UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 (Mark
One)
 
 x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended June 30, 2008or
  o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _____ to
_____
  Commission
file Number:  000-32891
 
 1ST CONSTITUTION BANCORP
 (Exact
Name of Registrant as Specified in Its Charter)
 
 New
      Jersey
            
            22-3665653(State
      of Other Jurisdiction
              of
      Incorporation or Organization)
            
            (I.R.S.
      Employer Identification No.)
 
 2650
      Route 130, P.O. Box 634, Cranbury, NJ
            
            08512(Address of Principal
      Executive Offices)
            
            (Zip
      Code)
 
 (609)
      655-4500(Issuer’s
      Telephone Number, Including Area Code)(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     Yes x        No
o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
              (Do
      not check if a smaller reporting company)
            o
            Smaller
      reporting company
            x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o    No
x
  As of
August 8, 2008, there were 3,997,890 shares of the registrant’s common stock, no
par value, outstanding.
  
 
  1ST
CONSTITUTION BANCORP
  FORM
10-Q
  INDEX
  PagePART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements
              1Consolidated
      Balance Sheets

                  as
      of June 30, 2008

                    and
      December 31, 2007 (unaudited)
              1Consolidated
      Statements of Income

                  for
      the Three Months and Six Months Ended

                    June
      30, 2008 and June 30, 2007 (restated)
    (unaudited)
              2Consolidated
      Statements of Changes in Shareholders’ Equity

                  for
      the Six Months Ended

                    June
      30, 2008 and June 30, 2007 (restated)
    (unaudited)
              3Consolidated
      Statements of Cash Flows
                for
      the Six Months Ended
                June
      30, 2008 and June 30, 2007 (restated) (unaudited)
              4Notes
      to Consolidated Financial Statements (unaudited)
              5Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition

                  and
      Results of Operations
              13Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              29Item
      4.
              Controls
      and Procedures
              30PART
      II.
              OTHER
      INFORMATIONItem
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              30Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              31Item
      6.
              Exhibits
              31SIGNATURES
              
              32
   
 PART
I. FINANCIAL INFORMATION
 Item
1. Financial
Statements
 1st
Constitution Bancorp and Subsidiaries
 Consolidated
Balance Sheets
 (unaudited)
  June
      30, 2008
            
            
            December
      31, 2007ASSETSCASH
      AND DUE FROM BANKS
            
            $
            18,481,595
            
            
            $
            7,517,158FEDERAL
      FUNDS SOLD / SHORT-TERM INVESTMENTS
            
            
            11,222
            
            
            
            30,944Total
      cash and cash equivalents
            
            
            18,492,817
            
            
            
            7,548,102INVESTMENT
      SECURITIES:Available
      for sale, at fair value
            
            
            72,340,516
            
            
            
            75,192,137Held
      to maturity (fair value of $15,913,428 and $23,411,269 in
              2008
      and 2007, respectively)
            
            
            16,295,970
            
            
            
            23,512,346Total
      investment securities
            
            
            88,636,486
            
            
            
            98,704,483LOANS
      HELD FOR SALE
            
            
            13,738,070
            
            
            
            10,322,005LOANS
            
            
            363,623,631
            
            
            
            294,760,718Less-
      Allowance for loan losses
            
            
            (3,635,766
            )
            
            
            (3,348,080
            )Net
      loans
            
            
            359,987,865
            
            
            
            291,412,638PREMISES
      AND EQUIPMENT, net
            
            
            2,568,475
            
            
            
            2,760,203ACCRUED
      INTEREST RECEIVABLE
            
            
            2,042,020
            
            
            
            2,495,732BANK-OWNED
      LIFE INSURANCE
            
            
            9,734,998
            
            
            
            9,545,009OTHER
      REAL ESTATE OWNED
            
            
            4,486,016
            
            
            
            2,960,727OTHER
      ASSETS
            
            
            4,358,548
            
            
            
            3,402,640Total
      assets
            
            $
            504,045,295
            
            
            $
            429,151,539LIABILITIES
      AND SHAREHOLDERS’ EQUITYLIABILITIES:DepositsNon-interest
      bearing
            
            $
            87,632,653
            
            
            $
            59,055,803Interest
      bearing
            
            
            308,771,142
            
            
            
            270,276,565Total
      deposits
            
            
            396,403,795
            
            
            
            329,332,368BORROWINGS
            
            
            43,600,000
            
            
            
            35,600,000REDEEMABLE
      SUBORDINATED DEBENTURES
            
            
            18,557,000
            
            
            
            18,557,000ACCRUED
      INTEREST PAYABLE
            
            
            2,022,862
            
            
            
            1,992,187ACCRUED
      EXPENSES AND OTHER LIABILITIES
            
            
            1,786,120
            
            
            
            2,696,667Total
      liabilities
            
            
            462,369,777
            
            
            
            388,178,222COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS’
      EQUITY:Common
      stock, no par value; 30,000,000 shares authorized; 3,992,339
              and
      3,993,905 shares issued and 3,991,652 and 3,992,715 shares
              outstanding
      as of June 30, 2008 and December 31, 2007, respectively
            
            
            32,566,923
            
            
            
            32,514,936Retained
      earnings
            
            
            10,200,292
            
            
            
            9,009,955Treasury
      Stock, shares at cost, 687 and 1,190 at June 30, 2008 and
              December
      31, 2007, respectively
            
            
            (10,999
            )
            
            
            (18,388
            )Accumulated
      other comprehensive loss
            
            
            (1,080,698
            )
            
            
            (533,186
            )Total
      shareholders’ equity
            
            
            41,675,518
            
            
            
            40,973,317Total
      liabilities and shareholders’ equity
            
            $
            504,045,295
            
            
            $
            429,151,539
 See
accompanying notes to consolidated financial statements
  1
 
 1st
      Constitution Bancorp and Subsidiaries
              Consolidated
      Statements of Income
              (unaudited)Three months ended June 30,
            
            
            Six months ended June 30,INTEREST
      INCOME
            
            2008
            
            
            2007
              (restated)
            
            
            2008
            
            
            2007
              (restated)Loans,
      including fees
            
            $
            6,127,318
            
            
            $
            6,092,841
            
            
            $
            12,136,418
            
            
            $
            12,260,566SecuritiesTaxable
            
            
            916,342
            
            
            
            1,083,967
            
            
            
            1,891,743
            
            
            
            2,076,294Tax-exempt
            
            
            139,478
            
            
            
            225,791
            
            
            
            285,077
            
            
            
            432,359Federal
      funds sold and short-term investments
            
            
            8,992
            
            
            
            42,879
            
            
            
            45,948
            
            
            
            65,423Total
      interest income
            
            
            7,192,130
            
            
            
            7,445,478
            
            
            
            14,359,186
            
            
            
            14,834,642INTEREST
      EXPENSEDeposits
            
            
            2,494,237
            
            
            
            2,435,381
            
            
            
            5,032,330
            
            
            
            4,651,466Securities
      sold under agreement to repurchase
              and
      other borrowed funds
            
            
            402,929
            
            
            
            346,073
            
            
            
            778,956
            
            
            
            632,412Redeemable
      subordinated debentures
            
            
            284,191
            
            
            
            349,507
            
            
            
            533,997
            
            
            
            778,574Total
      interest expense
            
            
            3,181,357
            
            
            
            3,130,961
            
            
            
            6,345,283
            
            
            
            6,062,452Net
      interest income
            
            
            4,010,773
            
            
            
            4,314,517
            
            
            
            8,013,903
            
            
            
            8,772,190Provision
      for loan losses
            
            
            195,000
            
            
            
            30,000
            
            
            
            360,000
            
            
            
            70,000Net
      interest income after provision for loan losses
            
            
            3,815,773
            
            
            
            4,284,517
            
            
            
            7,653,903
            
            
            
            8,702,190NON-INTEREST
      INCOMEService
      charges on deposit accounts
            
            
            197,556
            
            
            
            175,181
            
            
            
            383,444
            
            
            
            325,036Gain
      on sale of loans
            
            
            285,559
            
            
            
            188,741
            
            
            
            595,603
            
            
            
            420,518Income
      on bank-owned life insurance
            
            
            92,818
            
            
            
            88,233
            
            
            
            184,645
            
            
            
            178,581Other
      income
            
            
            228,971
            
            
            
            196,268
            
            
            
            427,589
            
            
            
            368,029Total
      non-interest income
            
            
            804,904
            
            
            
            648,423
            
            
            
            1,591,281
            
            
            
            1,292,164NON-INTEREST
      EXPENSESalaries
      and employee benefits
            
            
            2,073,066
            
            
            
            1,687,666
            
            
            
            4,051,127
            
            
            
            3,550,918Occupancy
      expense
            
            
            432,423
            
            
            
            411,128
            
            
            
            864,438
            
            
            
            802,060Data
      Processing expenses
            
            
            217,811
            
            
            
            215,898
            
            
            
            429,592
            
            
            
            412,974Other
      operating expenses
            
            
            893,842
            
            
            
            560,645
            
            
            
            1,686,335
            
            
            
            1,183,609Total
      non-interest expenses
            
            
            3,617,142
            
            
            
            2,875,337
            
            
            
            7,031,492
            
            
            
            5,949,561Income
      before income taxes
            
            
            1,003,535
            
            
            
            2,057,603
            
            
            
            2,213,692
            
            
            
            4,044,793INCOME
      TAXES
            
            
            285,689
            
            
            
            639,505
            
            
            
            693,649
            
            
            
            1,300,801Net
      income
            
            $
            717,846
            
            
            $
            1,418,098
            
            
            $
            1,520,043
            
            
            $
            2,743,992NET
      INCOME PER SHAREBasic
            
            $
            0.18
            
            
            $
            0.36
            
            
            $
            0.38
            
            
            $
            0.69Diluted
            
            $
            0.18
            
            
            $
            0.35
            
            
            $
            0.38
            
            
            $
            0.68
 See
accompanying notes to consolidated financial statements
  2
 
 1st
Constitution Bancorp and Subsidiaries
 Consolidated
Statements of Changes in Shareholders’ Equity
 For
the Six Months Ended June 30, 2008 and 2007
 (unaudited)
  Common
                Stock
              
              
              Retained
                Earnings
              
              
              Treasury
                Stock
              
              
              Accumulated
                Other
                Comprehensive
                Loss
              
              
              Total
                Shareholders’
                EquityBALANCE,
      January 1, 2007 (restated)
              
              $
              28,886,105
              
              
              $
              7,010,211
              
              
              $
              (3,545
              )
              
              $
              (945,726
              )
              
              $
              34,947,045Exercise
      of stock options, net and issuance
                of
      vested shares under employee
                benefit
      programs
              
              
              (13,881
              )
              
              
              -
              
              
              
              45,083
              
              
              
              -
              
              
              
              31,212SFAS
      123R share-based compensation
              
              
              63,245
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              63,245Treasury
      stock, shares acquired at cost
              
              
              -
              
              
              
              -
              
              
              
              (228,517
              )
              
              
              -
              
              
              
              (228,517
              )Comprehensive
      Income:
                Net
      Income for the six months
                ended
      June 30, 2007 (restated)
              
              
              -
              
              
              
              2,743,992
              
              
              
              -
              
              
              
              -
              
              
              
              2,743,992Unrealized
      loss on securities
                available
      for sale net of tax
                of
      $197,400 (restated)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (494,365
              )
              
              
              (494,365
              )Comprehensive
      Income (restated)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,249,627Balance,
      June 30, 2007 (restated)
              
              $
              28,935,469
              
              
              $
              9,754,203
              
              
              $
              (186,969
              )
              
              $
              (1,440,091
              )
              
              $
              37,062,612Balance,
      January 1, 2008
              
              $
              32,514,936
              
              
              $
              9,009,955
              
              
              $
              (18,388
              )
              
              $
              (533,186
              )
              
              $
              40,973,317Adjustment
      to initially apply EITF 06-4
              
              
              -
              
              
              
              (329,706
              )
              
              
              -
              
              
              
              -
              
              
              
              (329,706
              )Exercise
      of stock options, net and issuance
                of
      vested shares under employee
                benefit
      programs
              
              
              (10,161
              )
              
              
              -
              
              
              
              35,584
              
              
              
              -
              
              
              
              25,423SFAS
      123R share-based compensation
              
              
              62,148
              
              
              
              -
              
              
              
              --
              
              
              
              -
              
              
              
              62,148Treasury
      stock, shares acquired at cost
              
              
              -
              
              
              
              -
              
              
              
              (28,195
              )
              
              
              -
              
              
              
              (28,195
              )Comprehensive
      Income:
                Net
      Income for the six months
                ended
      June 30, 2008
              
              
              -
              
              
              
              1,520,043
              
              
              
              -
              
              
              
              -
              
              
              
              1,520,043Unrealized
      loss on securities
                available
      for sale net of tax of $272,197
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (528,381
              )
              
              
              (528,381
              )Unrealized
      loss on interest rate
                swap
      contract net of tax of $43,967
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (67,470
              )
              
              
              (67,470
              )Minimum
      pension liability net of
                tax
      of $32,149
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              48,339
              
              
              
              48,339Comprehensive
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              972,531BALANCE,
      June 30, 2008
              
              $
              32,566,923
              
              
              $
              10,200,292
              
              
              $
              (10,999
              )
              
              $
              (1,080,698
              )
              
              $
              41,675,518
 See
accompanying notes to consolidated financial statements
  3
  1st
Constitution Bancorp and Subsidiaries
 Consolidated
Statements of Cash Flows
 (unaudited)
  Six
      months ended June 30,2008
            
            
            2007(restated)OPERATING
      ACTIVITIES:Net income
            
            $
            1,520,043
            
            
            $
            2,743,992Adjustments to reconcile net incometo net cash provided by (used in) operating
      activities-Provision for loan losses
            
            
            360,000
            
            
            
            70,000Depreciation and amortization
            
            
            352,654
            
            
            
            369,719Net amortization of premiums on securities
            
            
            35,517
            
            
            
            11,907Gain on sales of loans held for sale
            
            
            (595,603
            )
            
            
            (420,518
            )Originations of loans held for sale
            
            
            (43,010,217
            )
            
            
            (30,603,730
            )Proceeds from sales of loans held for sale
            
            
            40,189,755
            
            
            
            35,695,668Income on Bank – owned life insurance
            
            
            (184,645
            )
            
            
            (178,581
            )Share-based
      compensation expense
            
            
            62,148
            
            
            
            63,245Decrease (increase)in accrued interest
      receivable
            
            
            453,712
            
            
            
            (346,890
            )Increase in other assets
            
            
            (662,423
            )
            
            
            (1,996
            )(Decrease) increase in accrued interest
      payable
            
            
            30,675
            
            
            
            (88,106
            )Decrease in accrued expenses and other
      liabilities
            
            
            (1,303,889
            )
            
            
            (456,851
            )Net
      cash (used in) provided by operating activities
            
            
            (2,752,273
            )
            
            
            6,857,859INVESTING
      ACTIVITIES:Purchases of securities -Available for sale
            
            
            (11,241,517
            )
            
            
            (15,776,240
            )Held to maturity
            
            
            -
            
            
            
            (7,677,917
            )Proceeds from maturities and prepayments of securities -Available for sale
            
            
            13,269,990
            
            
            
            3,226,445Held to maturity
            
            
            7,202,946
            
            
            
            337,517Net increase in loans
            
            
            (70,324,408
            )
            
            
            (20,422,562
            )Additional investment in other real estate
    owned
            
            
            (1,016,320
            )
            
            
            -Capital expenditures
            
            
            (142,570
            )
            
            
            (252,855
            )Proceeds from sales of other real estate
owned
            
            
            880,212
            
            
            
            -Cash consideration paid to acquire branch
            
            
            -
            
            
            
            (747,330
            )Cash and cash equivalents acquired from branch
            
            
            -
            
            
            
            19,514,239Net
      cash used in investing activities
            
            
            (61,371,667
            )
            
            
            (21,798,703
            )FINANCING
      ACTIVITIES:Issuance
      of common stock, net
            
            
            25,423
            
            
            
            31,212Purchase of treasury stock
            
            
            (28,195
            )
            
            
            (228,517
            )Net increase (decrease) in demand, savings and time
      deposits
            
            
            67,071,427
            
            
            
            (6,288,178
            )Repayment
      of redeemable subordinated debentures
            
            
            -
            
            
            
            (5,155,000
            )Net increase in other borrowings
            
            
            8,000,000
            
            
            
            25,800,000Net
      cash provided by financing activities
            
            
            75,068,655
            
            
            
            14,159,517Increase
      (decrease) in cash and cash equivalents
            
            
            10,944,715
            
            
            
            (781,327
            )CASH
      AND CASH EQUIVALENTSAT BEGINNING OF PERIOD
            
            
            7,548,102
            
            
            
            10,361,812CASH
      AND CASH EQUIVALENTSAT END OF PERIOD
            
            $
            18,492,817
            
            
            $
            9,580,485SUPPLEMENTAL
      DISCLOSURESOF CASH FLOW INFORMATION:Cash paid during the period for -Interest
            
            $
            6,314,608
            
            
            $
            6,150,558Income
      taxes
            
            
            2,120,200
            
            
            
            1,421,600Non-cash
      investing activitiesReal
      estate acquired in full satisfaction of loans in
    foreclosure
            
            
            1,389,181
            
            
            
            -
 See
accompanying notes to consolidated financial statements.
  4
 
 1st
Constitution Bancorp and Subsidiaries
 Notes
To Consolidated Financial Statements
 June
30, 2008 (Unaudited)
  (1)  Summary
of Significant Accounting Policies
  The
accompanying unaudited Consolidated Financial Statements have been prepared by
1st Constitution Bancorp (the “Company”) and include the Company, its
wholly-owned subsidiary, 1st
Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1st
Constitution Investment Company of Delaware, Inc., FCB Assets Holdings, Inc. and
1st Constitution Title Agency, LLC.  1st Constitution Capital Trust
II, a subsidiary of the Company, and 1st Constitution Capital Trust I, which was
a subsidiary of the Company until April 2007, are not included in
the  Consolidated Financial Statements as they are variable interest
entities and the Company is not the primary beneficiary.  All
significant inter-company accounts and transactions have been eliminated in
consolidation and certain prior period amounts have been reclassified to conform
to current year presentation.  The accounting and reporting policies
of the Company and its subsidiaries conform to accounting principles generally
accepted in the United States of America and pursuant to the rules and
regulations of the Securities and Exchange Commission (the “SEC”), including the
instructions to Form 10-Q and Article 8 of Regulation S-X.  Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to such rules and
regulations.  These Consolidated Financial Statements should be read
in conjunction with the audited consolidated financial statements and the notes
thereto included in the Company’s Form 10-K for the year ended December 31,
2007, filed with the SEC on April 15, 2008.
  In the
opinion of the Company, all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair presentation of the operating results
for the interim periods have been included. The results of operations for
periods of less than a year are not necessarily indicative of results for the
full year.
  Net
Income Per Common Share
  Basic net
income per common share is calculated by dividing net income by the weighted
average number of shares outstanding during each period.
  Diluted
net income per share is calculated by dividing net income by the weighted
average number of shares outstanding, as adjusted for the assumed exercise of
stock options and the vesting of unvested stock awards, using the treasury stock
method. All 2007 share information has been restated for the effect of a 6%
stock dividend declared December 20, 2007 and paid on February 6, 2008 to
shareholders of record on January 23, 2008.
  The
following tables illustrate the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS)
calculations.
  Three
      Months Ended June 30, 2008Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              amountBasic
      EPSNet
      income available to common stockholders
            
            $
            717,846
            
            
            
            3,989,997
            
            
            $
            0.18Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            -
            
            
            
            50,969
            
            
            
            -Diluted
      EPSNet
      income available to common shareholders
              plus
      assumed conversion
            
            $
            717,846
            
            
            
            4,040,966
            
            
            $
            0.18
  5
  Three
      Months Ended June 30, 2007
              (restated)Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              AmountBasic
      EPSNet
      income available to common stockholders
            
            $
            1,418,098
            
            
            
            3,958,888
            
            
            $
            0.36Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            -
            
            
            
            63,200
            
            
            
            (0.01
            )Diluted
      EPSNet
      income available to common stockholders
              plus
      assumed conversion
            
            $
            1,418,098
            
            
            
            4,022,088
            
            
            $
            0.35
 
 Six
      Months Ended June 30, 2008Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              AmountBasic
      EPSNet
      income available to common stockholders
            
            $
            1,520,043
            
            
            
            3,989,712
            
            
            $
            0.38Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            -
            
            
            
            54,634
            
            
            
            -Diluted
      EPSNet
      income available to common shareholders
              plus
      assumed conversion
            
            $
            1,520,043
            
            
            
            4,044,346
            
            
            $
            0.38
 
 
 Six
      Months Ended June 30, 2007
              (restated)Income
            
            
            Weighted-
              average
              shares
            
            
            Per
      share
              amountBasic
      EPSNet
      income available to common stockholders
            
            $
            2,743,992
            
            
            
            3,963,032
            
            
            
            0.69Effect
      of dilutive securitiesStock
      options and unvested stock awards
            
            
            -
            
            
            
            64,047
            
            
            
            (0.01
            )Diluted
      EPSNet
      income available to common shareholders
              plus
      assumed conversion
            
            $
            2,743,992
            
            
            
            4,027,079
            
            
            $
            0.68
 
 Share-Based
Compensation
  Share-based
compensation is accounted for in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based
Payment.  The Company adopted SFAS No. 123R on January 1, 2006
using the modified prospective approach.  The Company establishes fair
value for its equity awards to determine its cost and the Company recognizes the
related expense for stock options over the vesting period using the
straight-line method.  The grant date fair value for stock options is
calculated using the Black-Scholes option valuation model.
  The
Company’s stock-based incentive plans (“stock plans”) authorize the issuance of
shares of common stock pursuant to awards that may be granted in the form of
stock options to purchase common stock (“options”) and awards of shares of
restricted common stock (“stock awards”).  The purpose of the
Company’s stock plans is to attract
and retain personnel for positions of substantial responsibility and to provide
additional incentive to certain officers, directors, employees and other persons
to promote the success of the Company.  Under the Company’s stock
plans, options expire no later than ten years after the date of
grant.  Options are granted with an exercise price set at no less than
the fair market value of the Company’s stock on the date of the
grant.  The grant date fair value of the options is calculated using
the Black-Scholes option valuation model.
  6
  Stock-based
compensation expense related to options was $62,148 and $63,245 for the six
months ended June 30, 2008 and 2007, respectively.
  Option
transactions under the Company’s stock plans during the six months ended June
30, 2008 are summarized as follows:
  Stock
      Options
            
            Number
      of
              Shares
            
            
            Weighted
              Average
              Exercise
      Price
            
            
            Weighted
              Average
              Remaining
              Contractual
              Term
      (years)
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at January 1, 2008
            
            
            156,838
            
            
            $
            10.43Options
      Granted
            
            
            -
            
            
            
            -Options
      Exercised
            
            
            324
            
            
            
            3.24Options
      Forfeited
            
            
            -
            
            
            
            -Options
      Expired
            
            
            -
            
            
            
            -Outstanding
      at June 30, 2008
            
            
            156,514
            
            
            $
            10.44
            
            
            
            4.8
            
            
            $
            464,188Exercisable
      at June 30, 2008
            
            
            121,789
            
            
            $
            8.94
            
            
            
            3.7
            
            
            $
            464,188
 
 Stock
awards generally vest over a four-year service period on the anniversary of the
grant date.  Once vested, stock awards are irrevocable.  The
product of the number of shares granted and the grant date market price of the
Company’s common stock determine the fair value of shares covered by the stock
award under the Company’s stock plans.  Management recognizes
compensation expense for the fair value of the shares covered by the stock award
on a straight-line basis over the requisite service
period.  Stock-based compensation expense related to stock awards was
$99,145 and $180,800 for the six months ended June 30, 2008 and 2007,
respectively.
 
 The
following table summarizes the non-vested portion of stock awards outstanding at
June 30, 2008:
  Stock
      Awards
            
            Number
      of
              Shares
            
            
            Average
      Grant Date
              Fair
      ValueNon-vested
      stock awards at January 1, 2008
            
            
            47,993
            
            
            $
            15.35Shares granted
            
            
            -
            
            
            
            -Shares vested
            
            
            -
            
            
            
            -Shares forfeited
            
            
            -
            
            
            
            -Non-vested
      stock awards at June 30, 2008
            
            
            47,993
            
            
            $
            15.35
 
 As of
June 30, 2008, there was approximately $456,306 of unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the Company’s stock plans.  That cost is expected to be recognized
over the following four years.
 
 Benefit
Plans
  The
Company provides certain retirement benefits to employees under a 401(k)
plan.  The Company’s contributions to the 401(k) plan are expensed as
incurred.
  7
  The
Company also provides retirement benefits to certain employees under a
supplemental executive retirement plan.  The plan is unfunded and the
Company accrues actuarial determined benefit costs over the estimated service
period of the employees in the plan.  The Company follows Statement of
Financial Accounting Standards No. 132, as revised in December 2003 (“SFAS No.
132”), “Employers’ Disclosures about Pensions and Other Post-retirement Benefits—an
amendment of FASB Statements No. 87, 88, and 106” and Statement of Financial
Accounting Standards No. 158 (“SFAS No. 158”), “Employers Accounting for Defined
Benefit Pension and Other Post-retirement Plans—an amendment of FASB Statements
No. 87, 88, 106 and 132(R)”.  SFAS No. 132 revised employers’ disclosures
about pension and other post-retirement benefit plans.  It requires the
disclosure of additional information about changes in the benefit obligation and
the fair values of plan assets. It also standardizes the requirements for
pensions and other postretirement benefit plans, to the extent possible, and
illustrates combined formats for the presentation of pension plan and other
post-retirement benefit plan disclosures.  SFAS 158 requires an employer to
recognize the over funded or under funded status of a defined benefit
post-retirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur, through comprehensive
income.
  The
components of net periodic expense for the Company’s supplemental executive
retirement plan for the six months ended June 30, 2008 and 2007 are as
follows:
  Three
      months ended June 30,
            
            
            Six
      months ended June 30,2008
            
            2007
            
            
            2008
            
            
            2007Service
      cost
            $
            57,637
            
            $
            56,791
            
            
            $
            115,274
            
            
            $
            113,582Interest
      cost
            
            39,830
            
            
            32,889
            
            
            
            79,660
            
            
            
            65,778Actuarial
      loss recognized
            
            15,375
            
            
            6,217
            
            
            
            30,750
            
            
            
            12,434Prior
      service cost recognized
            
            24,858
            
            
            24,858
            
            
            
            49,716
            
            
            
            49,716$
            137,700
            
            $
            120,755
            
            
            $
            275,400
            
            
            $
            241,510
 
 In
September 2006, the Financial Accounting
Standards Board (“FASB”)Emerging Issues Task Force finalized Issue No.
06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-dollar Life
Insurance Arrangements (“EITF 06-4”).  EITF 06-4 requires that
a liability be recorded during the service period when a split-dollar life
insurance agreement continues after participants’ employment or
retirement.  The required accrued liability is based on either the
post-employment benefit cost for the continuing life insurance or based on the
future death benefit depending on the contractual terms of the underlying
agreement.  The Company adopted EITF 06-4 on January 1, 2008, and
recorded a cumulative effect adjustment of $329,706 as a reduction of retained
earnings effective January 1, 2008.  Total compensation expense for
2008 is projected to increase by approximately $16,120 as a result of the
adoption of EITF 06-4.
  8
  Other
Comprehensive Income (Loss)
  The
components of accumulated other comprehensive loss and their related income tax
effects are as
follows:
 June
      30,
            
            
            December
      31,2008
            
            
            2007Unrealized
      holding losses (gains) onsecurities
      available for sale
            
            $
            (770,015
            )
            
            $
            30,563Related
      income tax effect
            
            
            259,317
            
            
            
            (12,880
            )(510,698
            )
            
            
            17,683Unrealized
      loss on interest rateswap
      contract
            
            
            (211,191
            )
            
            
            (99,754
            )Related
      income tax effect
            
            
            83,809
            
            
            
            39,842(127,382
            )
            
            
            (59,912
            )Pension
      liability
            
            
            (737,876
            )
            
            
            (818,343
            )Related
      income tax effect
            
            
            295,258
            
            
            
            327,386(442,618
            )
            
            
            (490,957
            )Accumulated
      Other Comprehensive Loss
            
            $
            (1,080,698
            )
            
            $
            (533,186
            )
  The
components of other comprehensive income (loss) and their related income tax
effects for the three and and six
month periods ended June 30, 2008 and 2007, are as follows:
   Three
      Months Ended
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,
            
            
            June
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Unrealized
      holding losses onsecurities
      available for sale
            
            $
            (1,761,761
            )
            
            $
            (1,230,666
            )
            
            $
            (800,578
            )
            
            $
            (691,765
            )Related
      income tax effect
            
            
            598,863
            
            
            
            369,848
            
            
            
            272,197
            
            
            
            197,400(1,162,898
            )
            
            
            (860,818
            )
            
            
            (528,381
            )
            
            
            (494,365
            )Unrealized
      gain (loss) on interest rateswap
      contract
            
            
            614,841
            
            
            
            -
            
            
            
            (111,437
            )
            
            
            -Related
      income tax effect
            
            
            (245,893
            )
            
            
            -
            
            
            
            43,967
            
            
            
            -368,948
            
            
            
            -
            
            
            
            (67,470
            )
            
            
            -Pension
      liability amortization
            
            
            80,467
            
            
            
            -
            
            
            
            80,467
            
            
            
            -Related
      income tax effect
            
            
            (32,128
            )
            
            
            -
            
            
            
            (32,128
            )
            
            
            -48,339
            
            
            
            -
            
            
            
            48,339
            
            
            
            -Other
      Comprehensive Income
            
            $
            (745,611
            )
            
            $
            (860,818
            )
            
            $
            (547,512
            )
            
            $
            (494,365
            )
 
 Recent
Accounting Pronouncements
  In May
2008, the FASB issued Statement of Financial Accounting Standards No 162 (“SFAS
No. 162”), “The Hierarchy of Generally Accepted Accounting
Principles.”  SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements.  SFAS No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting
Principles.”  The adoption of SFAS No. 162 will not have a material
impact on the Company’s financial statements.
  9
  In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS
No. 161”), “Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133.” SFAS No. 161 requires entities that
utilize derivative instruments to provide qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of, and gains and losses on, derivative contracts, and details of
credit-risk-related contingent features in their hedged
positions.  SFAS No. 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS No. 133 have been
applied, and the impact that hedges have on an entity’s financial position,
financial performance, and cash flows.   SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged, but not
required.  We do not anticipate the adoption of SFAS No. 161 will have
a material effect on the Company’s financial statements.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R) (“SFAS No. 141(R)”), “Business Combinations (revised
2007).”  SFAS No. 141(R) significantly changes how entities apply the
acquisition method to business combinations. The new standard requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS No. 141(R) is
broader than its predecessor, SFAS No. 141, which only applied to business
combinations in which control was obtained by transferring
consideration.  SFAS No. 141(R) applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more
businesses, including combinations achieved without the transfer of
consideration.  SFAS No. 141(R) requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the Statement. This replaces SFAS No. 141’s
cost allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed, based on
their estimated fair values.  SFAS No. 141 required the acquirer to
include the costs incurred to effect the acquisition (acquisition-related costs)
in the cost of the acquisition that was allocated to the assets acquired and the
liabilities assumed.  SFAS No. 141(R) requires those costs to be
recognized separately from the acquisition. In accordance with SFAS No. 141,
restructuring costs that the acquirer expected, but was not obligated to incur,
were recognized as if they were a liability assumed at the acquisition
date.  SFAS No. 141(R) requires the acquirer to recognize those
restructuring costs that do not meet the criteria in Statement of Financial
Accounting Standards No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities” as an expense as incurred.  Acquisition related
transaction costs will be expensed as incurred. SFAS No. 141(R) requires an
acquirer to recognize assets or liabilities arising from all other contingencies
(contractual contingencies) as of the acquisition date, measured at their
acquisition-date fair values only if it is more likely than not that they meet
the definition of an asset or a liability on the acquisition date. Under SFAS
No. 141(R), changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income tax expense. Additionally, under SFAS No. 141(R), the
allowance for loan losses of an acquiree will not be permitted to be recognized
by the acquirer.  SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008.  This new pronouncement will impact
the Company’s accounting for business combinations beginning January 1,
2009.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160 (“SFAS No. 160”), “Noncontrolling Interest in Consolidated Financial
Statements–an amendment of Accounting Research Bulletin No. 51 (Consolidated
Financial Statements).”  SFAS No. 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements.  Its intention is to eliminate the
diversity in practice regarding the accounting for transactions between an
entity and noncontrolling interests.  SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company is currently
assessing the impact of the adoption of SFAS No. 160 on its financial
statements.
  In
November 2007, the SEC issued Staff Accounting Bulletin No. 109 (“SAB 109”),
“Written Loan Commitments Recorded at Fair Value through
Earnings.”  SAB 109 revises and rescinds portions of Staff Accounting
Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan
Commitments.” The SEC staff’s current view is that the
expected net future cash flows related to the associated servicing of a loan
should be included in the measurement of derivative and other written loan
commitments that are accounted for at fair value through earnings. That view is
consistent with the guidance in Statement of Financial Accounting Standards No.
156, “Accounting for Servicing of Financial Assets—an amendment of FASB
Statement No. 140” and Statement of Financial Accounting Standards No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities—including an
amendment of FASB Statement No. 115.”  SAB 109 retains the view
expressed in SAB 105 that internally developed intangible assets should not be
recorded as part of the fair value of a derivative loan commitment. The guidance
in SAB 109 is effective for derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007.  The adoption of
SAB 109 did not have a material impact on the Company’s financial
statements.
  10
  (2)  Fair
Value Measurements
  Effective
January 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements,” for
financial assets and financial liabilities.  SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurement.  In accordance with Financial Accounting Standards Board
Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” the
Company will delay application of SFAS No. 157 for non-financial assets and
non-financial liabilities until January 1, 2009.
  SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants.  A fair value measurement assumes that the transaction
to sell the asset or transfer the liability occurs in the principal market for
the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability.  The price in the
principal (or most advantageous) market used to measure the fair value of the
asset or liability will not be adjusted for transaction costs.  An
orderly transaction is a transaction that assumes exposure to the market for a
period prior to the measurement date to allow for marketing activities that are
usual and customary for transactions involving such assets and liabilities; it
is not a forced transaction.  Market participants are buyers and
sellers in the principal market that are (i) independent, (ii) knowledgeable,
(iii) able to transact and (iv) willing to transact.
  SFAS No.
157 requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach.  The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and
liabilities.  The income approach uses valuation techniques to convert
future amounts, such as cash flows or earnings, to a single present amount on a
discounted basis.  The cost approach is based on the amount that
currently would be required to replace the service capacity of an asset
(replacement cost).  Valuation techniques should be consistently
applied.
  Inputs to
valuation techniques refer to the assumptions that market participants would use
in pricing the asset or liability.  Inputs may be observable, meaning
those that reflect the assumptions market participants would use in pricing the
asset or liability developed based on market data obtained from independent
sources, or unobservable, meaning those that reflect the reporting entity’s own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances.  In that regard, SFAS No. 157 establishes a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs.  The fair value hierarchy is as
follows:
  ·
            Level
      1 Inputs – Unadjusted quoted prices in active markets for identical assets
      or liabilities that the reporting entity has the ability to access at the
      measurement date.
  ·
            Level
      2 Inputs – Inputs other than quoted prices included in Level 1 that are
      observable for the asset or liability, either directly or
      indirectly.  These might include quoted prices for similar
      assets or liabilities in active markets, quoted prices for identical or
      similar assets or liabilities in markets that are not active, inputs other
      than quoted prices that are observable for the asset or liability (such as
      interest rates, volatilities, prepayment speeds, credit risks, etc). or
      inputs that are derived principally from or corroborated by market data by
      correlation or other means.
  ·
            Level
      3 Inputs – Unobservable inputs for determining the fair values of assets
      or liabilities that reflect an entity’s own assumptions about the
      assumptions that market participants would use in pricing the assets or
      liabilities.
  11
  A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.  These valuation
methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value effective January 1,
2008.
  In
general, fair value is based upon quoted market prices, where
available.  If such quoted market prices are not available, fair value
is based upon internally developed models that primarily use, as inputs,
observable market-based parameters.  Valuation adjustments may be made
to ensure that financial instruments are recorded at fair
value.  These adjustments may include amounts to reflect counterparty
credit quality, the Company’s creditworthiness, among other things, as well as
unobservable parameters.  Any such valuation adjustments are applied
consistently over time.  The Company’s valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable
value or reflective value or reflective of future values.  While
management believes the Company’s valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date.
  Securities Available for
Sale.  Securities classified as available for sale are reported
at fair value utilizing Level 2 Inputs.  For these securities, the
Company obtains fair value measurements from an independent pricing
service.  The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade executive data, market consensus prepayments
speeds, credit information and the bond’s terms and conditions, among other
things.
  Derivatives.  Derivatives
are reported at fair value utilizing Level 2 Inputs.  The Company
obtains dealer quotations to value its interest rate swap.
  The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of June 30, 2008, segregated by the level
of the valuation inputs within the fair value hierarchy utilized to measure fair
value:
  Level
      1
              Inputs
            
            
            Level
      2
              Inputs
            
            
            Level
      3
              Inputs
            
            
            Total Fair
              ValueSecurities
      available for sale
            
            $
            -
            
            
            $
            72,340,516
            
            
            $
            -
            
            
            $
            72,340,516Derivative
      liabilities
            
            
            -
            
            
            
            211,192
            
            
            
            -
            
            
            
            211,192
 
 Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment).  Financial assets and financial liabilities measured at
fair value on a non-recurring basis were not significant at June 30,
2008.
 
 Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test.  Certain non-financial assets measured
at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial
long-lived assets measured at fair value for impairment
assessment.  As stated above, SFAS No. 157 will be applicable to these
fair value measurements beginning January 1, 2009.
  Effective
January 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.”.  SFAS No. 159 permits the Company to choose to
measure eligible items at fair value at specified election
dates.  Unrealized gains and losses on items for which the fair value
measurement option
has been elected are reported in earnings at each subsequent reporting
date.  The fair value option (i) may be applied instrument by
instrument, with certain exceptions, and thus, the Company may record identical
financial assets and liabilities at fair value or by another measurement basis
permitted under generally accepted accounting principals, (ii) is irrevocable
(unless a new election date occurs) and (iii) is applied only to entire
instruments and not to portions of instruments.  Adoption of SFAS No.
159 on January 1, 2008 did not have a significant impact on the Company’s
financial statements.
  12
  (3)
Acquisition of Unaffiliated Branch
  On
February 27, 2007, the Company, through the Bank, completed its acquisition of
the Hightstown, New Jersey branch of another financial institution for a
purchase price of $747,330.
  As a
result of the acquisition, the Hightstown branch became a branch of the
Bank.  Included in the acquisition of the branch were deposit
liabilities of $19.5 million, mostly in certificates of deposit, and cash of
approximately $18.8 million, net of assets acquired consisting of cash on hand
of approximately $137,000, fixed and other assets of approximately $91,000 and
the assumption of the lease of the branch premises. The cash received in the
transaction was utilized to repay short term borrowings used to purchase
investment securities prior to, and in contemplation of, the completion of the
acquisition.
  In
addition, the Bank recorded goodwill of $472,726 and a core deposit intangible
asset of $274,604.
  Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The
purpose of this discussion and analysis of the operating results and financial
condition at June 30, 2008 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 six month periods ended June
30, 2008 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, 2007, as filed with the Securities and Exchange Commission (the “SEC”) on
April 15, 2008.
  General
  Throughout
the following sections, the “Company” refers to 1st
Constitution Bancorp and, as the context requires, its wholly-owned
subsidiaries, 1st
Constitution Bank and 1stConstitution Capital Trust II; the “Bank” refers to 1st
Constitution Bank; “Trust II” refers to 1st
Constitution Capital Trust II; and “Trust I” refers to 1st
Constitution Capital Trust I, which was a subsidiary of the Company until its
termination in April 2007.  Trust II and Trust I are not included in
the Company’s consolidated financial statements as they are variable interest
entities and the Company is not the primary beneficiary.
  The
Company is a bank holding company registered under the Bank Holding Company Act
of 1956, as amended. The Company was organized under the laws of the State of
New Jersey in February 1999 for the purpose of acquiring all of the issued and
outstanding stock of the Bank, a full service commercial bank which began
operations in August 1989, and thereby enabling the Bank to operate within a
bank holding company structure. The Company became an active bank holding
company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company.
Other than its ownership interest in the Bank, the Company currently conducts no
other significant business activities.
  The Bank
operates eleven branches, and manages an investment portfolio through 1st
Constitution Investment Company of Delaware, Inc., its
subsidiary.  FCB Assets Holdings, Inc., a subsidiary of the Bank, is
used by the Bank to manage and dispose of repossessed real estate.
  13
  Trust II,
a subsidiary of the Company, was created in May 2006 to issue trust preferred
securities to assist the Company to raise additional regulatory
capital.
  Trust I,
which was a statutory business trust and a wholly-owned subsidiary of the
Company, had issued $5.0 million of variable rate trust preferred securities in
April 2002 and had held, as its sole asset, subordinated debentures issued by
the Company until such debentures were redeemed by the Company, and Trust I was
terminated, in April 2007.
  The
Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2008
contains restated unaudited consolidated financial information of the Company
for each of the first three quarters of 2007.  To the extent that the
discussion and analysis contained herein relates or refers to the Company’s
results for the first quarter or six months of 2007, such discussion and
analysis reflects the Company’s restated results for the three and six months
ended June 30, 2007.
  Forward-Looking
Statements
  This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).  The Private
Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward
looking statements.  When used in this and in future filings by the
Company with the SEC, in the Company’s press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases “will,” “will likely result,” “could,” “anticipates,”
“believes,” “continues,” “expects,” “plans,” “will continue,” “is anticipated,”
“estimated,” “project” or “outlook” or similar expressions (including
confirmations by an authorized executive officer of the Company of any such
expressions made by a third party with respect to the Company) are intended to
identify forward-looking statements. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, each of which
speak only as of the date made.  Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected.
  Factors
that may cause actual results to differ from those results expressed or implied,
include, but are not limited to, those listed under “Business”, “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Company’s Annual Report on Form 10-K filed with the SEC on
April 15, 2008, such as the overall economy and the interest rate environment;
the ability of customers to repay their obligations; the adequacy of the
allowance for loan losses; competition; significant changes in accounting, tax
or regulatory practices and requirements; certain interest rate risks; risks
associated with investments in mortgage-backed securities; and risks associated
with speculative construction lending. Although management has taken certain
steps to mitigate any negative effect of the aforementioned items, significant
unfavorable changes could severely impact the assumptions used and could have an
adverse effect on profitability. The Company undertakes no obligation to
publicly revise any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements, except as required by law.
  RESULTS
OF OPERATIONS
 
 Three
Months Ended June 30, 2008  Compared to the Three Months Ended June
30, 2007
 
 Summary
 
 The
Company realized net income of $717,846 for the three months ended June 30,
2008, a decrease of 49.4% from the $1,418,098 reported for the three months
ended June 30, 2007.  Diluted net income per share was $0.18 for the
three months ended June 30, 2008 compared to $0.35 per diluted share for the
three months ended June 30, 2007.  All prior year share information
has been restated for the effect of a 6% stock dividend declared on December 20,
2007 and paid on February 6, 2008 to shareholders of record on January 23,
2008.
 
 Key
performance ratios declined for the three months ended June 30, 2008 as compared
to the three months ended June 30, 2007.  Return on average assets and
return on average equity were 0.59% and 6.90% for the three months ended June
30, 2008 compared to 1.35% and 15.36%, respectively, for the three months ended
June 30, 2007.
 
 14
  A
significant factor impacting the Company’s net interest income has been the
declining level of market interest rates and the resulting compression of the
Company’s net interest margin.  The net interest margin for the three
months ended June 30, 2008 was 3.60% as compared to the 4.48% net interest
margin recorded for the three months ended June 30, 2007, a reduction of 88
basis points.  The Federal Reserve has decreased the level of market
interest rates by 250 basis points since September 18, 2007.  Since
the majority of the Company’s interest earning assets earn at floating rates,
these interest rate reductions have resulted in a decreased level of interest
income.  The Company will continue to closely monitor the mix of
earning assets and funding sources to maximize net interest income during this
challenging interest rate environment.
  The
Company has a significant investment in collateralized mortgages and
mortgage-backed securities.  Several financial institutions have
reported significant write-downs of the value of mortgage related
securities.  Certain of these types of securities may also not be
marketable except at significant discounts.  While management of the
Company is, as of the date of this report, unaware of any material exposures in
its portfolio of these securities, market conditions could further deteriorate
and result in the recognition of losses in the value of these
securities.
  Earnings
Analysis
 
 Interest
Income
 
 Interest
income for the three months ended June 30, 2008 was $7,192,130, decreasing by
3.4% from the $7,445,478 reported in the three months ended June 30,
2007.  The decrease in interest income was attributable to the current
period decrease in yields earned on the Bank’s interest-earning assets,
partially offset by increased average balances in those interest-earning
assets.  For the three months ended June 30, 2008, average interest
earning assets increased $59,688,865 or 15.1%, to $455,549,258 compared to
$395,860,393 for the three months ended June 30, 2007.  For the three
months ended June 30, 2008, the average yield on earning assets, on a
tax-equivalent basis, decreased 124 basis points to 6.41% from 7.65% for the
three months ended June 30, 2007.
 
 Interest
Expense
 
 Interest
expense for the three months ended June 30, 2008 was $3,181,357, an increase of
$50,396 from $3,130,961 reported for the three months ended June 30,
2007.  Total average interest bearing liabilities increased by
$44,230,933 to $362,461,495 for the three months ended June 30, 2008 from
$318,230,562 for the three months ended June 30, 2007.  The average
cost of interest bearing liabilities decreased 42 basis points to 3.53% for the
three months ended June 30, 2008 from 3.95% for the three months ended June 30,
2007.  These decreases were primarily a result of the current period
decrease in market-driven rates paid on deposits and short-term borrowed
funds.
 
 Net
Interest Income
  The
Company’s net interest income for the three months ended June 30, 2008 was
$4,010,773, a decrease of 7.0% from the $4,314,517 reported for June 30,
2007.  The net interest margin (on a tax-equivalent basis), which is
net interest income divided by average interest-earning assets, decreased 88
basis points to 3.60% for the three months ended June 30, 2008 from 4.48% for
the three months ended June 30, 2007.  The declining level of market
interest rates on the Bank’s floating rate assets in the competitive New Jersey
marketplace has contributed significantly to this margin
compression.
  Provision
for Loan Losses
  Management
maintains the allowance for loan losses at a level that is considered adequate
to absorb losses on existing loans that may become uncollectible, based upon an
evaluation of known and inherent risks in the loan
portfolio.  Additions to the allowance are made by charges to the
provision for loan losses.  The evaluation considers a complete review
of the following specific factors:  historical losses by loan
category, non-accrual loans, problem loans as identified through internal
classifications, collateral values, and the growth and size of the
portfolio.  Additionally, current economic conditions and local real
estate market conditions are considered.  As a result of this evaluation
process, the Company’s provision for loan losses was $195,000 for the three
months ended June 30, 2008 and $30,000 for the three months ended June 30,
2007.  See “Allowance for Loan Losses” on page 24.
  15
  Non-Interest
Income
  Total
non-interest income for the three months ended June 30, 2008 was $804,904, an
increase of $156,481, or 24.1%, over non-interest income of $648,423 for the
three months ended June 30, 2007.
  Service
charges on deposit accounts represent a significant source of non-interest
income.  Service charge revenues increased by $22,375, or 12.8%, to
$197,556 for the three months ended June 30, 2008 from $175,181 for the three
months ended June 30, 2007.  This increase was the result of a higher
volume of uncollected funds and overdraft fees collected on deposit accounts
during the second quarter of 2008 compared to the same period in
2007.
  Gain on
sales of loans increased by $96,818, or 51.3%, to $285,559 for the three months
ended June 30, 2008 when compared to $188,741 for the three months ended June
30, 2007.  The Bank sells both residential mortgage loans and Small
Business Administration (“SBA”) loans in the secondary market.  The
lower interest rate environment that continued into the first half of 2008 has
impacted the volume of sales transactions in the mortgage loan and SBA loan
markets and resultant gains resulting from these transactions.
  Non-interest
income also includes income from bank-owned life insurance (“BOLI”), which
amounted to $92,818 for the three months ended June 30, 2008 compared to $88,233
for the three months ended June 30, 2007.  The Bank purchased tax-free
BOLI assets to partially offset the cost of employee benefit plans and reduce
the Company’s overall effective tax rate.
  The Bank
also generates non-interest income from a variety of fee-based
services.  These include safe deposit box rental, wire transfer
service fees and Automated Teller Machine fees for non-Bank
customers.  Increased customer demand for these services contributed
to the other income component of non-interest income amounting to $228,971 for
the three months ended June 30, 2008, compared to $196,268 for the three months
ended June 30, 2007.
  Non-Interest
Expense
  Non-interest
expenses increased by $741,805, or 25.8%, to $3,617,142 for the three months
ended June 30, 2008 from $2,875,337 for the three months ended June 30,
2007.  The following table presents the major components of
non-interest expenses for the three months ended June 30, 2008 and
2007.
  Three
      months ended June 30,Non-interest
      Expenses
            
            2008
            
            
            2007Salaries
      and employee benefits
            
            $
            2,073,066
            
            
            $
            1,687,666Occupancy
      expenses
            
            
            432,423
            
            
            
            411,128Equipment
      expense
            
            
            153,583
            
            
            
            120,796Marketing
            
            
            73,206
            
            
            
            22,145Data
      processing expenses
            
            
            217,811
            
            
            
            215,898Regulatory,
      professional and other fees
            
            
            319,826
            
            
            
            73,320Office
      expense
            
            
            144,526
            
            
            
            152,408All
      other expenses
            
            
            202,701
            
            
            
            191,976Total
            
            $
            3,617,142
            
            
            $
            2,875,337
  Salaries
and employee benefits, which represent the largest portion of non-interest
expenses, increased by $385,400, or 22.8%, to $2,073,066 for the three months
ended June 30, 2008 compared to $1,687,666 for the three months ended June 30,
2007. The increase in salaries and employee benefits for the three months ended
June 30, 2008 was a result of an increase in the number of employees, regular
merit increases and increased health care costs. Overall staffing
levels increased to 108 full-time equivalent employees at June 30, 2008 as
compared to 97 full-time equivalent employees at June 30, 2007.
  16
  In
January 2008, the Bank established a Mortgage Warehouse Funding Group, which
introduced a revolving line of credit that is available to licensed mortgage
banking companies.  This group is based in a newly leased office space
in Somerset, NJ and consists of five newly hired staff members.  The
Bank’s action to establish this group and commence operations has contributed to
the 2008 increase in most components of non-interest expenses when compared with
2007 expenses for the same period.
  Marketing
expenses increased by $51,061, or 230.6%, to $73,206 for the three months ended
June 30, 2008 compared to $22,145 for the three months ended June 30,
2007.  The increase in expense was attributable to marketing campaigns
designed to increase low-cost core deposits, further develop our brand image and
continue the Bank’s support of community activities.
  Regulatory,
professional and other fees increased by $246,506, or 336%, to $319,826 for the
three months ended June 30, 2008 compared to $73,320 for the three months ended
June 30, 2007.  During the second quarter of 2008, the Company
incurred increased accounting and legal fees as a result of the restatement of
the Company’s financial statements for the first three quarters and the year
ended December 31, 2006 and the first three quarters of the year ended December
31, 2007, as described in Item 8 of the Company’s Annual Report on Form 10-K
filed with the SEC on April 15, 2008.  The Bank also incurred
professional fees in connection with audits performed by independent consultants
to assess the effectiveness of controls established over internal systems as
required by the Sarbanes-Oxley Act.
  An
important financial services industry productivity measure is the efficiency
ratio. The efficiency ratio is calculated by dividing total operating expenses
by net interest income plus non-interest income. An increase in the efficiency
ratio indicates that more resources are being utilized to generate the same or
greater volume of income, while a decrease would indicate a more efficient
allocation of resources.  The Company’s efficiency ratio increased to
75.1% for the three months ended June 30, 2008, compared to 57.9% for the three
months ended June 30, 2007.  The increase in the efficiency ratio is
due to the above-noted increases in non-interest expenses and reduced net
interest income.
  Six
Months Ended June 30, 2008 Compared to the Six Months Ended June 30,
2007
  Summary
  The
Company reported net income of $1,520,043 for the six months ended June 30,
2008, a decrease of $1,223,949, or 44.6%, from the $2,743,992 reported for the
six months ended June 30, 2007.  Net income per diluted share was
$0.38 for the six months ended June 30, 2008 compared to $0.68 per diluted share
for the six months ended June 30, 2007.
  Key
performance ratios declined for the six months ended June 30,
2008.  Return on average assets and return on average equity were
0.65% and 7.34%, respectively, for the six months ended June 30, 2008 compared
to 1.34% and 15.14%, respectively, for the six months ended June 30,
2007.
  Earnings
Analysis
  Interest
Income
  For the
six months ended June 30, 2008, total interest income was $14,359,186,
representing a decrease of $475,456 or 3.2%, from the total interest income of
$14,834,642 for the six months ended June 30, 2007.  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 six month periods ended
June 30, 2008 and 2007.
  17
 Average
      Balance Sheets with Resultant Interest and Rates(yields
      on a tax-equivalent basis)
            
            Six months endedJune 30, 2008
            
            
            Six months endedJune 30, 2007Average
              Balance
            
            
            Interest
            
            
            Average
              Rate
            
            
            Average
              Balance
            
            
            Interest
            
            
            Average
              RateAssets:Federal
      Funds Sold/Short-Term Investments
            
            $
            3,315,021
            
            
            $
            45,948
            
            
            
            2.80
            %
            
            $
            2,542,891
            
            
            $
            65,423
            
            
            
            5.19
            %Investment
      Securities:Collateralized
      Mortgage Obligations/
              Mortgage
      Backed Securities
            
            
            75,859,885
            
            
            
            1,891,743
            
            
            
            5.03
            %
            
            
            79,834,540
            
            
            
            2,076,294
            
            
            
            5.20
            %Obligations
      of States and Political Subdivisions
            
            
            14,905,787
            
            
            
            421,912
            
            
            
            5.71
            %
            
            
            22,534,371
            
            
            
            639,891
            
            
            
            5.68
            %Total
            
            
            90,765,672
            
            
            
            2,313,655
            
            
            
            5.14
            %
            
            
            102,368,911
            
            
            
            2,716,185
            
            
            
            5.31
            %Loan
      Portfolio:Construction
            
            
            125,325,518
            
            
            
            4,465,079
            
            
            
            7.18
            %
            
            
            128,038,453
            
            
            
            5,772,790
            
            
            
            9.09
            %Residential
      Real Estate
            
            
            10,262,589
            
            
            
            326,308
            
            
            
            6.41
            %
            
            
            7,657,934
            
            
            
            342,816
            
            
            
            9.03
            %Home
      Equity
            
            
            14,846,031
            
            
            
            483,102
            
            
            
            6.56
            %
            
            
            13,978,390
            
            
            
            529,513
            
            
            
            7.64
            %Commercial
      and commercial real estate
            
            
            124,908,153
            
            
            
            4,606,553
            
            
            
            7.44
            %
            
            
            112,177,995
            
            
            
            4,341,502
            
            
            
            7.80
            %Mortgage
      warehouse lines
            
            
            42,836,780
            
            
            
            1,052,384
            
            
            
            4.95
            %
            
            
            -
            
            
            
            -
            
            
            
            -Installment
            
            
            1,406,142
            
            
            
            55,781
            
            
            
            8.00
            %
            
            
            1,543,012
            
            
            
            64,859
            
            
            
            8.48
            %All
      Other Loans
            
            
            25,666,806
            
            
            
            1,147,211
            
            
            
            9.01
            %
            
            
            21,698,761
            
            
            
            1,209,086
            
            
            
            11.24
            %Total
            
            
            345,252,019
            
            
            
            12,136,418
            
            
            
            7.09
            %
            
            
            285,094,545
            
            
            
            12,260,566
            
            
            
            8.67
            %Total
      Interest-Earning Assets
            
            
            439,332,712
            
            
            
            14,496,021
            
            
            
            6.65
            %
            
            
            390,006,347
            
            
            
            15,042,174
            
            
            
            7.78
            %Allowance
      for Loan Losses
            
            
            (3,503,487
            )
            
            
            
            
            
            
            
            
            
            
            (3,202,227
            )Cash
      and Due From Bank
            
            
            11,230,919
            
            
            
            
            
            
            
            
            
            
            
            9,840,214Other
      Assets
            
            
            21,353,707
            
            
            
            
            
            
            
            
            
            
            
            16,993,628Total
      Assets
            
            $
            468,413,851
            
            
            
            
            
            
            
            
            
            
            $
            413,637,962Liabilities
      and Shareholders’ Equity:Interest-Bearing
      Liabilities:Money
      Market and NOW Accounts
            
            
            86,246,257
            
            
            
            1,054,068
            
            
            
            2.46
            %
            
            
            83,227,341
            
            
            
            838,662
            
            
            
            2.03
            %Savings
      Accounts
            
            
            74,058,876
            
            
            
            957,054
            
            
            
            2.61
            %
            
            
            65,745,828
            
            
            
            1,004,462
            
            
            
            3.08
            %Certificates
      of Deposit
            
            
            137,599,681
            
            
            
            3,021,208
            
            
            
            4.43
            %
            
            
            117,341,127
            
            
            
            2,808,342
            
            
            
            4.83
            %Other
      Borrowed Funds
            
            
            34,161,538
            
            
            
            778,956
            
            
            
            4.60
            %
            
            
            24,034,530
            
            
            
            632,412
            
            
            
            5.31
            %Trust
      Preferred Securities
            
            
            18,000,000
            
            
            
            533,997
            
            
            
            5.98
            %
            
            
            21,093,923
            
            
            
            778,574
            
            
            
            7.34
            %Total
      Interest-Bearing Liabilities
            
            
            350,066,352
            
            
            
            6,345,283
            
            
            
            3.66
            %
            
            
            311,442,749
            
            
            
            6,062,452
            
            
            
            3.93
            %Net
      Interest Spread
            
            
            
            
            
            
            
            
            
            
            2.99
            %
            
            
            
            
            
            
            
            
            
            
            3.85
            %Demand
      Deposits
            
            
            71,276,343
            
            
            
            
            
            
            
            
            
            
            
            60,426,470Other
      Liabilities
            
            
            5,399,204
            
            
            
            
            
            
            
            
            
            
            
            5,212,864Total
      Liabilities
            
            
            426,741,899
            
            
            
            
            
            
            
            
            
            
            
            377,082,083Shareholders'
      Equity
            
            
            41,671,952
            
            
            
            
            
            
            
            
            
            
            
            35,555,879Total
      Liabilities and Shareholders' Equity
            
            $
            468,413,851
            
            
            
            
            
            
            
            
            
            
            $
            413,637,962Net
      Interest Margin
            
            
            
            
            
            $
            8,150,738
            
            
            
            3.74
            %
            
            
            
            
            
            $
            8,979,722
            
            
            
            4.64
            %
 18
  The
decrease in interest income for the six months ended June 30, 2008 resulted from
a lower average yields earned on the securities and loan portfolios partially
offset by an increase in the loan portfolio average balance.  Average
loans increased $60,157,474, or 21.1%, to $345,252,019 for the six months ended
June 30, 2008 from $285,094,545 for the six months ended June 30, 2007, while
the yield on the portfolio decreased 158 basis points from 8.67% for the six
months ended June 30, 2007 to 7.09% for the six months ended June 30,
2008.  The lower loan yield reflected the lower interest rate
environment that continued through the first half of 2008.
  Average
securities decreased $11,603,239, or 11.3%, from $102,368,911 for the six months
ended June 30, 2007 to $90,765,672 for the six months ended June 30, 2008, while
the yield on the securities portfolio decreased to 5.14% for the six months
ended June 30, 2008 from 5.31% for the six months ended June 30,
2007.
  Overall,
the yield on the Company’s total interest-earning assets, on a tax-equivalent
basis, decreased 113 basis points to 6.65% for the six months ended June 30,
2008 from 7.78% for the six months ended June 30, 2007.
  Interest
Expense
  Total
interest expense for the six months ended June 30, 2008 was $6,345,283, an
increase of $282,831, or 4.7%, compared to $6,062,452 for the six months ended
June 30, 2007.  The average rate paid on interest bearing liabilities
for the six months ended June 30, 2008 decreased 27 basis points to 3.66% from
3.93% for the six months ended June 30, 2007. The increase in interest expense
for the current period resulted primarily from the increase in average
interest-bearing liabilities of $38,623,603 or 12.4%, partially offset by a
decline in the average rate paid on these liabilities.
  Net
Interest Income
  The
Company’s net interest income for the six months ended June 30, 2008 was
$8,013,903, a decrease of $758,287, or 8.6%, compared to $8,772,190 for the six
months ended June 30, 2007.  The net interest margin (on a
tax-equivalent basis) was 3.74% for the six months ended June 30, 2008, compared
to 4.64% for the six months ended June 30, 2007.  The lower yields
earned on the Bank’s floating-rate balances in the securities and loan
portfolios has contributed significantly to this margin
compression.
  Provision
for Loan Losses
  Management
considers a complete review of the following specific factors in determining the
provision for loan losses: historical losses by loan category, non-accrual
loans, problem loans as identified through internal classifications, collateral
values, and the growth and size of the loan portfolio.  In addition to
these factors, management takes into consideration current economic conditions
and local real estate market conditions.  Using this evaluation
process, the Company’s provision for loan losses was $360,000 for the six months
ended June 30, 2008 and $70,000 for the six months ended June 30,
2007.  While the risk profile of the loan portfolio was reduced by a
change in its composition via a $19,898,981 reduction in higher risk
construction loans and a $86,203,106 increase in lower risk mortgage warehouse
lines, the total loan portfolio grew by 23.4% from December 31, 2007 to June 30,
2008 and necessitated the increased provision to account for the inherent risk
in the portfolio as a result of this growth.  Also, management
replenished the reserves to compensate for the current period net charge-offs as
well as taking into consideration that real estate market conditions remained
weak.  Net charge offs/recoveries amounted to a net charge-off of
$72,314 for the six months ended June 30, 2008, compared to a net recovery of
$11,720 for the six months ended June 30, 2007.  See “Allowance for
Loan Losses” on page 24.
  Non-Interest
Income
  Total
non-interest income for the six months ended June 30, 2008 was $1,591,281, which
is an increase of $299,117, or 23.1%, from total non-interest income of
$1,292,164 for the six months ended June 30, 2007.
  19
  Service
charges on deposit accounts increased to $383,444 for the six months ended June
30, 2008 from $325,036 for the six months ended June 30,
2007.  Service charge income increased principally due to a higher
volume of uncollected funds and overdraft fees collected on deposit accounts
during the first six months of 2008 compared to 2007.
  Gain on
sale of loans held for sale represented the largest single source on
non-interest income. Gain on sale of loans held for sale for the six months
ended June 30, 2008 was $595,603 compared to $420,518 for the six months ended
June 30, 2007.  The lower interest rate environment in 2008 has
impacted the volume of sales transactions in the mortgage loan and SBA loan
markets and resultant gains from these transactions.
  Income
from BOLI assets amounted to $184,645 for the six months ended June 30, 2008,
compared to $178,581 for the six months ended June 30, 2007.  The
Company owns $9.7 million in tax-free BOLI assets which partially offset the
cost of employee benefit plans and reduce the Company’s overall effective tax
rate.
  The Bank
also generates non-interest income from a variety of fee-based services
contributed to the other income components of non-interest income, amounting to
$427,589 for the six months ended June 30, 2008, compared to $368,029 for the
six months ended June 30, 2007.
  Non-Interest
Expense
  Total
non-interest expense for the six months ended June 30, 2008 was $7,031,492,
which is an increase of $1,081,931, or 18.2%, compared to total non-interest
expense of $5,949,561 for the six months ended June 30, 2007.
  The
following table presents the major components of non-interest expense for the
six months ended June 30, 2008 and 2007.
  Six
      months ended June 30,2008
            
            
            2007Non-interest
      ExpensesSalaries
      and employee benefits
            
            $
            4,051,127
            
            
            $
            3,550,918Occupancy
      expense
            
            
            864,438
            
            
            
            802,060Equipment
      expense
            
            
            291,374
            
            
            
            246,209Marketing
            
            
            139,535
            
            
            
            47,026Data
      processing expenses
            
            
            429,592
            
            
            
            412,974Regulatory,
      professional and other fees
            
            
            491,544
            
            
            
            182,106Office
      expense
            
            
            285,697
            
            
            
            294,782All
      other expenses
            
            
            478,185
            
            
            
            413,486$
            7,031,492
            
            
            $
            5,949,561
  Salaries
and employee benefits increased $500,209, or 14.1%, to $4,051,127 for the six
months ended June 30, 2008, compared to $3,550,918 for the six months ended June
30, 2007.  This increase reflects the increase in staffing levels plus
normal employee salary increases.
  In
January 2008, the Bank established a Mortgage Warehouse Funding Group, which
introduced a revolving line of credit that is available to licensed mortgage
banking companies.  This group is based in a newly leased office space
in Somerset, NJ and consists of five newly hired staff.  The Bank’s
action to establish this group and commence operations has contributed to the
2008 increase in most components of non-interest expenses when compared with
2007 expenses for the same period.
  Marketing
expenses increased by $92,509, or 196.7%, to $139,535 for the six months ended
June 30, 2008, compared to $47,026 for the six months ended June 30,
2007.  The increase in expense was attributable to marketing campaigns
designed to increase low-cost core deposits, further develop our brand image and
continue the Bank’s support of community activities.
  20
  Regulatory,
professional and other fees increased by $309,438, or 169.9%, to $491,544 for
the six months ended June 30, 2008, compared to $182,106 for the six months
ended June 30, 2007.  During the first six months of 2008, the Company
incurred increased accounting and legal fees as a result of the restatement of
the Company’s financial statements for the first three quarters and the year
ended December 31, 2006 and the first three quarters of the year ended December
31, 2007, as described in Item 8 of the Company’s Annual Report on Form 10-K
filed with the SEC on April 15, 2008.  The Bank also incurred
professional fees in connection with audits performed by independent consultants
to assess the effectiveness of controls established over internal systems as
required by the Sarbanes-Oxley Act.
  All other
expenses, which are comprised of a variety of operating expenses and fees as
well as expenses associated with lending activities, increased by $64,699, or
15.6%, to $478,185 for the six months ended June 30, 2008, compared to $413,486
for the six months ended June 30, 2007.
  The
Company’s efficiency ratio increased to 73.2% for the six months ended June 30,
2008, compared to a ratio of 59.1% for the six months ended June 30,
2007.  The increase in this ratio for 2008 is due to the above-noted
increases in non-interest expenses and reduced level of net interest
income.
  Financial
Condition
  June
30, 2008 Compared with December 31, 2007
  Total
consolidated assets at June 30, 2008 totaled $504,045,295, increasing by
$74,893,756 from $429,151,539 at December 31, 2007.  The asset growth
was focused in our loan portfolio, which increased $71,991,292.  The
primary funding for asset growth came from deposits and borrowings, which
increased $67,071,427 and $8,000,000, respectively.
  Cash
and Cash Equivalents
  Cash and
cash equivalentsat June 30, 2008
totaled $18,492,817 compared to $7,548,102 at December 31, 2007. Cash and cash
equivalents at June 30, 2008 consisted of cash and due from banks of $18,481,595
and Federal funds sold/short term investments of $11,222. The corresponding
balances at December 31, 2007 were $7,517,158 and $30,944,
respectively.  The increase was due primarily to timing of cash flows
related to the Bank’s business activities.
  Investment
Securities
  The
Bank’s investment securities represented 17.6% of total assets at June 30, 2008
and 23.0% at December 31, 2007. Total investment securities decreased
$10,067,997, or 10.2%, at June 30, 2008 to $88,636,486 from $98,704,483 at
December 31, 2007.
  Securities
available for sale are investments that may be sold in response to changing
market and interest rate conditions or for other business
purposes.  Securities available for sale consist primarily of U.S.
Government and Federal agency securities as well as mortgage-backed
securities.  Activity in this portfolio is undertaken primarily to
manage liquidity and interest rate risk and to take advantage of market
conditions that create more economically attractive returns.  At June
30, 2008, securities available for sale totaled $72,340,516, which is a decrease
of $2,851,621, or 3.8%, from securities available for sale totaling $75,192,137
at December 31, 2007.
  At June
30, 2008, the securities available for sale portfolio had net unrealized losses
of $770,469, compared to net unrealized gains of $30,563 at December 31,
2007.  These unrealized gains/losses are reflected net of tax in
shareholders’ equity as a component of “Accumulated other comprehensive loss”
are primarily attributable to a loss in market value of collateralized mortgages
and mortgage backed-securities.
  21
  Securities
held to maturity, which are carried at amortized historical cost, are
investments for which there is the positive intent and ability to hold to
maturity. The held to maturity portfolio consists primarily of obligations of
states and political subdivisions. At June 30, 2008, securities held to maturity
were $16,295,970, a decrease of $7,216,376, or 30.7%, from $23,512,346 at
December 31, 2007.  The fair value of the held to maturity portfolio
at June 30, 2008 was $15,913,428, resulting in an unrealized loss of
$382,542.
  During
the six months ended June 30, 2008, the Bank purchased securities in the amounts
of $11,241,517 for the available for sale portfolio.  During this same
period, $20,472,936 in proceeds from maturities and repayments were
received.
  Loans
  The loan
portfolio, which represents the Bank’s largest asset, is a significant source of
both interest and fee income. Elements of the loan portfolio are subject to
differing levels of credit and interest rate risk. The Company’s primary lending
focus continues to be construction loans, commercial loans, owner-occupied
commercial mortgage loans and tenanted commercial real estate
loans.
  The
following table sets forth the classification of loans by major category at June
30, 2008 and December 31, 2007.
  Loan
      Portfolio Composition
            
            June
      30, 2008
            
            
            December
      31, 2007Component
            
            Amount
            
            
            %
              of
      total
            
            
            Amount
            
            
            %
              of
      totalConstruction
      loans
            
            $
            112,836,939
            
            
            
            31
            %
            
            $
            132,735,920
            
            
            
            45
            %Residential
      real estate loans
            
            
            10,792,008
            
            
            
            3
            %
            
            
            10,088,515
            
            
            
            3
            %Commercial
      and commercial real estate
            
            
            136,054,001
            
            
            
            37
            %
            
            
            135,128,642
            
            
            
            46
            %Mortgage
      warehouse lines
            
            
            86,203,106
            
            
            
            24
            %
            
            
            -0-
            
            
            
            0
            %Loans
      to individuals
            
            
            17,020,312
            
            
            
            5
            %
            
            
            16,324,817
            
            
            
            6
            %Deferred
      loan fees and costs
            
            
            508,484
            
            
            
            0
            %
            
            
            302,818
            
            
            
            0
            %All
      other loans
            
            
            208,781
            
            
            
            0
            %
            
            
            180,006
            
            
            
            0
            %$
            363,623,631
            
            
            
            100
            %
            
            $
            294,760,718
            
            
            
            100
            %
 
 The loan
portfolio increased by $68,862,913, or 23.4%, to $363,623,631 at June 30, 2008,
compared to $294,760,718 at December 31, 2007.  The construction loan
portfolio decreased by $19,898,981, or 15.0%, to $112,836,939 at June 30, 2008
compared to $132,735,920 at December 31, 2007.  This current period
decrease is a direct result of the current uncertain New Jersey economic
conditions and management’s actions to allow the higher risk construction loan
portfolio to run off while simultaneously focusing efforts to building the
balance of the lesser risk mortgage warehouse lines.  In January 2008,
the Bank’s Mortgage Warehouse Funding Group introduced a revolving line of
credit that is available to licensed mortgage banking companies (the “Warehouse
Line of Credit”) and that has been successful from inception.  The
Warehouse Line of Credit is used by the mortgage banker to originate one-to-four
family residential mortgage loans that are pre-sold to the secondary mortgage
market, which includes state and national banks, national mortgage banking
firms, insurance companies and government-sponsored enterprises, including the
Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage
Corporation (“FHLMC”) and others.  On average, an advance under the
Warehouse Line of Credit remains outstanding for a period of less than 30 days,
with repayment coming directly from the sale of the loan into the secondary
mortgage market.  Interest (the spread between our borrowing cost and
the rate charged to the client) and a transaction fee are collected by the Bank
at the time of repayment.  Additionally, customers of the Warehouse
Lines of Credit are required to maintain deposit relationships with the Bank
that, on average, represent 10% to 15% of the loan balances.  The Bank
had $86,203,106 outstanding Warehouse Line of Credit advances at June 30,
2008.
  The
ability of the Company to enter into larger loan relationships and management’s
philosophy of relationship banking are key factors in the Company’s strategy for
loan growth.  The ultimate collectability of the loan portfolio and
recovery of the carrying amount of real estate are subject to changes in the
Company’s market region’s economic environment and real estate
market.
  22
  Non-Performing
Assets
  Non-performing
assets consist of non-performing loans and other real estate owned.
Non-performing loans are composed of (1) loans on a non-accrual basis, (2) loans
which are contractually past due 90 days or more as to interest and principal
payments but have not been classified as non-accrual, and (3) loans whose terms
have been restructured to provide a reduction or deferral of interest on
principal because of a deterioration in the financial position of the
borrower.
  The
Bank’s policy with regard to non-accrual loans is that generally, loans are
placed on a non-accrual status when they are 90 days past due, unless such loans
are well secured and in the process of collection or, regardless of the past due
status of the loan, when management determines that the complete recovery of
principal or interest is in doubt.  Consumer loans are generally
charged off after they become 120 days past due.  Subsequent payments
on loans in non-accrual status are credited to income only if collection of
principal is not in doubt.
  Non-performing
loans increased by $434,107 to $2,470,965 at June 30, 2008 from $2,036,858 at
December 31, 2007.  The major segments of non-accrual loans consist of
land designated for residential development where the required approvals to
begin construction, commercial loans which are in the process of collection and
residential real estate which is either in foreclosure or under contract to
close after June 30, 2008.
 
 The table
below sets forth non-performing assets and risk elements in the Bank’s
portfolio, by type, for the years indicated.  As the table
demonstrates, non-performing loans to total loans decreased to 0.65% at June 30,
2008 from 0.67% at December 31, 2007 and loan quality is still considered to be
strong. This was accomplished through quality loan underwriting, a proactive
approach to loan monitoring and aggressive workout strategies.
 
 
 Non-Performing
      Assets and Loans
            
            June
      30,
            
            
            December
      31,2008
            
            
            2007Non-Performing
      loans:Loans
      90 days or more past due and still accruing
            
            $
            0
            
            
            $
            0Non-accrual
      loans
            
            
            2,470,965
            
            
            
            2,036,858Total
      non-performing loans
            
            
            2,470,965
            
            
            
            2,036,858Other
      real estate owned
            
            
            4,486,016
            
            
            
            2,960,727Total
      non-performing assets
            
            $
            6,956,981
            
            
            $
            4,997,585Non-performing
      loans to total loans
            
            
            0.65
            %
            
            
            0.67
            %Non-performing
      assets to total assets
            
            
            1.38
            %
            
            
            1.16
            %
  On an
absolute basis, non-performing assets increased by $1,959,396 to $6,956,981 at
June 30, 2008 from $4,997,585 at December 31, 2007.  During 2008, the
Bank has taken possession of five residential properties totaling $1,389,181
after aggregate loan charge-offs of $53,946.  During the second
quarter of 2008, management was successful in selling two of these real estate
owned properties, totaling approximately $880,212.  The balance of the
increase to “other real estate owned” in the approximate amount of $1,016,320 is
the result of the Company continuing to complete an 18-unit condominium project
for which it has commitments from individual buyers to
purchase.  Non-performing assets represented 1.38% of total assets at
June 30, 2008 and 1.16% at December 31, 2007.
 
 The Bank
had no loans classified as restructured loans at June 30, 2008 or December 31,
2007.
  Management
takes a proactive approach in addressing delinquent loans. The Company’s
President meets weekly with all loan officers to review the status of credits
past-due ten days or more. An action plan is discussed for each of the loans to
determine the steps necessary to induce the borrower to cure the delinquency and
restore the loan to a current
status. Also, delinquency notices are system generated when loans are five days
past-due and again at 15 days past-due.
  23
  In most
cases, the Company’s collateral is real estate and when the collateral is
foreclosed upon, the real estate is recorded at fair market value less estimated
selling costs, and subsequently carried at the lower of fair market value less
the estimated selling costs or the initially recorded amount. The amount, if
any, by which the recorded amount of the loan exceeds the fair market value of
the collateral is a loss which is charged to the allowance for loan losses at
the time of foreclosure or repossession. Resolution of a past-due loan can be
delayed if the borrower files a bankruptcy petition because collection action
cannot be continued unless the Company first obtains relief from the automatic
stay provided by the bankruptcy code.
  Allowance
for Loan Losses
  The
allowance for loan losses is maintained at a level sufficient in the opinion of
management to absorb estimated credit losses in the loan portfolio as of the
date of the financial statements. The allowance for loan losses is a valuation
reserve available for losses incurred or inherent in the loan portfolio and
other extensions of credit. The determination of the adequacy of the allowance
for loan losses is a critical accounting policy of the Company.
  The
Company’s primary lending emphasis is the origination of commercial and
commercial real estate loans, including construction loans. Based on the
composition of the loan portfolio, the primary risks inherent in it are
deteriorating credit quality, a decline in the economy, and a decline in New
Jersey real estate market values. Any one or a combination of these events may
adversely affect the loan portfolio and may result in increased delinquencies,
loan losses and increased future provision levels.
  All, or
part, of the principal balance of commercial and commercial real estate loans,
and construction loans are charged off to the allowance as soon as it is
determined that the repayment of all, or part, of the principal balance is
unlikely. Consumer loans are generally charged off no later than 120 days past
due on a contractual basis or  earlier in the event of bankruptcy, or
if there is an amount deemed uncollectible.Because all identified
losses are immediately charged off, no portion of the allowance for loan losses
is restricted to any individual loan or groups of loans, and the entire
allowance is available to absorb any and all loan losses.
  Management
reviews the adequacy of the allowance on at least a quarterly basis to ensure
that the provision for loan losses has been charged against earnings in an
amount necessary to maintain the allowance at a level that is adequate based on
management’s assessment of probable estimated losses. The Company’s methodology
for assessing the adequacy of the allowance for loan losses consists of several
key elements. These elements include a specific reserve for doubtful or high
risk loans, an allocated reserve and an unallocated portion.
  The
Company consistently applies the following comprehensive
methodology.  During the quarterly review of the allowance for loan
losses, management of the Company considers a variety of factors that
include:
  ·
            General
      economic conditions.
 ·
            Trends
      in charge-offs.
 ·
            Trends
      and levels of delinquent loans.
 ·
            Trends
      and levels of non-performing loans, including loans over 90 days
      delinquent.
 ·
            Trends
      in volume and terms of loans.
 ·
            Levels
      of allowance for specific classified
loans.
 ·
            Credit
      concentrations.
  The
specific reserve for high risk loans is established for specific commercial
loans, commercial real estate loans and construction loans which have been
identified by management as being high risk loans.  A high risk loan
is assigned a doubtful risk rating grade because the loan has not performed
according to payment terms and there is reason to believe that repayment of the
loan principal, in whole, or in part, is unlikely. The specific portion of the
allowance is the total amount of potential unconfirmed losses for such
individual doubtful loans. To assist in determining the fair value of loan
collateral, the Company often utilizes independent third party qualified
appraisal firms,
which in turn employ their own criteria and assumptions that may include
occupancy rates, rental rates and property expenses, among others.
  24
  The
second category of reserves consists of the allocated portion of the allowance.
The allocated portion of the allowance is determined by taking pools of loans
outstanding that have similar characteristics and applying historical loss
experience for each pool. This estimate represents the potential unconfirmed
losses within the portfolio. Individual loan pools are created for commercial
and commercial real estate loans, construction loans and for various types of
loans to individuals.  The historical estimation for each loan pool is
then adjusted to account for current conditions, current loan portfolio
performance, loan policy or management changes, or any other factor which may
cause future losses to deviate from historical levels.
  The
Company also maintains an unallocated allowance.  The unallocated
allowance is used to cover any factors or conditions which may cause a potential
loan loss but are not specifically identifiable.  It is prudent to
maintain an unallocated portion of the allowance because no matter how detailed
an analysis of potential loan losses is performed, these estimates inherently
lack precision. Management must make estimates using assumptions and information
which are often subjective and rapidly changing. At June 30, 2008, management
believed that the allowance for loan losses was adequate.
  The
allowance for loan losses amounted to $3,635,766 at June 30, 2008, which is an
increase of $287,686 from December 31, 2007.  As a result of the
uncertain economic conditions in New Jersey that existed during the first six
months of 2007, management’s plan was to reduce the risk profile of the loan
portfolio by allowing the balance of the higher risk construction loans
component to be reduced while simultaneously building the balance of the lower
risk mortgage warehouse lines components of the portfolio.  These
proactive measures resulted in a risk profile change in the loan portfolio at
June 30, 2008 as compared with December 31, 2007.  The ratio of the
allowance for loan losses to total loans was 0.96% at June 30, 2008 and 1.10% at
December 31, 2007, respectively.  Management believes the quality of
the loan portfolio remains strong and that the allowance for loan losses is
adequate in relation to credit risk exposure levels.
  25
  The
following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data.
 
 Allowance
      for Loan Losses
            
            Six
      Months
              Ended
              June
      30,
              2008
            
            
            Year
      Ended
              December
      31,
              2007
            
            
            Six
      Months Ended
              June
      30,
              2007Balance,
      beginning of period
            
            $
            3,348,080
            
            
            $
            3,228,360
            
            
            $
            3,228,360Provision
      charged to operating expenses
            
            
            360,000
            
            
            
            130,000
            
            
            
            70,000Loans
      charged off:Construction
      loans
            
            
            (53,946
            )
            
            
            -
            
            
            
            -Residential
      real estate loans
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      and commercial real estate
            
            
            (18,368
            )
            
            
            (88,891
            )
            
            
            (65,891
            )Loans
      to individuals
            
            
            0
            
            
            
            (1,614
            )
            
            
            (1,614
            )Lease
      financing
            
            
            0
            
            
            
            (478
            )
            
            
            (478
            )All
      other loans
            
            
            -
            
            
            
            -
            
            
            
            -(72,314
            )
            
            
            (90,983
            )
            
            
            (67,983
            )Recoveries:Construction
      loans
            
            
            0
            
            
            
            75,000
            
            
            
            75,000Residential
      real estate loans
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      and commercial real estate
            
            
            -
            
            
            
            -
            
            
            
            -Loans
      to individuals
            
            
            0
            
            
            
            5,703
            
            
            
            4,703Lease
      financing
            
            
            -
            
            
            
            -
            
            
            
            -All
      other loans
            
            
            -
            
            
            
            -
            
            
            
            -0
            
            
            
            80,703
            
            
            
            79,703Net
      (charge offs) / recoveries
            
            
            (72,314
            )
            
            
            (10,280
            )
            
            
            11,720Balance,
      end of period
            
            $
            3,635,766
            
            
            $
            3,348,080
            
            
            $
            3,310,080Loans:At
      period end
            
            $
            377,361,701
            
            
            $
            305,082,723
            
            
            $
            294,514,117Average
      during the period
            
            
            345,252,019
            
            
            
            292,371,351
            
            
            
            285,094,545Net
      charge offs to average loans outstanding
            
            
            (0.02
            )
            
            
            (0.00
            %)
            
            
            0.00
            %Allowance
      for loan losses to:Total
      loans at period end
            
            
            0.96
            %
            
            
            1.10
            %
            
            
            1.12
            %Non-performing
      loans
            
            
            147.14
            %
            
            
            164.37
            %
            
            
            94.74
            %
  Deposits
  Deposits,
which include demand deposits (interest bearing and non-interest bearing),
savings deposits and time deposits, are a fundamental and cost-effective source
of funding.  The Company offers a variety of products designed to
attract and retain customers, with the Company’s primary focus being on building
and expanding long-term relationships.
  26
  The
following table summarizes deposits at June 30, 2008 and December 31,
2007.
  June
      30,
                2008
              
              
              December
      31,
                2007DemandNon-interest
      bearing
              
              $
              87,632,653
              
              
              $
              59,055,803Interest
      bearing
              
              
              80,891,697
              
              
              
              86,168,444Savings
              
              
              82,762,039
              
              
              
              62,094,432Time
              
              
              145,117,405
              
              
              
              122,013,689$
              396,403,795
              
              
              $
              329,332,368
 It is the
Bank’s strategy to fund loan growth with deposits.  To achieve this
goal, deposit products, particularly short term certificates of deposit, were
priced to be attractive to depositors.  At June 30, 2008, time
deposits increased by $23,103,716, or 18.9%, to $145,117,405, compared to
$122,013,689 at December 31, 2007.  Balances were attracted from both
new customers as well as existing customers.
  Non-interest
bearing demand deposits increased by $28,576,850, or 48.4%, to $87,632,653 at
June 30, 2008, compared to $59,055,803 at December 31, 2007, as the Bank
attracted new business customers through the newly introduced mortgage Warehouse
Line of Credit product, which contributed significantly to this current period
increase in balances.
  Borrowings
  Borrowings
are mainly comprised of Federal Home Loan Bank (“FHLB”) borrowings and overnight
funds purchased by the Bank. These borrowings are primarily used to fund asset
growth not supported by deposit generation. The balance of other borrowings at
June 30, 2008 consisted of long-term FHLB borrowings of $30,500,000 and
overnight funds purchased of $13,100,000. The balance of borrowings at December
31, 2007 consisted of long-term FHLB borrowings of $30,500,000 and overnight
funds purchased of $5,100,000. The $8,000,000 increase in borrowings at June 30,
2008 was the result of an increase in short-term borrowings.  FHLB
advances are fully secured by marketable securities, certain commercial and
residential mortgages and home equity loans.
  Shareholders’
Equity And Dividends
  Shareholders’
equity at June 30, 2008 totaled $41,675,518, which is an increase of $702,201,
or 1.7%, from $40,973,317 at December 31, 2007.  Book value per common
share rose to $10.44 at June 30, 2008 from $10.26 at December 31,
2007.  The ratio of shareholders’ equity to total assets was 8.27% at
June 30, 2008 and 9.55% at December 31, 2007.
  The
increase in shareholders’ equity and book value per common share for the six
months ended June 30, 2008 resulted primarily from comprehensive income of
$972,531, consisting primarily of net income of $1,520,043 and unrealized loss
on securities available for sale net of tax benefits of $528,381.  In
addition, stockholders’ equity was reduced by an adjustment of $329,706
resulting from the initial adoption of EITF 06-04, effective January 1,
2008.
  The
Company’s stock is listed for trading on the Nasdaq Global Market System, under
the symbol “FCCY.”
  In 2005,
the Board of Directors authorized a common stock repurchase program that allows
for the repurchase of a limited number of the Company’s shares at management’s
discretion on the open market. The Company undertook this repurchase program in
order to increase shareholder value. A table disclosing repurchases of Company
shares made during the quarter ended June 30, 2008 is set forth under Part II,
Item 2 of this report, Unregistered Sales of Equity
Securities and Use of Proceeds.
  27
  Actual capital amounts and ratios for
the Company and the Bank as of June 30, 2008 and December 31, 2007 are as
follows:
 Actual
            
            
            For
      Capital
              Adequacy
      Purposes
            
            To
      Be Well
              Capitalized
      Under
              Prompt
      Corrective
              Action
      ProvisionAmount
            
            
            Ratio
            
            
            Amount
            
            Ratio
            
            Amount
            
            RatioAs
      of June 30, 2008CompanyTotal
      Capital to Risk Weighted Assets
            
            $
            63,120,153
            
            
            
            15.15
            %
            
            $
            33,332,480
            
            >8%
            
            $
            41,665,600
            
            >10%Tier
      1 Capital to Risk Weighted Assets
            
            
            55,532,787
            
            
            
            13.33
            %
            
            
            16,666,240
            
            >4%
            
            
            24,999,360
            
            >6%Tier
      1 Capital to Average Assets
            
            
            55,532,787
            
            
            
            11.37
            %
            
            
            19,539,356
            
            >4%
            
            
            24,424,195
            
            >5%BankTotal
      Capital to Risk Weighted Assets
            
            $
            61,462,679
            
            
            
            14.75
            %
            
            $
            33,332,480
            
            >8%
            
            $
            41,665,600
            
            >10%Tier
      1 Capital to Risk Weighted Assets
            
            
            57,826,913
            
            
            
            13.88
            %
            
            
            16,666,240
            
            >4%
            
            
            24,999,360
            
            >6%Tier
      1 Capital to Average Assets
            
            
            57,826,913
            
            
            
            11.85
            %
            
            
            19,525,209
            
            >4%
            
            
            24,406,512
            
            >5%
 
 As
      of December 31, 2007CompanyTotal
      Capital to Risk Weighted Assets
            
            $
            62,006,573
            
            
            
            17.75
            %
            
            $
            27,949,600
            
            >8%
            
            $
            34,937,000
            
            >10%Tier
      1 Capital to Risk Weighted Assets
            
            
            54,437,463
            
            
            
            15.58
            %
            
            
            13,974,800
            
            >4%
            
            
            20,962,200
            
            >6%Tier
      1 Capital to Average Assets
            
            
            54,437,463
            
            
            
            12.66
            %
            
            
            17,196,222
            
            >4%
            
            
            21,495,277
            
            >5%BankTotal
      Capital to Risk Weighted Assets
            
            $
            59,961,320
            
            
            
            17.16
            %
            
            $
            27,949,600
            
            >8%
            
            $
            34,937,000
            
            >10%Tier
      1 Capital to Risk Weighted Assets
            
            
            56,613,240
            
            
            
            16.20
            %
            
            
            13,974,800
            
            >4%
            
            
            20,962,200
            
            >6%Tier
      1 Capital to Average Assets
            
            
            56,613,240
            
            
            
            13.20
            %
            
            
            17,152,520
            
            >4%
            
            
            21,440,650
            
            >5%
  The
minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1
capital to risk weighted assets ratio of 4.0% and a total capital to risk
weighted assets ratio of 8.0%.  To be considered “well capitalized,”
an institution must have a minimum Tier 1 leverage ratio of 5.0%.  At
June 30, 2008, 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 June
30, 2008, the amount of liquid assets remained at a level management deemed
adequate to ensure that contractual liabilities, depositors’ withdrawal
requirements, and other operational and customer credit needs could be
satisfied.
  Liquidity
measures the ability to satisfy current and future cash flow needs as they
become due. Liquidity management refers to the Company’s ability to support
asset growth while satisfying the borrowing needs and deposit withdrawal
requirements of customers. In addition to maintaining liquid assets, factors
such as capital position, profitability, asset quality and availability of
funding affect a bank’s ability to meet its liquidity needs. On the asset side,
liquid funds are maintained in the form of cash and cash equivalents, Federal
funds sold, investment securities held to maturity maturing within one year,
securities available for sale and loans held for sale. Additional asset-based
liquidity is derived from scheduled loan repayments as well as investment
repayments of principal and interest from mortgage-backed securities. On the
liability side, the primary source of liquidity is the ability to generate core
deposits. Short-term borrowings are used as supplemental funding sources when
growth in the core deposit base does not keep pace with that of earnings
assets.
  The Bank
has established a borrowing relationship with the FHLB and a correspondent bank
which further supports and enhances liquidity. At June 30, 2008, the Bank
maintained an Overnight Line of Credit at the FHLB in the amount of $47,534,500
plus a One-Month Overnight Repricing Line of Credit of $47,534,500. Advances
issued under these programs are subject to FHLB stock level and collateral
requirements. Pricing of these advances may fluctuate based on existing market
conditions. The Bank also maintains an unsecured Federal funds line of
$13,500,000 with a correspondent bank.
  28
  The
Consolidated Statements of Cash Flows present the changes in cash from
operating, investing and financing activities. At June 30, 2008, the balance of
cash and cash equivalents was $18,492,817.
  Net cash
used in operating activities totaled $2,752,273 for the six months ended June
30, 2008 compared to net cash provided by operating activities of $6,857,859 in
the six months ended June 30, 2007. The primary sources of funds are net income
from operations adjusted for provision for loan losses, depreciation expenses,
and net proceeds from sales of loans held for sale.  The primary use
of funds was origination of loans held for sale.
  Net cash
used in investing activities totaled $61,371,667 in the six months ended June
30, 2008, compared to $21,798,703 used in investing activities in the six months
ended June 30, 2007. The current period increased amount was primarily the
result of the increase in the loan portfolio.
  Net cash
provided by financing activities amounted to $75,068,655 in the six months ended
June 30, 2008, compared to $14,159,517 provided by financing activities in the
six months ended June 30, 2007. The current period amount resulted primarily
from an increase in deposits combined with an increase in borrowings during the
six months period ended June 30, 2008.
  The
securities portfolio is also a source of liquidity, providing cash flows from
maturities and periodic repayments of principal. During the six months ended
June 30, 2008, maturities and prepayments of investment securities totaled
$20,472,936.  Another source of liquidity is the loan portfolio, which
provides a flow of payments and maturities.
  The
Company anticipates that cash and cash equivalents on hand, the cash flow from
assets as well as other sources of funds will provide adequate liquidity for the
Company’s future operating, investing and financing needs.  Management
will continue to monitor the Company’s liquidity and maintain it at a level that
it deems adequate and not excessive.
  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 re-pricing of assets and liabilities, loan prepayments,
deposit withdrawals, and differences in lending and funding rates. Management
actively seeks to monitor and control the mix of interest rate-sensitive assets
and interest rate-sensitive liabilities.
  The
Company continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. Management believes that
hedging instruments currently available are not cost-effective, and therefore,
has focused its efforts on increasing the Company’s spread by attracting
lower-cost retail deposits.
  Item
3. Quantitative and
Qualitative Disclosures About Market Risk
  Not
required.
  29
  Item
4. Controls and
Procedures.
  The
Company has established disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms and is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
  The
Company’s principal executive officer and principal financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this quarterly
report.  Based upon such evaluation, the Company’s principal executive
officer and principal financial officer have concluded that the Company’s
disclosure controls and procedures are effective as of the end of the period
covered by this quarterly report.
  The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended June 30, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
  PART
II. OTHER INFORMATION
  Item 2.Unregistered Sales of Equity
Securities and Use of Proceeds.
  Issuer
Purchases of Equity Securities
  In 2005,
the Board of Directors authorized a stock repurchase program under which the
Company may purchase in open market or privately negotiated transactions up to
5% of its common shares outstanding on that date. The Company undertook these
repurchase programs 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 June 30, 2008.
  Issuer
Purchases of Equity Securities (1)
  Period
            
            Total
              Number
      of
              Shares
      Purchased
            
            
            Average
      Price
              Paid
      Per
              Share
            
            
            Total
      Number of
              Shares
      Purchased
              As
      Part of Publicly
              Announced
      Plan or
              Program
            
            
            Maximum
      Number
              of
      Shares That May
              Yet
      be Purchased
              Under
      the Plan or
              ProgramBeginning
            EndingApril
      1, 2008
            April
      30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            159,496May
      1, 2008
            May
      31, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            159,496June
      1, 2008
            June
      30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            159,496Total
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            159,496
 _________________
 (1)
            The
      Company’s common stock repurchase program covers a maximum of 185,787
      shares of common stock of the Company, representing 5% of the outstanding
      common stock of the Company on July 21, 2005, as adjusted for the annual
      stock dividends, including the 6% stock dividend declared on December 20,
      2007 paid on February 6, 2008.
  30
  Item
4. Submission of Matters
to a Vote of Securities Holders.
 
 The
Company’s Annual Meeting of Shareholders (the “Annual Meeting”) was held on May
22, 2008.
 
 There
were present at the Annual Meeting in person or by proxy shareholders holding an
aggregate of 2,020,621 shares of common stock of a total number of 3,989,428
shares of common stock issued, outstanding and entitled to vote at the Annual
Meeting.
 
 At the
Annual Meeting, Robert F. Mangano was re-elected as a Class I director of the
Company, with 2,016,200 shares votes cast for and 4,421 shares
withheld.  Directors whose term of office continued following the
meeting were Charles S. Crow, III, Frank E. Walsh III, William M. Rue and David
C. Reed.
 
 A vote of
the shareholders was taken at the Annual Meeting on the proposal to approve and
ratify the appointment of Beard Miller Company LLP as the Company’s independent
auditor for the year ending December 31, 2008.  The proposal was
approved by the shareholders, with 2,005,257 shares voting in favor of the
proposal and 8,249 shares voting against the proposal.  There were
7,115 abstentions and broker non-votes.
  Item 6.
            Exhibits.31.1
            *
            Certification
      of Robert F. Mangano, principal executive officer of the Company, pursuant
      to Securities Exchange Act Rule 13a-14(a)31.2
            *
            Certification
      of Joseph M. Reardon, principal financial officer of the Company, pursuant
      to Securities Exchange Act Rule 13a-14(a)32
            *
            Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, principal
      executive officer of the Company, and Joseph M. Reardon, principal
      financial officer of the Company
 _____________________
 *           Filed
herewith.
 
  31
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
   1ST
      CONSTITUTION BANCORPDate:
      August 14, 2008
              By:
              /s/ ROBERT
      F. MANGANORobert
      F. ManganoPresident
      and Chief Executive Officer(Principal
      Executive Officer)
   Date:
      August 14, 2008
              By:
              /s/ JOSEPH
      M. REARDONJoseph
      M. ReardonSenior
      Vice President and Treasurer(Principal
      Financial and Accounting Officer)
 32