 245,353,724 |  
|                                                                                                                                                                                       |  |                   
|SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE                                                                                                                                         |  |                    | 1,941,042   |   |                   |   | 1,921,015   |  
|OTHER BORROWINGS                                                                                                                                                                       |  |                    | 16,500,000  |   |                   |   | 15,500,000  |  
|REDEEMABLE SUBORDINATED DEBENTURES                                                                                                                                                     |  |                    | 5,155,000   |   |                   |   | 5,155,000   |  
|ACCRUED INTEREST PAYABLE                                                                                                                                                               |  |                    | 898,267     |   |                   |   | 906,576     |  
|ACCRUED EXPENSES AND OTHER LIABILITIES                                                                                                                                                 |  |                    | 1,456,554   |   |                   |   | 1,061,603   |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total liabilities                                                                                                                                                                      |  |                    | 303,864,587 |   |                   |   | 269,897,918 |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|SHAREHOLDERS EQUITY:                                                                                                                                                                  |  |                    |             |   |                   |   |             |  
|Common stock, no par value; 15,000,000 shares authorized; 1,565,367 shares issued and 1,558,273 and 1,565,163 outstanding as of September 30,
2004 and December 31, 2003, respectively |  |                    | 19,626,788  |   |                   |   | 19,694,828  |  
|Retained earnings                                                                                                                                                                      |  |                    | 6,508,387   |   |                   |   | 3,745,784   |  
|Treasury Stock, shares at cost (7,094 shares at September 30, 2004 and 204 shares at December 31, 2003, respectively)                                                                  |  |                    | (228,896    | ) |                   |   | (5,517      | )
|Accumulated other comprehensive income                                                                                                                                                 |  |                    | 117,533     |   |                   |   | 150,161     |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total shareholders equity                                                                                                                                                             |  |                    | 26,023,812  |   |                   |   | 23,585,256  |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                                                                                             |  | $                  | 329,888,399 |   |                   | $ | 293,483,174 |  
|                                                                                                                                                                                       |  |                    |             |   |                   |   |             |  



See accompanying notes to consolidated
financial statements.



1



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##### Table of Contents

1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Income

(Unaudited)



|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|---------------------------------------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                                                                   |  | Three months ended September 30, |           | Nine months ended September 30,
|                                                                                   |  | 2004                             |           | 2003                            |   | 2004      |  | 2003
|INTEREST INCOME                                                                    |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Interest and fees on loans                                                         |  | $                                | 3,491,228 |                                 | $ | 2,897,516 |  | $    | 9,747,859  |  | $ | 8,499,453 
|Interest on securities                                                             |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Taxable                                                                            |  |                                  | 821,323   |                                 |   | 622,215   |  |      | 2,422,332  |  |   | 1,933,340 
|Tax-exempt                                                                         |  |                                  | 90,461    |                                 |   | 85,114    |  |      | 258,112    |  |   | 227,323   
|Interest on Federal funds sold and short-term investments                          |  |                                  | 634       |                                 |   | 1,396     |  |      | 7,491      |  |   | 6,969     
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Total interest income                                                              |  |                                  | 4,403,646 |                                 |   | 3,606,241 |  |      | 12,435,794 |  |   | 10,667,085
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|INTEREST EXPENSE                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Interest on deposits                                                               |  |                                  | 874,168   |                                 |   | 757,576   |  |      | 2,382,346  |  |   | 2,417,925 
|Interest on securities sold under agreement to repurchase and other borrowed funds |  |                                  | 272,382   |                                 |   | 261,413   |  |      | 741,578    |  |   | 725,548   
|Interest on redeemable subordinated debentures                                     |  |                                  | 64,784    |                                 |   | 63,761    |  |      | 190,421    |  |   | 194,684   
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Total interest expense                                                             |  |                                  | 1,211,334 |                                 |   | 1,082,750 |  |      | 3,314,345  |  |   | 3,338,157 
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Net interest income                                                                |  |                                  | 3,192,312 |                                 |   | 2,523,491 |  |      | 9,121,449  |  |   | 7,328,928 
|Provision for loan losses                                                          |  |                                  | 60,000    |                                 |   | 60,000    |  |      | 180,000    |  |   | 180,000   
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Net interest income after provision for loan losses                                |  |                                  | 3,132,312 |                                 |   | 2,463,491 |  |      | 8,941,449  |  |   | 7,148,928 
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|NON-INTEREST INCOME                                                                |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Service charges on deposit accounts                                                |  |                                  | 142,355   |                                 |   | 124,799   |  |      | 390,501    |  |   | 428,774   
|Gain on sale of loans held for sale                                                |  |                                  | 307,539   |                                 |   | 399,612   |  |      | 916,861    |  |   | 1,016,764 
|Gain on sale of securities available for sale                                      |  |                                  | 27,545    |                                 |   | 0         |  |      | 27,545     |  |   | 0         
|Income on bank-owned life insurance                                                |  |                                  | 79,855    |                                 |   | 62,688    |  |      | 198,355    |  |   | 202,051   
|Other income                                                                       |  |                                  | 90,603    |                                 |   | 94,383    |  |      | 224,358    |  |   | 227,434   
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Total non-interest income                                                          |  |                                  | 647,897   |                                 |   | 681,482   |  |      | 1,757,620  |  |   | 1,875,023 
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|NON-INTEREST EXPENSE                                                               |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Salaries and employee benefits                                                     |  |                                  | 1,283,588 |                                 |   | 1,022,114 |  |      | 3,696,763  |  |   | 2,966,496 
|Occupancy expense                                                                  |  |                                  | 282,028   |                                 |   | 199,198   |  |      | 765,955    |  |   | 603,827   
|Other operating expenses                                                           |  |                                  | 789,961   |                                 |   | 601,106   |  |      | 2,152,272  |  |   | 1,809,044 
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Total non-interest expense                                                         |  |                                  | 2,355,577 |                                 |   | 1,822,418 |  |      | 6,614,990  |  |   | 5,379,367 
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Income before income taxes                                                         |  |                                  | 1,424,632 |                                 |   | 1,322,555 |  |      | 4,084,079  |  |   | 3,644,584 
|Income taxes                                                                       |  |                                  | 468,537   |                                 |   | 469,722   |  |      | 1,321,476  |  |   | 1,288,867 
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Net income                                                                         |  | $                                | 956,095   |                                 | $ | 852,833   |  | $    | 2,762,603  |  | $ | 2,355,717 
|                                                                                   |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|NET INCOME PER SHARE                                                               |  |                                  |           |                                 |   |           |  |      |            |  |   |           
|Basic                                                                              |  | $                                | 0.61      |                                 | $ | 0.54      |  | $    | 1.77       |  | $ | 1.51      
|Diluted                                                                            |  | $                                | 0.58      |                                 | $ | 0.52      |  | $    | 1.68       |  | $ | 1.44      



See
accompanying notes to consolidated financial statements



2



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##### Table of Contents

1st Constitution Bancorp and Subsidiaries

Consolidated Statements Of Cash Flows

(Unaudited)



|                                                                                  |  |                                 |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | Nine months ended September 30, |            
|                                                                                  |  | 2004                            |             |   | 2003 |  
|OPERATING ACTIVITIES:                                                             |  |                                 |             |   |      |   |             |  
|Net income                                                                        |  | $                               | 2,762,603   |   |      | $ | 2,355,717   |  
|Adjustments to reconcile net income to net cash provided by operating activities- |  |                                 |             |   |      |   |             |  
|                                                                                  |  |                                
|Provision for loan losses                                                         |  |                                 | 180,000     |   |      |   | 180,000     |  
|Depreciation and amortization                                                     |  |                                 | 267,203     |   |      |   | 249,803     |  
|Net amortization of premiums on securities                                        |  |                                 | 291,770     |   |      |   | 1,006,940   |  
|Gain on sale of loans held for sale                                               |  |                                 | (916,861    | ) |      |   | (1,016,764  | )
|Gain on sale of securities available for sale                                     |  |                                 | (27,545     | ) |      |   | 0           |  
|Originations of loans held for sale                                               |  |                                 | (56,690,533 | ) |      |   | (65,616,944 | )
|Proceeds from sales of loans held for sale                                        |  |                                 | 63,569,264  |   |      |   | 73,181,162  |  
|(Increase) decrease in accrued interest receivable                                |  |                                 | (318,653    | ) |      |   | (112,998    | )
|Income on Bank-owned life insurance                                               |  |                                 | (198,355    | ) |      |   | (202,051    | )
|(Increase) decrease in other assets                                               |  |                                 | (34,677     | ) |      |   | 167,219     |  
|Decrease in accrued interest payable                                              |  |                                 | (8,309      | ) |      |   | (329,029    | )
|Increase (decrease) in accrued expenses and other liabilities                     |  |                                 | 394,951     |   |      |   | (215,497    | )
|                                                                                  |  |                                 |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |                                 | 9,270,858   |   |      |   | 9,647,558   |  
|                                                                                  |  |                                 |             |   |      |   |             |  
|                                                                                  |  |                                
|INVESTING ACTIVITIES:                                                             |  |                                 |             |   |      |   |             |  
|                                                                                  |  |                                
|Purchases of securities -                                                         |  |                                 |             |   |      |   |             |  
|Available for sale                                                                |  |                                 | (28,454,928 | ) |      |   | (42,820,888 | )
|Held to maturity                                                                  |  |                                 | (3,302,038  | ) |      |   | (198,102    | )
|Proceeds from maturities and prepayments of securities -                          |  |                                 |             |   |      |   |             |  
|Available for sale                                                                |  |                                 | 18,899,045  |   |      |   | 47,344,551  |  
|Held to maturity                                                                  |  |                                 | 693,051     |   |      |   | 902,400     |  
|Proceeds from sales of securities available for sale                              |  |                                 | 3,801,300   |   |      |   | 0           |  
|Net increase in loans                                                             |  |                                 | (35,957,717 | ) |      |   | (4,962,436  | )
|Capital expenditures                                                              |  |                                 | (1,093,602  | ) |      |   | (263,997    | )
|                                                                                  |  |                                 |             |   |      |   |             |  
|Net cash (used in) provided by investing activities                               |  |                                 | (45,414,790 | ) |      |   | 1,528       |  
|                                                                                  |  |                                 |             |   |      |   |             |  
|FINANCING ACTIVITIES:                                                             |  |                                 |             |   |      |   |             |  
|                                                                                  |  |                                
|Purchase of treasury stock, net                                                   |  |                                 | (291,419    | ) |      |   | 0           |  
|Net increase in demand, savings and time deposits                                 |  |                                 | 32,560,000  |   |      |   | 3,707,864   |  
|Net increase (decrease) in securities sold under agreements to repurchase         |  |                                 | 20,027      |   |      |   | (538,345    | )
|Net increase in other borrowings                                                  |  |                                 | 1,000,000   |   |      |   | 3,500,000   |  
|                                                                                  |  |                                 |             |   |      |   |             |  
|Net cash provided by financing activities                                         |  |                                 | 33,288,608  |   |      |   | 6,669,519   |  
|                                                                                  |  |                                 |             |   |      |   |             |  
|(Decrease) increase in cash and cash equivalents                                  |  |                                 | (2,855,423  | ) |      |   | 16,318,605  |  
|                                                                                  |  |                                
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                  |  |                                 | 14,702,886  |   |      |   | 9,594,374   |  
|                                                                                  |  |                                 |             |   |      |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        |  | $                               | 11,847,463  |   |      | $ | 25,912,979  |  
|                                                                                  |  |                                 |             |   |      |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                |  |                                 |             |   |      |   |             |  
|Cash paid during the period for -                                                 |  |                                 |             |   |      |   |             |  
|Interest                                                                          |  | $                               | 3,322,654   |   |      | $ | 3,667,186   |  
|Income taxes                                                                      |  | $                               | 1,811,112   |   |      | $ | 1,380,230   |  
|                                                                                  |  |                                 |             |   |      |   |             |  



See accompanying notes to consolidated
financial statements



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##### Table of Contents

1st Constitution Bancorp and Subsidiaries

Notes To Consolidated Financial Statements

September 30, 2004 (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, 2003, filed with the SEC on March 25, 2004.



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.



Certain reclassifications have been made to the prior years financial statements to conform with the classifications used in 2004.



Net Income Per Common Share



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



Diluted net income per common
share is computed by dividing net income by the weighted average number of shares outstanding, as adjusted for the assumed exercise of potential common stock options, using the treasury stock method. All share and per share amounts have been
restated for the effect of a 5% stock dividend declared on December 18, 2003 and paid on January 31, 2004 to shareholders of record on January 15, 2004.



4



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##### Table of Contents

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 September 30, 2004 |        
|                                                                    |  | Income                                |         | Weighted- averageshares |           | Per share amount |  
|Basic EPS                                                           |  |                                       |         |                         |           |                  |   |       |  
|Net income available to common stockholders                         |  | $                                     | 956,095 |                         | 1,560,165 |                  | $ | 0.61  |  
|                                                                    |  |                                       |        
|Effect of dilutive securities                                       |  |                                       |         |                         |           |                  |   |       |  
|Options and Grants                                                  |  |                                       |        |                         | 78,655    |                  |   | (0.03 | )
|                                                                    |  |                                       |         |                         |           |                  |   |       |  
|Diluted EPS                                                         |  |                                       |         |                         |           |                  |   |       |  
|Net income available to common stockholders plus assumed conversion |  | $                                     | 956,095 |                         | 1,638,820 |                  | $ | 0.58  |  
|                                                                    |  |                                       |         |                         |           |                  |   |       |  



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



|                                                                    |  |                                       |         |                         |           |                  |   |       |  
|------------------------------------------------------------------- |  | ------------------------------------- | ------- | ----------------------- | --------- | ---------------- | - | ----- | -
|                                                                    |  | Three Months Ended September 30, 2003 |        
|                                                                    |  | Income                                |         | Weighted- averageshares |           | Per share Amount |  
|Basic EPS                                                           |  |                                       |         |                         |           |                  |   |       |  
|Net income available to common stockholders                         |  | $                                     | 852,833 |                         | 1,567,446 |                  | $ | 0.54  |  
|                                                                    |  |                                       |        
|Effect of dilutive securities                                       |  |                                       |         |                         |           |                  |   |       |  
|Options and Grants                                                  |  |                                       |        |                         | 72,229    |                  |   | (0.02 | )
|                                                                    |  |                                       |         |                         |           |                  |   |       |  
|                                                                    |  |                                       |        
|Diluted EPS                                                         |  |                                       |         |                         |           |                  |   |       |  
|Net income available to common stockholders plus assumed conversion |  | $                                     | 852,833 |                         | 1,639,675 |                  | $ | 0.52  |  
|                                                                    |  |                                       |         |                         |           |                  |   |       |  



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



|                                                                    |  |                                      |           |                         |           |                  |   |       |  
|------------------------------------------------------------------- |  | ------------------------------------ | --------- | ----------------------- | --------- | ---------------- | - | ----- | -
|                                                                    |  | Nine Months Ended September 30, 2004 |          
|                                                                    |  | Income                               |           | Weighted- averageshares |           | Per share amount |  
|Basic EPS                                                           |  |                                      |           |                         |           |                  |   |       |  
|Net income available to common stockholders                         |  | $                                    | 2,762,603 |                         | 1,562,237 |                  | $ | 1.77  |  
|                                                                    |  |                                      |          
|Effect of dilutive securities                                       |  |                                      |           |                         |           |                  |   |       |  
|Options and Grants                                                  |  |                                      |          |                         | 78,511    |                  |   | (0.09 | )
|                                                                    |  |                                      |           |                         |           |                  |   |       |  
|Diluted EPS                                                         |  |                                      |           |                         |           |                  |   |       |  
|Net income available to common stockholders plus assumed conversion |  | $                                    | 2,762,603 |                         | 1,640,748 |                  | $ | 1.68  |  
|                                                                    |  |                                      |           |                         |           |                  |   |       |  



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



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##### Table of Contents

|                                                                    |  |                                      |           |                         |           |                  |   |       |  
|------------------------------------------------------------------- |  | ------------------------------------ | --------- | ----------------------- | --------- | ---------------- | - | ----- | -
|                                                                    |  | Nine Months Ended September 30, 2003 |          
|                                                                    |  | Income                               |           | Weighted- averageshares |           | Per share Amount |  
|Basic EPS                                                           |  |                                      |           |                         |           |                  |   |       |  
|Net income available to common stockholders                         |  | $                                    | 2,355,717 |                         | 1,563,319 |                  | $ | 1.51  |  
|                                                                    |  |                                      |          
|Effect of dilutive securities Options and Grants                    |  |                                      |          |                         | 77,723    |                  |   | (0.07 | )
|                                                                    |  |                                      |           |                         |           |                  |   |       |  
|Diluted EPS                                                         |  |                                      |           |                         |           |                  |   |       |  
|Net income available to common stockholders plus assumed conversion |  | $                                    | 2,355,717 |                         | 1,641,042 |                  | $ | 1.44  |  
|                                                                    |  |                                      |           |                         |           |                  |   |       |  



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



Stock-Based
Compensation



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



|                                                                                                                                 |  |                                  |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                 |  | Three months ended September 30, |        
|                                                                                                                                 |  | 2004                             |         |   | 2003 |  
|Net income -                                                                                                                     |  |                                  |         |   |      |   |         |  
|As reported                                                                                                                      |  | $                                | 956,095 |   |      | $ | 852,833 |  
|Deduct: Stock-based employee compensation determined under fair value based method for stock options, net of related tax
effects |  |                                  | (6,357  | ) |      |   | (4,387  | )
|                                                                                                                                 |  |                                  |         |   |      |   |         |  
|Pro forma                                                                                                                        |  | $                                | 949,738 |   |      | $ | 848,446 |  
|                                                                                                                                 |  |                                  |         |   |      |   |         |  
|Net income per share -                                                                                                           |  |                                  |         |   |      |   |         |  
|As reported -                                                                                                                    |  |                                  |         |   |      |   |         |  
|Basic                                                                                                                            |  | $                                | 0.61    |   |      | $ | 0.54    |  
|Diluted                                                                                                                          |  | $                                | 0.58    |   |      | $ | 0.52    |  
|Pro forma -                                                                                                                      |  |                                  |         |   |      |   |         |  
|Basic                                                                                                                            |  | $                                | 0.61    |   |      | $ | 0.54    |  
|Diluted                                                                                                                          |  | $                                | 0.58    |   |      | $ | 0.52    |  



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##### Table of Contents

|                                                                                                                                 |  |                                 |           |   |      |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                 |  | Nine months ended September 30, |          
|                                                                                                                                 |  | 2004                            |           |   | 2003 |  
|Net income -                                                                                                                     |  |                                 |           |   |      |   |           |  
|As reported                                                                                                                      |  | $                               | 2,762,603 |   |      | $ | 2,355,717 |  
|Deduct: Stock-based employee compensation determined under fair value based method for stock options, net of related tax
effects |  |                                 | (19,071   | ) |      |   | (13,161   | )
|                                                                                                                                 |  |                                 |           |   |      |   |           |  
|Pro forma                                                                                                                        |  | $                               | 2,743,532 |   |      | $ | 2,342,556 |  
|                                                                                                                                 |  |                                 |           |   |      |   |           |  
|Net income per share -                                                                                                           |  |                                 |           |   |      |   |           |  
|As reported -                                                                                                                    |  |                                 |           |   |      |   |           |  
|Basic                                                                                                                            |  | $                               | 1.77      |   |      | $ | 1.51      |  
|Diluted                                                                                                                          |  | $                               | 1.68      |   |      | $ | 1.44      |  
|Pro forma -                                                                                                                      |  |                                 |           |   |      |   |           |  
|Basic                                                                                                                            |  | $                               | 1.76      |   |      | $ | 1.50      |  
|Diluted                                                                                                                          |  | $                               | 1.67      |   |      | $ | 1.43      |  



On March 31, 2004, the Financial
Accounting Standards Board (FASB) issued a proposed Statement, Share-Based Payment - an Amendment of FASB Statements No. 123 and APB No. 95, that 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. Under the
FASBs proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would
generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The proposed
Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees. On October 13, 2004, FASB voted to delay the adoption of this proposed standard by public
companies until their first fiscal quarter beginning after June 15, 2005. The Company continues to evaluate this proposed statement and its effects on its results of operations.



Trust Preferred Securities



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain entities in which voting rights are not effective in identifying the investor with the controlling financial interest.
An entity is subject to consolidation under FIN 46 if the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entitys
activities, or are not exposed to the entitys losses or entitled to its residual returns (variable interest entities). Variable interest entities within the scope of FIN 46 would be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entitys expected losses, receives a majority of its expected returns, or both.



Management has determined that 1stConstitution Capital Trust I (the Trust) qualifies as a variable interest entity under FIN 46. 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



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##### Table of Contents

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 and
accordingly deconsolidated the Trust as of December 31, 2003.



In May 2004, the
Federal Reserve Board proposed a rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the proposal, after a three-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 proposed rule, the Company expects to include all of its $5.2 million in trust preferred securities in Tier 1 capital. However, the provisions of the final rule could significantly differ from
those proposed and there can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier 1 capital for regulatory capital purposes.



New Accounting Pronouncements



EITF Issue No. 03-1



In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF Abstract 03-1, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments (EITF 03-1). The quantitative and qualitative disclosure provisions of EITF 03-1 were effective for years ending after December 15, 2003 and were included in the Companys 2003 Form
10-K. In March 2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a
three-step approach for determining whether an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In September 2004, the FASB issued a proposed Staff Position, EITF Issue
03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector
spreads and analyzed for other-than-temporary impairment under paragraph 16 of EITF 03-1. In September 2004, the FASB also issued a Staff Position, EITF Issue 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1).
EITF 03-1-1 delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay of the effective date will be superseded concurrent with the final issuance of EITF 03-1-a. The Company is in
the process of determining the impact that this EITF will have on its financial statements.



8



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##### Table of Contents

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



The following discussion of the operating results and financial condition at September 30, 2004 is intended to help readers analyze the accompanying financial statements,
notes and other supplemental information contained in this document. Results of operations for the three and nine month periods ended September 30, 2004 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, 2003, as
filed with the SEC on March 25, 2004.



General



Throughout the following sections, the Company refers to 1stConstitution Bancorp and its wholly owned subsidiaries, 1stConstitution Bank and 1stConstitution Capital Trust I, the Bank refers to 1stConstitution Bank, and the Trust refers
to 1stConstitution Capital Trust I. The purpose of this discussion and analysis is to assist in the understanding
and evaluation of the Companys financial condition, changes in financial condition, and results of operations.



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



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



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



9



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##### Table of Contents

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



Three Months Ended September 30, 2004 and September 30, 2003



Summary



The Company realized net income of $956,095 for the three months ended September 30, 2004, an increase of 12.1% from the $852,833 reported
for the three months ended September 30, 2003. Diluted net income per share was $0.58 for the three months ended September 30, 2004 compared to $0.52 per diluted share for the three months ended September 30, 2003.



Key performance ratios continued to improve for 2004. Return on average assets and return on
average equity were 1.16% and 15.42% for the three months ended September 30, 2004 compared to 1.22% and 15.40%, respectively, for the three months ended September 30, 2003.



The Companys net interest income for the three months ended September 30, 2004 was $3,192,312, an increase of 26.5% from the
$2,523,491 reported for September 30, 2003. The net interest margin for the three months ended September 30, 2004 was 4.12% compared to 3.88% reported for the three months ended September 30, 2003. During fiscal 2003, the Company was confronted with
continuing net interest margin pressures due to the very low interest rate environment, as well as elevated levels of loan prepayments and accelerated amortization of premiums on mortgage-backed investment securities. During the third quarter of
2004, a rising interest rate environment continued to evolve, resulting in a lesser level of loan prepayments and net premium amortization expense decreasing to $69,476 for the three months ended September 30, 2004 from $670,251 for the three months
ended September 30, 2003.



Non-interest expense increased by $533,159, or
29.3%, to $2,355,577 for the three months ended September 30, 2004 compared to $1,822,418 for the three months ended September 30, 2003. During the second quarter of 2004, the Company opened two new branch offices, one in West Windsor, New Jersey
and one in Jamesburg, New Jersey, and in August opened the permanent



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##### Table of Contents

location of the Perth Amboy branch. As a result, each component of non-interest expense in the three months ended
September 30, 2004 was impacted by the additional costs involved in staffing and otherwise making these new branches operational. Despite the increase in operating costs for the three months ended September 30, 2004 compared to the three months
ended September 30, 2003, the Companys efficiency ratio increased marginally to 62.4% compared to 59.3% for the three months ended September 30, 2003.



Earnings Analysis



Interest Income



Interest income for the three
months ended September 30, 2004 was $4,403,646, increasing by 796,979, or 22.1%, from the $3,606,241 reported for the three months ended September 30, 2003. This is primarily attributable to the continuation of the rising interest rate environment
that evolved during the second quarter of 2004. For the three months ended September 30, 2004, average interest earning assets increased $48,007,449 or 18.3% to $310,209,819 compared to $262,202,370 for the three months ended September 30, 2003. The
increase in interest income resulting from increases in earning asset volume was also positively affected by an increase in the average yield earned on these assets. For the three months ended September 30, 2004, the average yield on earning assets
increased 15 basis points to 5.67% from 5.52% for the same period last year.



Interest Expense



Interest expense for the three months ended
September 30, 2004 was $1,211,334, an increase of $128,584, 11.9%, from $1,082,750 reported for the three months ended September 30, 2003. Total average interest bearing liabilities increased by $35,788,399, or 16.8%, to $249,180,721 for the three
months ended September 30, 2004 from $213,392,322 for the three months ended September 30, 2003. The average cost of interest bearing liabilities decreased 8 basis points to 1.93% for the three months ended September 30, 2004 from 2.01% for the
three months ended September 30, 2003. This was primarily a result of a change in the deposit mix between the two periods, as balances in higher rate certificates of deposit in excess of $100,000 decreased, whereas increases in lower rate money
market and NOW accounts increased, as a percentage of average total deposits for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003.



Net Interest Income



The net effect of the changes in interest income and interest expense for the three months ended September 30, 2004 compared to the three months ended September 30, 2003
was an increase of $668,821, or 26.5%, in net interest income. The net interest margin, on a fully taxable equivalent basis, increased 24 basis points to 4.12% for the three months ended September 30, 2004 from 3.88% for the three months ended
September 30, 2003. The increase in the net interest margin was primarily the result of interest earning assets repricing faster than interest bearing liabilities in the rising rate environment that evolved during the second quarter of 2004,
combined with a lower level of net amortization of premiums on mortgage-backed investment securities.



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##### Table of Contents

Provision for Loan Losses



For each of the three month periods ended September 30, 2004 and September 30, 2003, the provision for loan losses was $60,000. The comparable provisions were the result
of a stable loan portfolio combined with low levels of non-performing loans. The amount of the loan loss provisions and the level of the allowance for loan losses are critical accounting policies 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.



Non-Interest Income



Total non-interest income decreased $33,585, or 4.9%, to $647,897 for the three months ended September 30, 2004 from $681,482 for the three
months ended September 30, 2003. The decrease was due primarily to a decrease of $92,073 in gains on sale of loans held for sale. The increasing interest rate environment that evolved during mid-2004 has slowed the volume of mortgage loan
originations and refinancing and subsequent secondary market mortgage loan sales.



Non-Interest Expense



Non-interest expense increased $533,159, or
29.3%, to $2,355,577 for the three months ended September 30, 2004, from $1,822,418 for the three months ended September 30, 2003. Salaries and employee benefits increased $261,474 for the three months ended September 30, 2004 compared to the three
months ended September 30, 2003, primarily due to (a) increased branch staffing levels as a result of the opening of three new branch locations during mid-2004 plus (b) normal employee salary increases. Occupancy expense increased $82,830 and other
expenses increased $188,855, primarily as a result of costs related to making these new branches operational.



An important industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources. The Companys efficiency ratio for the quarter ended September 30, 2004
was 62.4% compared to 59.3% for the quarter ended September 30, 2003.



Nine
Months Ended September 30, 2004 and September 30, 2003



Summary



The Company realized net income of $2,762,603 for the nine months ended
September 30, 2004, an increase of $406,886, or 17.3%, over the $2,355,717 realized for the nine months ended September 30, 2003. Net income per diluted share was $1.68 for the nine months ended September 30, 2004 compared to $1.44 per diluted share
for the nine months ended September 30, 2003.



Key performance ratios remained
strong for the nine months ended September 30, 2004. Return on average assets and return on average equity were 1.20% and 15.24% for the nine months ended September 30, 2004 compared to 1.18% and 14.65%, respectively, for the nine months ended
September 30, 2003.



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##### Table of Contents

The Companys net interest income for the nine months ended September 30, 2004 was $9,121,449, an increase of
$1,792,521, or 24.5%, from the $7,328,928 reported for the nine months ended September 30, 2003. The net interest margin for the nine months ended September 30, 2004 was 4.23% compared to 3.94% reported for the nine months ended September 30, 2003.
During the 12 months ended December 31, 2003, the Company was confronted with continuing net interest margin pressures due to the very low interest rate environment as well as elevated levels of loan prepayments and accelerated amortization of
premiums on mortgage-backed securities. During the nine months ended September 30, 2004, a rising interest rate environment evolved resulting in a lesser level of loan prepayments and amortization expense decreasing to $291,770 from the nine months
ended September 30, 2004 versus the $1,006,940 reported for the nine months ended September 30, 2003.



Non-interest expense increased by $1,235,623, or 23.0%, to $6,614,990 for the nine months ended September 30, 2004 from $5,379,367 for the nine months ended September 30, 2003. During the nine months ended September
30, 2004, the Company opened a loan production office in Fort Lee, New Jersey, as well as three new branch locations in West Windsor, Jamesburg, and Perth Amboy, New Jersey. As a result, each component of non-interest expense in the nine months
ended September 30, 2004 was impacted by the additional costs involved in staffing and otherwise making these offices operational. Despite the increase in operating costs for the nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003, the Companys efficiency ratio increased modestly to 62.0% for the nine months ended September 30, 2004 compared to 60.5% for the nine months ended September 30, 2003.



Earnings Analysis



Interest Income



For nine months ended September 30, 2004, total interest income was $12,435,794, an increase of $1,768,709, or 16.6%, compared to total interest income of $10,667,085 for
the nine months ended September 30, 2003. The following table sets forth the Companys consolidated average balances of assets, liabilities and shareholders equity as well as interest income and expense on related items, and the
Companys average rate for the nine month periods ended September 30, 2004 and 2003.



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|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ----------- | - | ------------------------------------ | - | ----------- |  | ----- | -------------- |  | - | ----------- | - | ----------- | - | ---------- |  | ----- | -
|Average Balance Sheets with Resultant Interest and Rates  (interest and yields on a tax-equivalent basis) | 
|                                                                                                          |  | Nine months ended September 30, 2004 |             |   | Nine months ended September 30, 2003 |  
|                                                                                                          |  | AverageBalance                       |             |   | Interest                             |   | AverageRate |  |       | AverageBalance |  |   | Interest    |   | AverageRate |  
|Assets:                                                                                                   |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|                                                                                                          |  |                                      |             |   |                                      |  
|Federal Funds Sold/Short-Term Investments                                                                 |  | $                                    | 1,048,301   |   |                                      | $ | 7,491       |  | 0.95  | %              |  | $ | 884,616     |   |             | $ | 6,969      |  | 1.05  | %
|Securities:                                                                                               |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Collateralized Mortgage Obligations/ Mortgage Backed Securities                                           |  |                                      | 88,313,814  |   |                                      |   | 2,422,332   |  | 3.66  | %              |  |   | 77,213,925  |   |             |   | 1,933,340  |  | 3.34  | %
|States and Political Subdivisions                                                                         |  |                                      | 8,981,114   |   |                                      |   | 382,006     |  | 5.67  | %              |  |   | 7,772,851   |   |             |   | 336,438    |  | 5.77  | %
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Total                                                                                                     |  |                                      | 97,294,928  |   |                                      |   | 2,804,338   |  | 3.84  | %              |  |   | 84,986,776  |   |             |   | 2,269,778  |  | 3.56  | %
|                                                                                                          |  |                                      |             |   |                                      |  
|Loan Portfolio:                                                                                           |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Commercial                                                                                                |  |                                      | 25,245,479  |   |                                      |   | 1,547,928   |  | 8.17  | %              |  |   | 37,295,880  |   |             |   | 1,998,839  |  | 7.14  | %
|Installment                                                                                               |  |                                      | 3,549,759   |   |                                      |   | 212,438     |  | 7.97  | %              |  |   | 9,693,342   |   |             |   | 559,582    |  | 7.69  | %
|Commercial Mortgages                                                                                      |  |                                      | 54,663,163  |   |                                      |   | 2,889,434   |  | 7.04  | %              |  |   | 50,216,678  |   |             |   | 2,711,125  |  | 7.19  | %
|Construction - Wholesale                                                                                  |  |                                      | 68,423,691  |   |                                      |   | 2,578,866   |  | 5.02  | %              |  |   | 37,403,669  |   |             |   | 1,360,009  |  | 4.84  | %
|Residential Mortgages                                                                                     |  |                                      | 9,231,185   |   |                                      |   | 496,818     |  | 7.17  | %              |  |   | 8,691,311   |   |             |   | 500,178    |  | 7.67  | %
|Construction - Retail                                                                                     |  |                                      | 5,001,054   |   |                                      |   | 217,145     |  | 5.78  | %              |  |   | 3,488,778   |   |             |   | 148,078    |  | 5.65  | %
|Home Equity                                                                                               |  |                                      | 10,595,982  |   |                                      |   | 403,397     |  | 5.07  | %              |  |   | 8,320,335   |   |             |   | 289,901    |  | 4.64  | %
|SBA Loans                                                                                                 |  |                                      | 2,711,474   |   |                                      |   | 128,304     |  | 6.30  | %              |  |   | 2,703,726   |   |             |   | 131,238    |  | 6.47  | %
|All Other Loans                                                                                           |  |                                      | 13,557,592  |   |                                      |   | 1,273,529   |  | 12.51 | %              |  |   | 8,658,576   |   |             |   | 800,503    |  | 12.32 | %
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Total                                                                                                     |  |                                      | 192,979,379 |   |                                      |   | 9,747,859   |  | 6.73  | %              |  |   | 166,472,294 |   |             |   | 8,499,452  |  | 6.83  | %
|                                                                                                          |  |                                      |             |   |                                      |  
|Total Interest-Earning Assets                                                                             |  |                                      | 291,322,608 |   |                                      |   | 12,559,688  |  | 5.74  | %              |  |   | 252,343,686 |   |             |   | 10,776,199 |  | 5.71  | %
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Allowance for Loan Losses                                                                                 |  |                                      | (1,883,819  | ) |                                      |   |             |  |       |                |  |   | (1,764,046  | ) |             |   |            |  |       |  
|Cash and Due From Bank                                                                                    |  |                                      | 7,537,862   |   |                                      |   |             |  |       |                |  |   | 8,776,035   |   |             |   |            |  |       |  
|Other Assets                                                                                              |  |                                      | 10,660,581  |   |                                      |   |             |  |       |                |  |   | 8,528,807   |   |             |   |            |  |       |  
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Total Assets                                                                                              |  | $                                    | 307,637,232 |   |                                      |   |             |  |       |                |  | $ | 267,884,482 |   |             |   |            |  |       |  
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Interest-Bearing Liabilities:                                                                             |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Money Market and NOW Accounts                                                                             |  | $                                    | 91,040,699  |   |                                      | $ | 678,985     |  | 0.99  | %              |  | $ | 74,025,512  |   |             | $ | 556,678    |  | 1.01  | %
|Savings Accounts                                                                                          |  |                                      | 27,513,451  |   |                                      |   | 101,205     |  | 0.49  | %              |  |   | 17,481,460  |   |             |   | 118,315    |  | 0.90  | %
|Certificates of Deposit                                                                                   |  |                                      | 73,628,027  |   |                                      |   | 1,413,422   |  | 2.56  | %              |  |   | 62,219,596  |   |             |   | 1,340,644  |  | 2.88  | %
|Certificates of Deposit of $100,000 and Over                                                              |  |                                      | 9,848,619   |   |                                      |   | 188,734     |  | 2.55  | %              |  |   | 19,430,523  |   |             |   | 402,287    |  | 2.77  | %
|Federal Funds Purchased/Other Borrowed Funds                                                              |  |                                      | 25,726,564  |   |                                      |   | 741,578     |  | 3.84  | %              |  |   | 25,992,498  |   |             |   | 725,548    |  | 3.73  | %
|Redeemable Subordinated Debentures                                                                        |  |                                      | 5,155,000   |   |                                      |   | 190,421     |  | 5.08  | %              |  |   | 5,000,000   |   |             |   | 194,685    |  | 5.13  | %
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Total Interest-Bearing Liabilities                                                                        |  |                                      | 232,912,360 |   |                                      |   | 3,314,345   |  | 1.90  | %              |  |   | 204,149,589 |   |             |   | 3,338,158  |  | 2.19  | %
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Net Interest Spread                                                                                       |  |                                      |             |   |                                      |   |             |  | 3.85  | %              |  |   |             |   |             |   |            |  | 3.52  | %
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Demand Deposits                                                                                           |  |                                      | 48,119,500  |   |                                      |   |             |  |       |                |  |   | 40,080,999  |   |             |   |            |  |       |  
|Other Liabilities                                                                                         |  |                                      | 2,397,018   |   |                                      |   |             |  |       |                |  |   | 2,161,926   |   |             |   |            |  |       |  
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Total Liabilities                                                                                         |  |                                      | 283,428,878 |   |                                      |   |             |  |       |                |  |   | 246,392,514 |   |             |   |            |  |       |  
|Shareholders Equity                                                                                      |  |                                      | 24,208,354  |   |                                      |   |             |  |       |                |  |   | 21,491,968  |   |             |   |            |  |       |  
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Total Liabilities and Shareholders Equity                                                                |  |                                      | 307,637,232 |   |                                      |   |             |  |       |                |  |   | 267,884,482 |   |             |   |            |  |       |  
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  
|Net Interest Margin                                                                                       |  |                                      |             |   |                                      | $ | 9,245,343   |  | 4.23  | %              |  |   |             |   |             | $ | 7,438,041  |  | 3.94  | %
|                                                                                                          |  |                                      |             |   |                                      |   |             |  |       |                |  |   |             |   |             |   |            |  |       |  



The current year increase in interest
income resulted from higher average balances in the securities and loan portfolios which were modestly offset by a lower average yield earned on the loan portfolio. In addition, net amortization expense of premiums on mortgage-backed investment
securities decreased to $291,770 for the nine months ended September 30, 2004 compared to $1,006,940 for the nine months ended September 30, 2003. Average loans increased $26,507,085, or 15.9%, to $192,979,379 for the nine months ended September 30,
2004 from $166,472,294 for the nine months ended September 30, 2003, while the yield on the portfolio decreased 10 basis points to 6.73% for the nine months ended September 30, 2004 from 6.83% for the nine months ended September 30, 2003. The lower
loan yield reflected the lower interest rate environment that existed throughout 2003 and continued into the first quarter of 2004.



Average securities increased $12,308,152, or 14.5%, from $84,986,776 for the nine months ended September 30, 2003 to $97,294,928 for the nine months ended September 30,
2004, while the yield on the securities portfolio increased 28 basis points to 3.84% for the nine months ended September 30, 2004 from 3.56% for the nine months ended September 30, 2003.



Overall, the yield on the Companys total interest-earning assets increased 3 basis points to 5.74% for the nine months ended September
30, 2004 from 5.71% for the nine months ended September 30, 2003.



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##### Table of Contents

Interest Expense



Total interest expense for the nine months ended September 30, 2004 was $3,314,345, a decrease of $23,812, or 0.71%, compared to $3,338,157 for the nine months ended
September 30, 2003. The decrease in interest expense for the current period resulted primarily from the impact of higher levels of interest-bearing liabilities priced at a significantly lower market interest rate level. The average rate paid on
interest bearing liabilities for the nine months ended September 30, 2004 decreased 29 basis points to 1.90% from 2.19% for the nine months ended September 30, 2003.



Net Interest Income



The Companys net interest income for the nine months ended September 30, 2004 was $9,121,449, an increase of $1,792,521, or 24.5%, compared to $7,328,928 for the
nine months ended September 30, 2003. For the nine months ended September 30, 2004, interest income increased by $1,768,709 compared to the nine months ended September 30, 2003, while interest expense decreased by $23,812 for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003.



The
net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest-earning assets, was 4.23% for the nine months ended September 30, 2004 compared to 3.94% for the nine months ended September 30, 2003. The
principal factors causing the increase in the net interest margin were the lower interest rate environment that existed throughout 2003 and early 2004 combined with a lower level of net amortization expense of premiums on mortgage-backed investment
securities due to the current rising interest rate environment.



Provision for
Loan Losses



The provision for loan losses for the nine months ended September
30, 2004 and 2003 was $180,000. The comparable provisions were the result of a stable loan portfolio combined with low levels of non-performing loans.



Non-Interest Income



Total non-interest income for the nine months ended September 30, 2004 was $1,757,620, a decrease of $117,403, or 6.3%, from non-interest income of $1,875,023 for the nine months ended September 30, 2003.



Gain on sale of loans held for sale represents the largest single source on non-interest
income. Gain on sale of loans held for sale for the nine months ended September 30, 2004 was $916,861, a decrease of $99,903, or 9.8%, from $1,016,764 for the nine months ended September 30, 2003. The increasing interest rate environment that
evolved during mid-2004 has slowed the volume of mortgage loan originations and refinancing and subsequent secondary market mortgage loan sales.



Service charges on deposit accounts were $390,501 for the nine months ended September 30, 2004, a decrease of $38,273, or 8.9%, from $428,774 for the nine months ended
September 30, 2003. Service charge income decreased for the nine months ended September 30, 2004 principally due to decreases in income from overdraft fees and wire transfer service fees.



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##### Table of Contents

The other income component of non-interest income amounted to $224,358 for the nine months ended September 30, 2004, a
decrease of $3,076, or 1.35%, from $227,434 for the nine months ended September 30, 2003. Income from Bank Owned Life Insurance (BOLI) amounted to $198,355 for the nine months ended September 30, 2004, a decrease of $3,696, or 1.8%, from
$202,051 for the nine months ended September 30, 2003. In 2001, the Company purchased $6.0 million in tax-free BOLI assets which partially offset the cost of employee benefit plans and reduced the overall effective tax rate.



The Company also generates non-interest income from a variety of other fee-based services.
Deposit and service fee charges are reviewed and adjusted as needed from time to time by management to reflect current costs incurred by the Bank to offer the products and services amid the Companys competitive market.



Non-Interest Expense



Total non-interest expense for the nine months ended September 30, 2004 was $6,614,990, an increase of $1,235,623, or 23.0%, compared to
non-interest expense of $5,379,367 for the nine months ended September 30, 2003.



The following table presents the major components of non-interest expense for the nine months ended September 30, 2004 and 2003.



Non-interest Expenses



|                                        |  |                                 |           |      |   |          
|--------------------------------------- |  | ------------------------------- | --------- | ---- | - | ---------
|                                        |  |                                 |           |      |   |          
|                                        |  | Nine months ended September 30,
|                                        |  | 2004                            |           | 2003
|Salaries and employee benefits          |  | $                               | 3,696,763 |      | $ | 2,966,496
|Occupancy expense                       |  |                                 | 765,955   |      |   | 603,827  
|Equipment expense                       |  |                                 | 354,397   |      |   | 332,626  
|Marketing                               |  |                                 | 214,288   |      |   | 177,074  
|Computer services                       |  |                                 | 470,552   |      |   | 368,328  
|Regulatory, professional and other fees |  |                                 | 390,674   |      |   | 434,380  
|Office expense                          |  |                                 | 330,674   |      |   | 232,036  
|All other expenses                      |  |                                 | 391,688   |      |   | 264,600  
|                                        |  |                                 |           |      |   |          
|                                        |  | $                               | 6,614,990 |      | $ | 5,379,367
|                                        |  |                                 |           |      |   |          



Salaries and employee benefits
increased $730,267, or 24.6%, to $3,696,763 for the nine months ended September 30, 2004 compared to $2,966,496 for the nine months ended September 30, 2003. This increase reflects the increase in staffing levels due to the opening of a loan
production office during the first quarter of 2004 and three new branch locations during the nine months ended September 30, 2004 plus normal employee salary increases.



The Companys ratio of non-interest expense to average assets was 2.87% for the nine months ended September 30, 2004 compared to 2.68%
for the nine months ended September 30, 2003. The Companys efficiency ratio was 62.0% for the nine months ended September 30, 2004 compared to a ratio of 60.5% for the nine months ended September 30, 2003.



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##### Table of Contents

Financial Condition



September 30, 2004 Compared with December 31, 2003



Total consolidated assets at September 30, 2004 amounted to $329,888,399, an increase of $36,405,225, or 12.4%, compared to $293,483,174 at December 31, 2003. The growth
in the Companys asset base was primarily due to increases in the loan and securities portfolios.



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



Cash and Cash Equivalents



Cash and Cash Equivalents at September 30, 2004 totaled $11,847,463 compared to $14,702,886 at December 31, 2003. Cash and cash equivalents at September 30, 2004 consisted of cash and due from banks of $11,124,936 and
Federal funds sold/short term investments of $722,527. The corresponding balances at December 31, 2003 were $6,987,850 and $7,715,036, respectively. The balance of cash and cash equivalents at September 30, 2004 decreased primarily due to fund loan
growth and manage the Companys liquidity position.



Securities



Securities represented 30.1% of total assets at September 30, 2004 and 31.1%
at December 31, 2003. Total securities increased $8,058,888, or 8.8%, at September 30, 2004 to $99,250,058 compared to $91,191,170 at December 31, 2003.



Securities available for sale totaled $90,458,599 at September 30, 2004, an increase of $5,458,626, or 6.4%, from December 31, 2003. During the nine months ended
September 30, 2004, $28,454,928 of securities available for sale were purchased (predominantly mortgage backed securities) and funded by calls and maturities of securities held to maturity, securities available for sale and short-term investments.



Securities held to maturity totaled $8,791,459 at September 30, 2004, an
increase of $2,600,262, or 42.0%, from December 31, 2003.



Loans



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



17



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##### Table of Contents

The following table sets forth the classification of loans by major category at September 30, 2004 and December 31, 2003.



Loan Portfolio Composition



|                                |  |                    |             |            |                   |   |        |   |             |  |       |  
|------------------------------- |  | ------------------ | ----------- | ---------- | ----------------- | - | ------ | - | ----------- |  | ----- | -
|                                |  | September 30, 2004 |             |            | December 31, 2003 |  
|Component                       |  | Amount             |             | % of total |                   |   | Amount |   | % of total  | 
|Construction loans              |  | $                  | 80,318,753  |            | 40.2              | % |        | $ | 56,971,265  |  | 34.7  | %
|Residential real estate loans   |  |                    | 10,190,112  |            | 5.1               | % |        |   | 8,059,032   |  | 4.9   | %
|Commercial and industrial loans |  |                    | 93,471,199  |            | 46.8              | % |        |   | 83,398,619  |  | 50.9  | %
|Loans to individuals            |  |                    | 15,154,331  |            | 7.6               | % |        |   | 13,236,895  |  | 8.1   | %
|Lease financing                 |  |                    | 100,513     |            | 0.1               | % |        |   | 1,054,198   |  | 0.6   | %
|All other loans                 |  |                    | 651,592     |            | 0.3               | % |        |   | 1,230,297   |  | 0.8   | %
|                                |  |                    |             |            |                   |   |        |   |             |  |       |  
|                                |  | $                  | 199,886,500 |            | 100.0             | % |        | $ | 163,950,306 |  | 100.0 | %
|                                |  |                    |             |            |                   |   |        |   |             |  |       |  



The loan portfolio increased
$35,936,194, or 18.0%, at September 30, 2004 to $199,886,500 from $163,950,306 at December 31, 2003. The ability of the Company to enter into larger loan relationships and managements philosophy of relationship banking are key factors in the
Companys strategy for loan growth. Strong competition from both bank and non-bank competitors could result in comparatively lower yields on new and established lending relationships. The ultimate collectability of the loan portfolio and the
recovery of the carrying amount of real estate are subject to changes in the Companys market regions economic environment and real estate market.



Non-Performing Assets



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



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



The following table sets forth Non-Performing Assets and Loans at September 30, 2004 and
December 31, 2003. As the table demonstrates, despite the amount of non-performing assets at September 30, 2004, loan quality and ratios remain strong. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring
and aggressive workout strategies.



18



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##### Table of Contents

Non-Performing Assets and Loans



|                                                  |  |                    |         |   |                   |   |         |  
|------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                  |  | September 30, 2004 |         |   | December 31, 2003 |  
|Non-Performing loans:                             |  |                    |         |   |                   |   |         |  
|Loans 90 days or more past due and still accruing |  | $                  | 183,264 |   |                   | $ | 0       |  
|Non-accrual loans                                 |  |                    | 640,903 |   |                   |   | 330,783 |  
|                                                  |  |                    |         |   |                   |   |         |  
|Total non-performing loans                        |  |                    | 824,167 |   |                   |   | 330,783 |  
|Other real estate owned/other assets              |  |                    | 40,465  |   |                   |   | 8,971   |  
|                                                  |  |                    |         |   |                   |   |         |  
|Total non-performing assets                       |  | $                  | 864,632 |   |                   | $ | 339,754 |  
|                                                  |  |                    |         |   |                   |   |         |  
|Non-performing loans to total loans               |  |                    | 0.41    | % |                   |   | 0.20    | %
|Non-performing assets to total assets             |  |                    | 0.26    | % |                   |   | 0.12    | %



The Company had no restructured loans
at September 30, 2004 and December 31, 2003. Impaired loans totaled $640,903 at September 30, 2004 and $330,783 at December 31, 2003.



Allowance for Loan Losses



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



Management utilizes a systematic and documented allowance
adequacy methodology for loan losses that requires specific allowance assessment 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 $1,945,109 at September 30, 2004, an increase of $158,477, or 8.9%, from $1,786,632 at December 31, 2003. The ratio of the
allowance for loan losses to total loans was 0.97% at September 30, 2004 and 1.09% at December 31, 2003. The quality of the loan portfolio remained strong and management believes 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



|                                             |  |                    |             |    |                    |   |             |   
|-------------------------------------------- |  | ------------------ | ----------- | -- | ------------------ | - | ----------- | --
|                                             |  | September 30, 2004 |             |    | September 30, 2003 |  
|Balance, beginning of period                 |  | $                  | 1,786,632   |    |                    | $ | 1,669,882   |   
|Provision charged to operating expenses      |  |                    | 180,000     |    |                    |   | 180,000     |   
|Loans charged off                            |  |                    | (22,273     | )  |                    |   | (98,640     | ) 
|Recoveries                                   |  |                    | 750         |    |                    |   | 0           |   
|                                             |  |                    |             |    |                    |   |             |   
|Net (charge offs)                            |  |                    | (21,523     | )  |                    |   | (98,640     | ) 
|                                             |  |                    |             |    |                    |   |             |   
|Balance, end of period                       |  | $                  | 1,945,109   |    |                    | $ | 1,751,242   |   
|                                             |  |                    |             |    |                    |   |             |   
|Loans:                                       |  |                    |             |    |                    |   |             |   
|At period end                                |  | $                  | 199,886,500 |    |                    | $ | 180,191,263 |   
|Average during the period                    |  |                    | 192,979,379 |    |                    |   | 166,472,294 |   
|Net charge offs to average loans outstanding |  |                    | (0.01       | )% |                    |   | (0.06       | )%
|Allowance for loan losses to:                |  |                    |             |    |                    |   |             |   
|Total loans at period end                    |  |                    | 0.97        | %  |                    |   | 0.97        | % 
|Non-performing loans                         |  |                    | 236.01      | %  |                    |   | 483.92      | % 



19



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##### Table of Contents

Deposits



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



Total deposits increased $32,560,000, or 13.3%, to $277,913,724 at September 30, 2004 from $245,353,724 at December 31, 2003. This increase
in total deposits was the result of a $10,189,253 increase in non-interest bearing deposits to $52,850,885, and a $22,370,547 increase in interest bearing deposits to $225,062,839.



Other Borrowings



Other Borrowings are mainly comprised of fixed rate convertible advances from the Federal Home Loan Bank (FHLB) and overnight funds purchased. These
borrowings are primarily used to fund asset growth not supported by deposit generation. FHLB advances are fully secured by marketable securities and qualifying one-to-four family mortgage loans. The balance of other borrowings at September 30, 2004
consisted of fixed rate term FHLB borrowings of $15,500,000 and overnight funds purchased of $1,000,000. The balance of other borrowings at December 31, 2003 consisted of FHLB borrowings of $15,500,000.



Trust Preferred Securities



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain entities in which voting rights are
not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under FIN 46 if the investors either do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support, are unable to direct the entitys activities, or are not exposed to the entitys losses or entitled to its residual returns (variable interest entities). Variable interest entities
within the scope of FIN 46 would be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entitys expected losses, receives
a majority of its expected returns, or both.



Management has determined that
the Trust qualifies as a variable interest entity under FIN 46. 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 and accordingly deconsolidated the Trust as of December 31, 2003.



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In May 2004, the Federal Reserve Board proposed a rule that would continue to allow the inclusion of trust preferred
securities in Tier 1 capital, but with stricter quantitative limits. Under the proposal, after a three-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 proposed rule, the Company expects to include
all of its $5.2 million in trust preferred securities in Tier 1 capital. However, the provisions of the final rule could significantly differ from those proposed and there can be no assurance that the Federal Reserve Board will not further limit the
amount of trust preferred securities permitted to be included in Tier 1 capital for regulatory capital purposes.



Shareholders Equity and Dividends



Shareholders equity at September 30, 2004 totaled $26,023,812, an increase of $2,438,556, or 10.3%, from $23,585,256 at December 31, 2003. Book value per common
share rose to $16.70 at September 30, 2004 from $15.07 at December 31, 2003.



The increase in shareholders equity and book value per share resulted primarily from net income of $2,762,603 plus the increase in unrealized holding gains on available for sale securities less the effect of stock buybacks.



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 three months ended September 30, 2004 is set forth under Part II, Item 2 of this report, Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.



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



Capital Ratios



|                                       |  |        |            |       |       |  
|-------------------------------------- |  | ------ | ---------- | ----- | ----- | -
|                                       |  | Amount |            | Ratio |      
|As of September 30, 2004 -             |  |        |            |       |       |  
|Total capital to risk weighted assets  |  | $      | 32,851,388 |       | 14.11 | %
|Tier 1 capital to risk weighted assets |  |        | 30,906,279 |       | 13.28 | %
|Tier 1 capital to average assets       |  |        | 30,906,279 |       | 9.43  | %
|                                       |  |       
|As of December 31, 2003 -              |  |        |            |       |       |  
|Total capital to risk weighted assets  |  | $      | 30,221,727 |       | 14.94 | %
|Tier 1 capital to risk weighted assets |  |        | 28,435,095 |       | 14.06 | %
|Tier 1 capital to average assets       |  |        | 28,435,095 |       | 9.74  | %



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, 2004, the ratios of the Company exceeded the ratios required to be considered well capitalized. It is managements goal to monitor
and maintain adequate capital levels to continue to support asset growth and continue its status as a well-capitalized institution.



Liquidity



At September 30, 2004, 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 borrowing relationships with the FHLB and a correspondent bank which further support and enhance liquidity.



The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At September 30, 2004, the balance of cash and
cash equivalents was $11,847,463.



Net cash provided by operating activities
totaled $8,979,340 in the nine months ended September 30, 2004 compared to $9,647,558 in the nine months ended September 30, 2003. 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.



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Net cash used in investing activities totaled $45,414,790 in the nine months ended September 30, 2004 compared to $1,528
provided by investing activities in the nine months ended September 30, 2003. The current period amount was the result of a higher volume of securities purchases and loan originations for the nine months ended September 30, 2004.



Net cash provided by financing activities amounted to $33,580,027 in the nine months ended
September 30, 2004 compared to $6,669,519 provided by financing activities in the nine months ended September 30, 2003. The amount for the nine months ended September 30, 2004 resulted primarily from a greater increase in the level of deposits
during this period compared to the nine months ended September 30, 2003.



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, 2004, maturities and prepayments of investment securities totaled $19,592,096.
Another source of liquidity is the loan portfolio, which provides a steady flow of payments and maturities.



Interest Rate Sensitivity Analysis



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



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



Item 3. Quantitative and Qualitative Disclosures about Market Risk



To measure the impacts of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (EVPE) models. The modified
duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is
also used to dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The economic value of equity is likely to be different as interest rates change. Results falling outside prescribed
ranges require action by management. At September 30, 2004 and December 31, 2003, 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



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deposit premiums may be less than what is available in an outright sale. The model does not consider potential premiums
on floating rate loan sales, the impact of overhead expense, non-interest income, taxes, industry market price multiples and other factors reflected in the market capitalization of a company.



Market Risk Analysis



|                                   |  |                    |            |        |                   |            |        |  |   |            |    |        |   |            |        |   |            |    |  |   |            |   
|---------------------------------- |  | ------------------ | ---------- | ------ | ----------------- | ---------- | ------ |  | - | ---------- | -- | ------ | - | ---------- | ------ | - | ---------- | -- |  | - | ---------- | --
|                                   |  | September 30, 2004 |            |        | December 31, 2003 |           
|Change in Rates                    |  | Flat               |            | -200bp |                   |            | +200bp |  |   | Flat       |    | -200bp |   |            | +200bp |  
|Economic Value of Portfolio Equity |  | $                  | 37,033,000 |        | $                 | 33,340,000 |        |  | $ | 35,964,000 |    |        | $ | 30,507,000 |        | $ | 27,599,000 |    |  | $ | 26,218,000 |   
|Change                             |  |                    |            |        | $                 | (3,693,000 | )      |  | $ | (1,069,000 | )  |        |   |            |        |   | (2,907,000 | )  |  |   | (4,288,000 | ) 
|Change as a % of assets            |  |                    |            |        |                   | (1.12      | )%     |  |   | (0.32      | )% |        |   |            |        |   | (0.99      | )% |  |   | (1.46      | )%



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 Officers have concluded that the Companys disclosure controls and procedures are effective.



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



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##### Table of Contents

PART II. OTHER INFORMATION



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.



Issuer Purchases of Equity Securities



On March 12, 2001, 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 an effort to increase shareholder value. The following table provides common stock repurchases made by or on behalf of the Company during the three
months ended September 30, 2004.



Issuer Purchases of Equity
Securities (1)



|                  |  |                               |  |                           |  |                                                                           |       |                                                                         |       |  |       
|----------------- |  | ----------------------------- |  | ------------------------- |  | ------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------- | ----- |  | ------
|Period            |  | TotalNumberof SharesPurchased |  | AveragePricePaid PerShare |  | Total Number ofShares PurchasedAs Part ofPubliclyAnnounced Planor Program |       | Maximum Number ofShares ThatMay Yet bePurchasedUnder the Planor Program
|Beginning         |  | Ending                        |  |                           |  |                                                                           |       |                                                                         |       |  |       
|July 1, 2004      |  | July 31, 2004                 |  | 0                         |  |                                                                           |      |                                                                         | 0     |  | 49,934
|August 1, 2004    |  | August 31, 2004               |  | 2,152                     |  | $                                                                         | 32.78 |                                                                         | 2.152 |  | 47,782
|September 1, 2004 |  | September 30, 2004            |  | 2,000                     |  | $                                                                         | 32.04 |                                                                         | 2,000 |  | 45,782
|                  |  |                               |  |                           |  |                                                                           |       |                                                                         |       |  |       
|                  |  | Total                         |  | 4,152                     |  | $                                                                         | 32.42 |                                                                         | 4,152 |  | 45,782
|                  |  |                               |  |                           |  |                                                                           |       |                                                                         |       |  |       

---

|(1) | The stock repurchase program covers a maximum of 66,805 shares of common stock of the Company, representing 5% of the common stock of the Company on December 31, 2000, and was
announced on March 12, 2001. 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 6. Exhibits.



| | (a) | Exhibits
| | --- | --------



|      |  |                                                                                                                                                                                                                                                            
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i)  |  | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(i) to the Companys Form 10-K filed with the SEC on March 25, 2004)                                                                                                    
|      | 
|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)                                                                                                                         
|      | 
|31.1* |  | Certification of Robert F. Mangano, Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)                                                                                                                             
|      | 
|31.2* |  | Certification of Joseph M. Reardon, Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)                                                                                                                             
|      | 
|32 *  |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, Chief Executive Officer of the Company,
and Joseph M. Reardon, Chief Financial Officer of the Company

---

|* | Filed herewith
|- | --------------



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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 BANCORP
|                        |  |                        
|Date: November 12, 2004 |  | By:                     |  | ROBERT F. MANGANO                    
|                        |  |                         |  | Robert F. Mangano                    
|                        |  |                         |  | President and Chief Executive Officer
|                        |  |                         |  | (Principal Executive Officer)        



|                        |  |     |  |                                    
|----------------------- |  | --- |  | -----------------------------------
|Date: November 12, 2004 |  | By: |  | JOSEPH M. REARDON                  
|                        |  |     |  | Joseph M. Reardon                  
|                        |  |     |  | Senior Vice President and Treasurer
|                        |  |     |  | (Principal Accounting Officer)     



27