UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-Q (Mark One) ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September 30, 2005 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission file Number: 
000-32891 1st Constitution Bancorp (Exact Name of Registrant as Specified in Its Charter) New Jersey
    
    22-3665653(State of Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)2650 Route 130, P.O. Box 634, Cranbury, NJ
    
    08512(Address of Principal Executive Offices)
    
    (Zip Code)  (609) 655-4500 (Issuer's Telephone Number, Including Area Code)  (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes ýNo o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
    Yes oNo ý Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
    Yes oNo ý As of November 3, 2005, there were 3,268,516
shares of the registrant's common stock, no par value, outstanding.
  1ST CONSTITUTION BANCORP
FORM 10-Q
INDEXPagePART I.
FINANCIAL INFORMATIONItem 1.
Financial Statements
1Consolidated Balance Sheets
as of September 30, 2005 (unaudited)
and December 31, 2004
1Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 2005 (unaudited) and September 30, 2004 (unaudited)
2Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 2005 (unaudited) and September 30, 2004 (unaudited)
3Notes to Consolidated Financial Statements (unaudited)
4Item 2.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
8Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27Item 4.
Controls and Procedures
28PART II
OTHER INFORMATIONItem 2.
Unregistered Sales of Equity Securities and Use of Proceeds
29Item 6.
Exhibits
30SIGNATURES
31PART I. FINANCIAL INFORMATION
Item 1.                 Financial Statements
1st Constitution Bancorp and Subsidiaries
Consolidated Balance Sheets
September 30, 2005

December 31, 2004ASSETS
(unaudited)CASH AND DUE FROM BANKS
$8,796,819

$7,898,395FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS
4,533,128

26,014Total cash and cash equivalents
13,329,947

7,924,409INVESTMENT SECURITIES:Available for sale, at fair value
71,253,891

85,588,649Held to maturity (fair value of $21,764,672 and $12,292,250 in 2005 and 2004,respectively)
21,719,692

12,167,137Total investment securities
92,973,583

97,755,786LOANS HELD FOR SALE
11,851,931

9,927,881LOANS
226,575,492

210,653,051Less- Allowance for loan losses
(2,265,621)

(2,005,169)Net loans
236,161,802

208,647,882PREMISES AND EQUIPMENT, net
2,573,362

2,324,219ACCRUED INTEREST RECEIVABLE
1,839,345

1,444,493BANK OWNED LIFE INSURANCE
8,771,564

6,643,502OTHER ASSETS
392,445

1,162,268Total assets
$356,042,048

$335,830,440LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:DepositsNon-interest bearing
$58,347,516

$50,794,581Interest bearing
236,505,427

226,092,452Total deposits
294,852,943

276,887,033OTHER BORROWINGS
23,500,000

25,200,000REDEEMABLE SUBORDINATED DEBENTURES
5,155,000

5,155,000ACCRUED INTEREST PAYABLE
1,085,903

982,020ACCRUED EXPENSES AND OTHER LIABILITIES
2,628,215

816,003Total liabilities
327,222,061

309,040,056SHAREHOLDERS EQUITY:Common stock, no par value; 30,000,000 shares authorized; 3,324,578 shares issued and3,268,878 and 3,311,621 outstanding as of September 30, 2005 and December 31,2004, respectively
22,284,746

22,255,402Retained earnings
8,091,028

4,725,257Treasury Stock, shares at cost (55,700 shares at September 30, 2005 and 5,199 shares atDecember 31, 2004, respectively)
(1,102,614)

(86,896)Accumulated other comprehensive loss
(453,173)

(103,379)Total shareholders equity
28,819,987

26,790,384Total liabilities and shareholders equity
$356,042,048

$335,830,440See accompanying notes to consolidated financial statements.1

1st Constitution Bancorp and Subsidiaries
Consolidated Statements of Income(Unaudited)
Three months ended September 30,
Nine months ended September 30,INTEREST INCOME
2005

2004

2005

2004Interest and fees on loans
$4,587,261

$3,341,228

$12,625,782

$9,747,859Interest on securitiesTaxable
757,452

821,323

2,240,205

2,422,332Tax-exempt
168,240

90,461

491,915

258,112Interest on Federal funds sold andshort-term investments
5,348

634

17,488

7,491Total interest income
5,518,301

4,403,646

15,375,390

12,435,794INTEREST EXPENSEInterest on deposits
1,114,673

874,168

3,036,325

2,382,346Interest on securities sold underagreement to repurchase and other borrowed funds
386,081

272,382

989,870

741,578Interest on redeemable subordinated debentures
90,898

64,784

251,167

190,421Total interest expense
1,591,652

1,211,334

4,277,362

3,314,345Net interest income
3,926,649

3,192,312

11,098,028

9,121,449Provision for loan losses
85,000

60,000

280,000

180,000Net interest income after provision for loan losses
3,841,649

3,131,312

10,818,028

8,941,449NON-INTEREST INCOMEService charges on deposit accounts
178,365

142,355

507,610

390,501Gain on sale of loans held for sale
382,568

307,539

1,132,834

916,861Gain on sale of securities available for sale
-

27,545

-

27,545Income on bank-owned life insurance
56,452

79,855

178,062

198,355Other income
152,366

90,603

382,661

224,358Total other income
769,751

647,897

2,201,167

1,757,620NON-INTEREST EXPENSESalaries and employee benefits
1,560,158

1,283,588

4,326,701

3,696,763Occupancy expense
336,336

282,028

1,026,437

765,955Other operating expenses
958,511

789,961

2,693,605

2,152,272Total other expense
2,855,005

2,355,577

8,046,743

6,614,990Income before income taxes
1,756,395

1,424,632

4,972,452

4,084,079Income taxes
567,529

468,537

1,606,681

1,321,476Net income
$1,188,866

$956,095

$3,365,771

$2,762,603NET INCOME PER SHAREBasic
$0.36

$0.29

$1.02

$0.84Diluted
$0.35

$0.28

$0.98

$0.80See accompanying notes to consolidated financial statements2

1st Constitution Bancorp and Subsidiaries 
Consolidated
Statements Of Cash Flows(Unaudited)


Nine months ended September 30,2005

2004OPERATING ACTIVITIES:Net income
$3,365,771

$2,762,603Adjustments to reconcile net incometo net cash provided by operating activities-Provision for loan losses
280,000

180,000Depreciation and amortization
391,666

267,203Net amortization on securities
114,091

291,770Gain on sale of loans held for sale
(1,132,834)

(916,861)Gain on sale of securities available for sale
-

(27,545)Originations of loans held for sale
(54,352,744)

(56,690,533)Proceeds from sales of loans held for sale
53,561,528

63,569,264(Increase) decrease in accrued interest receivable
(394,852)

(318,653)Income on Bank-owned life insurance
(178,062)

(198,355)(Increase) decrease in other assets
(2,171,335)

(34,677)Increase (decrease) in accrued interest payable
103,883

(8,309)Increase (decrease) in accrued expenses and other liabilities
1,812,212

394,951Net cash provided by operating activities
1,399,324

9,270,858INVESTING ACTIVITIES:Purchases of securities -Available for sale
(1,505,424)

(28,454,928)Held to maturity
(9,734,659)

(3,302,038)Proceeds from maturities and prepayments of securities -Available for sale
15,160,171

18,899,045Held to maturity
169,852

693,051Proceeds from sales of securities available for sale
-

3,801,300Purchase of Bank-owned life insurance
(1,950,000)

-Net increase in loans
(15,941,990)

(35,957,717)Purchases of premises and equipment, net
(640,809)

(1,093,602)Net cash used in investing activities
(14,442,859)

(45,414,790)FINANCING ACTIVITIES:Issuance of common stock, net
29,344

-Purchase of treasury stock
(1,246,181)

(291,419)Net increase in demand, savings and time deposits
17,965,910

32,560,000Net increase in securities sold under agreements to repurchase
-

20,027Net increase in other borrowings
1,700,000

1,000,000Net cash provided by financing activities
18,449,073

33,288,608Increase (decrease) in cash and cash equivalents
5,405,538

(2,855,423)CASH AND CASH EQUIVALENTSAT BEGINNING OF PERIOD
7,924,409

14,702,886CASH AND CASH EQUIVALENTSAT END OF PERIOD
$13,329,947

$11,847,463SUPPLEMENTAL DISCLOSURESOF CASH FLOW INFORMATION:Cash paid during the period for -Interest
$4,173,479

$3,322,654Income taxes
$95,000

$1,811,112See accompanying notes to consolidated financial statements3

1st Constitution Bancorp and SubsidiariesNotes To Consolidated Financial Statements
September 30, 2005 (Unaudited)
(1) Summary of Significant Accounting Policies
The accompanying unaudited Consolidated Financial Statements herein have been prepared by 1st Constitution Bancorp (the Company) in accordance with accounting principles generally accepted in the United States of
America and pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such
rules and regulations. These Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto included in the Companys Form 10-K for the year ended December 31, 2004, filed with the
SEC on March 24, 2005.
In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the operating results for the interim periods have been included.  The results of
operations for periods of less than a year are not necessarily indicative of results for the full year.
(2) Net Income Per Common ShareBasic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income by the weighted average number of shares outstanding, as adjusted for the assumed exercise of potential common stock options, using the treasury stock method.
All share information has been restated for the effect of a (i) 5% stock dividend declared on December 17, 2004 and paid on January 31, 2005 to shareholders of record on January 18, 2005, and (ii) a two-for-one stock split in the form of a stock
dividend declared on January 20, 2005 and paid on February 28, 2005 to shareholders of record on February 10, 2005.
The following tables illustrate the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations.
Three Months Ended September 30, 2005Income

Weighted-
average
shares

Per share
amountBasic EPSNet income available to common stockholders
$1,188,866

3,267,489

$0.36Effect of dilutive securitiesOptions and Grants
-

131,449

(0.01)Diluted EPSNet income available to common stockholdersplus assumed conversion
$1,188,866

3,398,938

$0.35
All options have been included in the computation of diluted earnings per share.
4

Three Months Ended September 30, 2004Income

Weighted-
average
shares

Per share
amountBasic EPSNet income available to common stockholders
$956,095

3,284,557

$0.29Effect of dilutive securitiesOptions and Grants
-

165,589

(0.01)Diluted EPSNet income available to common stockholdersplus assumed conversion
$956,095

3,450,146

$0.28


All options have been included in the computation of diluted earnings per share.
NineMonths Ended September 30, 2005Income

Weighted-
average
shares

Per share
amountBasic EPSNet income available to common stockholders
$3,365,771

3,293,984

$1.02Effect of dilutive securitiesOptions and Grants
-

129,421

(0.04)Diluted EPSNet income available to common stockholdersplus assumed conversion
$3,365,771

3,423,405

$0.98
All options have been included in the computation of diluted earnings per share.
Nine Months Ended September 30, 2004Income

Weighted-
average
shares

Per share
amountBasic EPSNet income available to common stockholders
$2,762,603

3,288,920

$0.84Effect of dilutive securitiesOptions and Grants
-

165,286

(0.04)Diluted EPSNet income available to common stockholdersplus assumed conversion
$2,762,603

3,454,206

$0.80
All options have been included in the computation of diluted earnings per share.
5

(3) Stock-Based CompensationStock-based compensation is accounted for under the intrinsic value based method as prescribed by Accounting Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  Included below
are the pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transaction and Disclosure which assumes the fair value
based method of accounting had been adopted.
Three months ended September 30,2005

2004Net income -As reported
$1,188,866

$956,095Deduct: Stock-based employee compensationdetermined under fair value based method forstock options, net of related tax effects
(6,385)

(6,357)Pro forma
$1,182,481

$949,738Net income per share -As reported -Basic
$0.36

$0.29Diluted
$0.35

$0.28Pro forma -Basic
$0.36

$0.29Diluted
$0.35

$0.28Nine months ended September 30,2005

2004Net income -As reported
$3,365,771

$2,762,603Deduct: Stock-based employee compensationdetermined under fair value based method forstock options, net of related tax effects
(19,155)

(19,071)Pro forma
$3,346,616

$2,743,532Net income per share -As reported -Basic
$1.02

$0.84Diluted
$0.98

$0.80Pro forma -Basic
$1.02

$0.83Diluted
$0.98

$0.79
FASB Statement No. 123 (revised 2004),Share-Based Payment(Statement 123(R)). Statement 123(R) addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity
instruments.  Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement.  Statement 123(R) generally requires that an entity account
for those transactions using the fair-value-based method; and eliminates an entitys ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25,Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued.
6

Statement 123(R) requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Company beginning January 1, 2006.  The Company
must use either the modified prospective or the modified retrospective transition method.  Early adoption of Statement 123(R) for interim or annual periods for which financial statements or interim reports have not been issued is permitted.  The
adoption of Statement 123(R) is expected to reduce reported net income and earnings per share. Management is evaluating Statement 123(R) and has not yet determined its full impact on the consolidated financial statements of the Company.
(4) Variable Interest Entities
Management has determined that the 1stConstitution Capital Trust I (the Trust) qualifies as a variable interest entity under FASB Interpretation 46
(FIN 46). In 2002, the Trust issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trust holds, as its sole asset, subordinated debentures issued by the Company in 2002. Prior to December
31, 2003, the Trust was included in the Companys consolidated balance sheet and statements of income. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions of which were required to be
applied to certain variable interest entities, including the Trust, by March 31, 2004. The Company adopted the provisions under FIN 46, as interpreted by FIN 46(R), and accordingly deconsolidated the Trust as of December 31, 2003.
In March 2005, the Federal Reserve Board adopted a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a
five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other
elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Based on the final rule, the Company expects to include all of its $5.2 million in trust preferred securities in Tier 1 capital.
(5) Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes standards for the way public business enterprises report information about operating segments in annual financial statements
and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and
major customers.  Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess
performance.  The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets.  It also requires that information be reported about revenues derived from
the enterprises products or services, or about the countries in which the enterprises earn revenues and hold assets, and about major customers, regardless of whether the information is used in making operating decisions.
7

Substantially all of the Companys business is conducted through its banking subsidiary and involves the delivery of loan and deposit products to customers. The Company makes operating decisions and assesses performance based
on an ongoing review of these banking operations, which constitute the only operating segment for financial reporting.
Item 2.         Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the operating results and financial condition at September 30, 2005 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this
document. Results of operations for the three and nine month periods ended September 30, 2005 are not necessarily indicative of results to be attained for any other period.
This discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Companys Form 10-K (Managements
Discussion and Analysis of Financial Condition and Results of Operations) for the year ended December 31, 2004, as filed with the SEC on March 24, 2005.
General
Throughout the following sections, the Company refers to 1stConstitution Bancorp and its wholly owned subsidiaries, 1stConstitution Bank and 1stConstitution Capital Trust I, the Bank refers to 1stConstitution Bank, and the Trust refers to 1stConstitution Capital Trust I. The purpose of this discussion and analysis is to
assist in the understanding and evaluation of the Companys financial condition, changes in financial condition, and results of operations.
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently
conducts no other significant business activities.
The Bank operates nine branches, and has two subsidiaries, 1stConstitution Investment Company of Delaware, Inc., which manages an investment portfolio, and FCB Assets
Holdings, Inc., which is used by the Bank to manage and dispose of repossessed real estate.
The Trust, an unconsolidated subsidiary of the Company, was created to issue trust preferred securities to assist the Company to raise additional regulatory capital.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about our confidence and strategies and
our expectations about new and existing programs and products, relationships, opportunities,
8

technology and market conditions. These statements may be identified by such forward-looking terminology as expect, believe, anticipate, or by expressions of confidence such as continuing or strong or similar statements or
variations of such terms.  Such forward-looking statements involve certain risks and uncertainties.  These include, but are not limited to, expected cost savings not being realized or not being realized within the expected time frame; income or
revenues being lower than expected or operating costs higher; competitive pressures in the banking or financial services industries increasing significantly; business disruption related to program implementation or methodologies; weakening of
general economic conditions nationally or in New Jersey; changes in legal and regulatory barriers and structures; and unanticipated occurrences delaying planned programs or initiatives or increasing their costs or decreasing their benefits, as well
as other risks and uncertainties detailed from time to time in filings of the Company with the U.S. Securities and Exchange Commission.  Actual results may differ materially from such forward-looking statements. These forward-looking statements
speak only as of the date of this document.
Critical Accounting Policies and Estimates
The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements,
management has made estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as of the date of the consolidated statements of financial condition and results of operations for the periods
indicated. Actual results could differ significantly from those estimates. Note 1 to the Companys Consolidated Financial Statements for the year ended December 31, 2004 contains a summary of the Companys significant accounting
policies.
The Companys accounting policies are fundamental to understanding Managements Discussion and Analysis of Financial Condition and Results of Operations, which is based upon the Companys consolidated financial
statements.
Management believes the Companys policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective
judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application is periodically
reviewed with the Audit Committee and the Board of Directors. The provision for loan losses is based upon managements evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving
consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable
value of any underlying collateral and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available to it, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. Various regulatory agencies, as an
integral part of their examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon
9

information available to them at the time of their examination. Furthermore, the majority of the Companys loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Companys loan
portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the Central New Jersey area experience an adverse economic shock. Future adjustments to the allowance for loan losses
may be necessary due to economic, operating, regulatory and other conditions beyond the Companys control.
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement 123(R)). Statement 123(R) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement.  Statement 123(R) generally requires
that an entity account for those transactions using the fair-value-based method; and eliminates an entitys ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25,
Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. Statement 123(R) requires entities to disclose information about the nature of the share-based payment transactions and the effects of those
transactions on the financial statements. Statement 123(R) is effective for the Company beginning January 1, 2006.  The Company must use either the modified prospective or the modified retrospective transition method. Early adoption of Statement
123(R) for interim or annual periods for which financial statements or interim reports have not been issued is permitted.  The adoption of Statement 123(R) is expected to reduce reported net income and earnings per share. Management is evaluating
Statement 123(R) and has not yet determined its full impact on the consolidated financial statements of the Company.
In March 2005 the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 requires an entity to recognize a liability for the fair value of a legal obligation to
perform asset-retirement activities that are conditional on a future event if the amount can be reasonably estimated. The Interpretation provides guidance to evaluate whether fair value is reasonably estimable. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. FIN 47 is not expected to have a material impact on the Companys financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting
pronouncement when the pronouncement does not include specific transition provisions. SFAS
No. 154 requires retrospective application of changes in accounting principle to
prior periods' financial statements unless it is impracticable to determine
either the period-specific effects or the cumulative
10

effect of the change. APB Opinion No. 20 previously required
that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in accounting principle. SFAS No. 154 carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 also carries forward the guidance in APB Opinion No. 20 requiring justification of a
change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted. Our adoption of SFAS No.
154 will not have an impact on our financial condition or results of operations.
Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.EITF 03-1 provides guidance for determining when
an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is
considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii)
evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to
the difference between the investments cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began presenting the new disclosure requirements in its consolidated financial statements for the
year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of
these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance.
In June, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed its staff to issue proposed FSP EITF 03-1-a, Implementation Guidance for the Application of
Paragraph 16 of EITF Issue No. 03-1, as final. The final FSP will supersede EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and EITF Topic No. D-44, Recognition
of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The final FSP (retitled FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments)
will replace the guidance set forth in paragraphs 10-18 of Issue 03-1 with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities,
SEC Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FASB Staff Position No. FAS 115-1 and FAS
124-1. The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (the FSP), was issued on November 3, 2005 and addresses the determination of when an investment is considered impaired; whether
the impairment is other than temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures
about unrealized losses that have
11

not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance in EITF Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations (principally Statement of Financial
Accounting Standards No. 115 and SEC Staff Accounting Bulletin 59). Under the FSP, impairment losses must be recognized in earnings equal to the entire difference between the securitys cost and its fair value at the financial statement date,
without considering partial recoveries subsequent to that date. The FSP also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value
of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not expect that the application of the FSP will have a material impact on its
financial condition, results of operations or financial statement disclosures.
In July 2005, the FASB issued an Exposure Draft of a proposed Interpretation, Accounting for Uncertain Tax Positions. The proposed Interpretation clarifies the accounting for uncertain tax positions in accordance with
FASB Statement No. 109, Accounting for Income Taxes. The proposed Interpretation requires that a tax position meet a probable recognition threshold for the benefit of the uncertain tax position to be recognized in the
financial statements. A tax position that fails to meet the probable recognition threshold will result in either a reduction of a current or deferred tax asset or receivable, or recording a current or deferred tax liability. The proposed
Interpretation also provides guidance on measurement, de-recognition of tax benefits, classification, interim period accounting disclosure, and transition requirements in accounting for uncertain tax positions. The proposed Interpretation has a
60-day comment period and is scheduled to be effective for all companies as of the first fiscal year ending after December 15, 2005. The Company is assessing the impact of adopting the new pronouncement and is currently unable to estimate its impact
on its consolidated financial statements.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2005 and September 30, 2004
Summary
The Company realized net income of $1,188,866 for the three months ended September 30, 2005, an increase of 24.3% from the $956,095 reported for the three months ended September 30, 2004. Diluted net income per share was
$0.35 for the three months ended September 30, 2005 compared to $0.28 per diluted share for the three months ended September 30, 2004.
Key performance ratios continued to improve for 2005. Return on average assets and return on average equity were 1.34% and 17.14% for the three months ended September 30, 2005 compared to 1.16% and 15.42%, respectively, for the
three months ended September 30, 2004.
All prior year share information has been restated for the effect of a 5% stock dividend declared on December 17, 2004 and paid on January 31, 2005 to shareholders of record on January 18, 2005, and the Companys two-for-one
stock split in the form of a stock dividend declared on January 20, 2005 and paid on February 28, 2005 to shareholders of record on February 10, 2005.
12

A significant factor impacting the Companys net interest income has been the rising level of market interest rates that evolved during the latter half of 2004 and continued through the second quarter of 2005. The Federal
Reserve Banks Open Market Committee (FOMC) held eight meetings in 2004 and held six meetings through the third quarter of 2005. Beginning with the June 30, 2004 meeting, the FOMC increased short-term interest rates by 25 basis
points and continued with a series of 25 basis point increases in each of the next six meetings in 2004 and in each of the six meetings in 2005. The immediate benefit of these interest rate increases to the Companys investment security
purchases and floating rate assets resulted in a 104 basis point increase in the yield on total interest-earning assets. In addition, managements ability to lag the interest rate increases on deposits coupled with a tight discipline in deposit
pricing resulting in a 68 basis point increase to the Companys net interest margin. Management expects the FOMC to continue its program of increasing the targeted Federal Funds rate over the next few months and has structured the
Companys balance sheet to an asset sensitive position in order to continue to benefit from this rising market rates environment.
Earnings Analysis
Interest Income
Interest income for the three months ended September 30, 2005 was $5,518,301, increasing by 25.3% from the $4,403,646 reported in the three months ended September 30, 2004. This is primarily attributable to the rising
interest rate environment that evolved during the latter half of 2004 and continued through the first three quarters of 2005.  For the three months ended September 30, 2005, average interest earning assets increased $20,918,064 or 6.7%, to
$331,127,883 compared to $310,209,819 for the three months ended September 30, 2004. The increase in interest income resulting from increases in earning asset volume was complemented by an increase in the average yield earned on these
assets.  For the three months ended September 30, 2005, the average yield on earning assets increased 104 basis points to 6.71% from 5.67% for the three months ended September 30, 2004.
Interest Expense
Interest expense for the three months ended September 30, 2005 was $1,591,652, an increase of $380,318, or 31.4% from $1,211,334 reported for the three months ended September 30, 2004. Total average interest bearing
liabilities increased by $12,126,089 to $261,306,810 for the three months ended September 30, 2005 from $249,180,721 for the three months ended September 30, 2004. The average cost of interest bearing liabilities increased 49 basis
points to 2.42% for the three months ended September 30, 2005 from 1.93% for the three months ended September 30, 2004, primarily as a result of an increase in market-driven rates paid on deposits and short-term borrowed funds.
13

Net Interest Income
The Companys net interest income for the three months ended September 30, 2005 was $3,926,649, an increase of 23.0% from the $3,192,312 reported for September 30, 2004. The net interest margin, on a fully taxable
equivalent basis, increased 68 basis points to 4.80% for the three months ended September 30, 2005 from 4.12% for the three months ended September 30, 2004. The increase in the net interest margin was primarily the result of interest earning assets
repricing faster than interest bearing liabilities in the rising current rate environment, combined with a lower level of net amortization of premiums on mortgage-backed investment securities. Net amortization expense decreased to $32,452 for
the three months ended September 30, 2005 versus $69,476 for the three months ended September 30, 2004.
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 $85,000 for the three months ended September 30, 2005 and $60,000 for the three months ended September 30, 2004.
Non-Interest Income
Total non-interest income for the three months ended September 30, 2005 was $796,751, an increase of $121,854, or 18.8% from non-interest income of $647,897 for the three months ended September 30, 2004.
Gain on sale of loans held for sale represents the largest single source of non-interest income. Gain on sale of loans held for sale for the three months ended September 30, 2005 was $382,568 compared to $307,539 for the
three months ended September 30, 2004. The current interest rate environment in 2005, with a continued lower level of long term market notes, has greatly fueled the volume of mortgage loan originations and subsequent secondary market mortgage loan
sales.
Service charges on deposit accounts were $178,365 for the three months ended September 30, 2005 compared to $142,355 for the three months ended September 30, 2004. Service charge income increased in 2005 principally due to
managements actions to restructure servivce charges and fees based on the results of a comparative study of market fees performed in early 2005. This also resulted in an increase in the other income component of non-interest income to
$152,366 for the three months ended September 30, 2005 compared to $90,603 for the three months ended September 30, 2004.  Included in this component are fees assessed for ATM usage, wire transfer execution, lock box services and other
branch network services.
14

Income from Bank Owned Life Insurance (BOLI) amounted to $56,452 for the three months ended September 30, 2005, compared to $79,855 for the three months ended September 30, 2004. In 2001, the Company purchased
tax-free BOLI assets which partially offset the cost of employee benefit plans and reduced the overall effective tax rate.
Non-Interest Expense
The following table presents the major components of non-interest expense for the three months ended September 30, 2005 and 2004.
Non-interest ExpensesThree months ended September 30,2005
2004Salaries and employee benefits

$1,560,158
$1,283,588Occupancy expense

336,336
282,028Equipment expense

119,168
127,532Marketing

69,437
81,480Computer services

162,953
182,325Regulatory, professional and other fees

358,613
100,203Office expense

92,220
126,007All other expenses

156,120
172,414Total

$2,855,005
$2,355,577Non-interest expense increased $499,428, or 21.2%, to $2,855,005 for the three months ended September 30, 2005 from $2,355,577 for the three months ended September 30, 2004.
Salaries and employee benefits increased $276,570 for the three months ended September 30, 2005 compared to the three months ended September 30, 2004, primarily due to (a) increased branch staffing levels as the result of
opening two new branches during the latter half of 2004 plus (b) normal employee salary increases.
Occupancy expense amounted to $336,336 for the three months ended September 30, 2005, an increase of $54,308, or 19.3%, compared to $282,028 for the three months ended September 30, 2004. The opening of two new
branches during the latter half of 2004 is the primary cause for the current year increase.
Regulatory, professional and other fees increased $258,410 to $358,613 for the three months ended September 30, 2005 compared to $100,203 for the three months ended September 30, 2004. This current year increase is due
to increased legal and independent accountant fees incurred in connection with the Companys efforts to comply with the requirements of Sarbanes-Oxley section 404.
An important industry productivity measure is the efficiency ratio.  The efficiency ratio is calculated by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates
that more resources are being utilized to generate the same or greater volume of income, while a decrease would
15

indicate a more efficient allocation of resources.  The Companys efficiency ratio decreased to 60.8% for the three months ended September 30, 2005 compared to a ratio of 62.4% for the three months ended September 30, 2004.
Nine Months Ended September 30, 2005 and September 30, 2004
Summary
The Company realized net income of $3,365,771 for the nine months ended September 30, 2005, an increase of $603,168, or 21.8%, over the $2,762,603 realized for the nine months ended September 30, 2004.  Net income per
diluted share was $0.98 for the nine months ended September 30, 2005 compared to $0.80 per diluted share for the nine months ended September 30, 2004.
Key performance ratios continued to improve during the nine months ended September 30, 2005. Return on average assets and return on average equity were 1.32% and 16.49%, respectively, for the nine months ended September 30, 2005
compared to 1.20% and 15.24%, respectively, for the nine months ended September 30, 2004.
Earnings Analysis
Interest Income
For nine months ended September 30, 2005, total interest income was $15,375,390, an increase of $2,939,596, or 23.6%, compared to total interest income of $12,435,794 for the nine months ended September 30, 2004. The
following table sets forth the Companys consolidated average balances of assets, liabilities and shareholders equity as well as interest income and expense on related items, and the Companys average rate for the nine month periods
ended September 30, 2005 and 2004.
Average Balance Sheets with Resultant Interest and Rates(yields on a tax-equivalent basis)
Nine months ended September 30, 2005

Nine months ended September 30, 2004Average
Balance
Interest
Average
Rate

Average
Balance
Interest
Average
RateAssets:Federal Funds Sold/Short-Term Investments
$793,267
$17,488
2.95%

$1,048,301
$7,491
0.95%Securities:Collateralized Mortgage Obligations/Mortgage Backed Securities
76,920,888
2,240,205
3.88%

88,313,814
2,422,332
3.66%States and Political Subdivisions
18,752,945
728,034
5.18%

8,981,114
382,006
5.67%Total
95,673,833
2,968,239
4.14%

97,294,928
2,804,338
3.84%Loan Portfolio:Commercial
35,824,182
1,968,394
7.35%

25,245,479
1,547,928
8.17%Installment
2,408,793
151,194
8.39%

3,549,759
212,438
7.97%Commercial Mortgages
57,002,370
3,046,661
7.15%

54,663,163
2,889,434
7.04%Construction - Wholesale
86,428,044
4,641,073
7.18%

68,423,691
2,578,866
5.02%Residential Mortgages
9,244,450
428,700
6.20%

9,231,185
496,818
7.17%Construction Retail
4,656,709
249,456
7.16%

5,001,054
217,145
5.78%Home Equity
13,282,411
611,604
6.16%

10,595,982
403,397
5.07%SBA Loans
5,900,159
353,198
8.00%

2,711,474
128,304
6.30%All Other Loans
10,535,809
1,175,502
14.86%

13,557,592
1,273,529
12.51%Total
225,282,927
12,625,782
7.49%

192,979,379
9,747,859
6.73%16

Total Interest-Earning Assets
321,750,027
15,611,509
6.49%
291,322,608
12,559,688
5.74%Allowance for Loan Losses
(2,134,401)


(1,883,819)Cash and Due From Bank
9,017,781


7,537,862Other Assets
12,269,270


10,660,581Total Assets
$340,902,677


$307,637,232Interest-Bearing Liabilities:Money Market and NOW Accounts
$102,099,602
$879,410
1.15%
$91,040,699
$678,985
0.99%Savings Accounts
28,918,212
217,815
1.01%
27,513,451
101,205
0.49%Certificates of Deposit
75,436,641
1,661,977
2.95%
73,628,027
1,413,422
2.56%Certificates of Deposit of $100,000 and Over
11,809,764
277,123
3.14%
9,848,619
188,734
2.55%Federal Funds Purchased/Other Borrowed Funds
31,226,601
989,870
4.24%
25,726,564
741,578
3.84%Redeemable Subordinated Debentures
5,155,000
251,167
6.62%
5,155,000
190,421
5.08%Total Interest-Bearing Liabilities
254,645,820
4,277,362
2.26%
232,912,360
3,314,345
1.90%Net Interest Spread


4.24%


3.85%Demand Deposits
56,054,980


48,119,500Other Liabilities
2,914,652


2,397,018Total Liabilities
313,615,452


283,428,878Shareholders' Equity
27,287,225


24,208,354Total Liabilities and Shareholders' Equity
340,902,677


307,637,232Net Interest Margin

$11,334,147
4.71%

9,245,343
4.23%
The current year increase in interest income resulted from higher average balances in the securities and loan portfolios combined with higher average yields earned on the loan portfolio. Net amortization of premiums on
mortgage-backed investment securities decreased to $114,091 for the nine months ended September 30, 2005 compared to $291,770 for the nine months ended September 30, 2004. Average loans increased $32,303,548, or 16.7%, to
$225,282,927 for the nine months ended September 30, 2005 from $192,979,379 for the nine months ended September 30, 2004, while the yield on the loan portfolio increased 76 basis points to 7.49% for the nine months ended September 30, 2005
from 6.73% for the nine months ended September 30, 2004. The higher loan yield reflected the higher interest rate environment that evolved during the latter half of 2004 and continued through the first three quarters of 2005.
Average securities decreased $1,621,095, or 1.7%, from $97,294,928 for the nine months ended September 30, 2004 to $95,673,833 for the nine months ended September 30, 2005, while the yield on the securities portfolio
increased 30 basis points to 4.14% for the nine months ended September 30, 2005 from 3.84% for the nine months ended September 30, 2004.
Overall, the yield on the Companys total interest-earning assets increased 75 basis points to 6.49% for the nine months ended September 30, 2005 from 5.74% for the nine months ended September 30, 2004.
17

Interest Expense
Total interest expense for the nine months ended September 30, 2005 was $4,277,362, an increase of $963,017, or 29.1%, compared to $3,314,345 for the nine months ended September 30, 2004. The increase in interest
expense for the current period resulted primarily from the impact of higher levels of interest-bearing liabilities priced at higher market interest rate levels. The average rate paid on interest bearing liabilities for the nine months ended
September 30, 2005 increased 36 basis points to 2.26% from 1.90% for the nine months ended September 30, 2004.
Net Interest Income
The Companys net interest income for the nine months ended September 30, 2005 was $11,098,028, an increase of $1,976,579, or 2.17%, compared to $9,121,449 for the nine months ended September 30, 2004.  The net
interest margin (on a tax-equivalent basis), which is net interest income divided by average interest-earning assets, was 4.71% for the nine months ended September 30, 2005 compared to 4.23% for the nine months ended September 30, 2004.
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 $280,000 for the nine months ended September 30, 2005 and $180,000 for the nine months ended September 30, 2004.
Non-Interest Income
Total non-interest income for the nine months ended September 30, 2005 was $2,201,167, an increase of $443,547, or 25.2%, from non-interest income of $1,757,620 for the nine months ended September 30, 2004.
Gain on sale of loans held for sale represents the largest single source on non-interest income. Gain on sale of loans held for sale for the nine months ended September 30, 2005 was $1,132,834 compared to $916,861 for the
nine months ended September 30, 2004. The current interest rate environment in 2005, with a continued lower level of long term market notes, has greatly fueled the volume of mortgage loan originations and subsequent secondary market mortgage loan
sales.
Service charges on deposit accounts were $507,610 for the
nine months ended September 30, 2005 compared
18

to $390,501 for the nine months ended September 30, 2004.
Service charge income increased in 2005 principally due to managements actions to restructure service charged and fees based on the results of a comparative study of market fees performed in early 2005. This also resulted in an increase in
the other income component of non-interest income to $382,661 for the nine months ended September 30, 2005 compared to $224,358 for the nine months ended September 30, 2004.
Income from Bank Owned Life Insurance (BOLI) amounted to $178,062 for the nine months ended September 30, 2005, compared to $198,355 for the nine months ended September 30, 2004. In 2001, the Company purchased
$6.0 million of tax-free BOLI assets which partially offset the cost of employee benefit plans and reduced the overall effective tax rate. In August 2005, the Company purchased an additional $1,950,000 of tax-free BOLI assets.
Non-Interest Expense
Total non-interest expense for the nine months ended September 30, 2005 was $8,046,743, an increase of $1,431,753, or 21.6%, compared to non-interest expense of $6,614,990 for the nine months ended September 30,
2004.
The following table presents the major components of non-interest expense for the nine months ended September 30, 2005 and 2004.

Non-interest ExpensesNine months ended September 30,2005
2004Salaries and employee benefits
$4,326,701
$3,696,763Occupancy expense
1,026,437
765,955Equipment expense
359,286
354,397Marketing
239,559
214,288Computer services
465,354
470,552Regulatory, professional and other fees
839,058
390,674Office expense
293,099
330,674All other expenses
497,249
391,688Total
$8,046,743
$6,614,991
Salaries and employee benefits increased $629,938 to $4,326,701 for the nine months ended September 30, 2005 compared to $3,696,763 for the nine months ended September 30, 2004. This increase, as well as the increases
in occupancy expense and equipment expense, reflect the increase in staffing and occupancy and equipment expenditures due to the opening of new branches during the latter half of 2004, plus normal employee salary increases.
Regulatory, professional and other fees increased $448,384 to $389,058 for the nine months ended September 30, 2005 compared to $390,674 as the Company incurred increased legal, independent accountant and consultant
fees in working to comply with the requirements of Sarbanes-Oxley Section 404.
19

The Companys efficiency ratio decreased to 60.5% for the nine months ended September 30, 2005 compared to a ratio of 62.0% for the nine months ended September 30, 2004.
Financial Condition
September 30, 2005 Compared with December 31, 2004
Total consolidated assets at September 30, 2005 amounted to $356,042,048, an increase of $20,211,608, or 6.0%, compared to $335,830,440 at December 31, 2004.  The growth in the Companys asset base was primarily
due to increases in the loan and securities portfolios.
The following discussion addresses the major components of the Companys balance sheet.
Cash and Cash Equivalents
Cash and Cash Equivalents at September 30, 2005 totaled $13,329,947 compared to $7,924,409 at December 31, 2004. Cash and cash equivalents at September 30, 2005 consisted of cash and due from banks of $8,796,819 and
Federal funds sold/short term investments of $4,533,128. The corresponding balances at December 31, 2004 were $7,898,395 and $26,014, respectively. The balance of cash and cash equivalents at September 30, 2005 increased primarily due to
an end-of-month inflow of non-interest bearing deposits.
Investment Securities
Securities represented 26.1% of total assets at September 30, 2004 and 29.1% at December 31, 2004. Total securities decreased $4,782,203, or 4.9%, at September 30, 2005 to $92,973,583 compared to $97,775,786 at
December 31, 2004.
Securities available for sale totaled $71,253,891 at September 30, 2005, a decrease of $14,334,758, or 16.7%, from December 31, 2004.  Securities held to maturity totaled $21,719,692 at September 30, 2005, an increase
of $9,552,555, or 78.5%, from December 31, 2004. During the nine months ended September 30, 2005, $1,505,424 of securities available for sale and $9,734,659 of securities held to maturity were purchased and funded by calls and maturities
of securities held to maturity, securities available for sale and short-term investments.
Loans
The loan portfolio, which represents the Companys largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. The
Companys primary lending focus continues to be commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans.
20

The following table sets forth the classification of loans by major category at September 30, 2005 and December 31, 2004.
Loan Portfolio Composition
September 30, 2005
December 31, 2004Component

Amount

% of total

Amount

%of totalConstruction loans

$95,049,722

42.0%

$88,027,024

41.8%Residential real estate loans

9,069,672

4.0%

9,815,366

4.7%Commercial and commercial real estate

105,101,732

46.4%

96,021,077

45.6%Loans to individuals

16,566,869

7.3%

16,002,619

7.6%Lease financing

27,709

0.0%

74,543

0.0%All other loans

759,788

0.3%

712,422

0.3%$226,575,492

100.0%

$210,653,051

100.0%
The loan portfolio increased $15,922,441, or 7.6%, at September 30, 2005 to $226,575,492 from $210,653,051 at December 31, 2004.  The ability of the Company to enter into larger loan relationships and managements
philosophy of relationship banking are key factors in the Companys strategy for loan growth.  Strong competition from both bank and non-bank competitors could result in comparatively lower yields on new and established lending relationships.
The ultimate collectability of the loan portfolio and the recovery of the carrying amount of real estate are subject to changes in the Companys market region's economic environment and real estate market.
Non-Performing Assets
Non-performing assets consist of non-performing loans and other real estate owned.  Non-performing loans are composed of (1) loans on a non-accrual basis, (2) loans which are contractually past due 90 days or more as to interest
and principal payments but have not been classified as non-accrual, and (3) loans whose terms have been restructured to provide a reduction or deferral of interest on principal because of a deterioration in the financial position of the
borrower.
The Companys policy with regard to non-accrual loans varies by the type of loan involved. Generally, commercial loans are placed on a non-accrual status when they are 90 days past due unless these loans are well secured and
in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or interest is in doubt. Consumer loans are generally charged off after they become 90 days past due.
Residential mortgage loans are not generally placed on a non-accrual status unless the value of the real estate has deteriorated to the point that a potential loss of principal or interest exists. Subsequent payments are credited to income only if
collection of principal is not in doubt.
Nonaccrual loans amounted to $818,555 at September 30, 2005,
compared to $1,049,411 at December 31, 2004. As the table demonstrates, despite
the amount of non-performing assets at September 30, 2005, loan quality
21

and ratios remain strong. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.

Non-Performing Assets and Loans
September 30,
December 31,2005
2004Non-Performing loans:Loans 90 days or more past due and still accruing
$0
$63,130Non-accrual loans
818,555
1,049,411Total non-performing loans
818,555
1,112,541Other real estate owned
0
0Total non-performing assets
$818,555
$1,112,541Non-performing loans to total loans
0.34%
0.50%Non-performing assets to total assets
0.23%
0.33%

The Company had no restructured loans at September 30, 2005 and December 31, 2004. Impaired loans totaled $818,555 at September 30, 2005 and $1,049,411 at December 31, 2004.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available
for losses incurred or inherent in the loan portfolio and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.
Management utilizes a systematic and documented allowance adequacy methodology for loan losses that requires specific allowance assessment for all loans, including real estate mortgages and consumer loans. This methodology assigns
reserves based upon credit risk ratings for all loans. The reserves are based upon various factors, including historical performance, and the current economic environment. Management continually reviews the process used to determine the adequacy of
the allowance for loan losses. Allocations to the allowance for loan losses, both specific and general, are determined after this review.  Loans are classified based on internal reviews and evaluations performed by the lending staff. These
evaluations are, in turn, examined by the Companys internal loan review specialist. A formal loan review function, independent of loan origination, is used to identify and monitor risk classifications.
The allowance for loan losses amounted to $2,265,621 at September 30, 2005, an increase of $260,452 from December 31, 2004. The ratio of the allowance for loan losses to total loans was 1.00% at September 30, 2005 and
0.95% at December 31, 2004, respectively. The quality of the loan portfolio remained strong and it is managements belief that the allowance for loan losses is adequate in relation to credit risk exposure levels.
22

The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
Allowance for Loan Losses
September 30,

September 30,2005

2004Balance, beginning of period
$2,005,169

$1,786,632Provision charged to operating expenses
280,000

180,000Loans charged offConstruction loansResidential real estate loansCommercial and commercial real estate
(10,182)

(17,070)Loans to individuals
(11,133)

(5,203)Lease financing
(2,182)All other loans(23,498)

(22,273)RecoveriesConstruction loansResidential real estate loansCommercial and commercial real estate
749

750Loans to individuals
2,451Lease financing
750All other loans3,950

750Net (charge offs) / recoveries
(19,548)

(21,523)Balance, end of period
$2,265,621

$1,945,109Loans:At period end
$226,575,492

$199,886,500Average during the period
225,282,927

192,979,379Net charge offs to average loans outstanding
(-0.01%)

(0.01%)Allowance for loan losses to:Total loans at period end
1.00%

.097%Non-performing loans
276.78%

236.01%
Deposits
Deposits, which include demand deposits (interest bearing and non-interest bearing), savings and time deposits, are a fundamental and cost-effective source of funding. The Company offers a variety of products designed to attract
and retain customers, with the Companys primary focus being on building and expanding long-term relationships.
Total deposits increased $17,965,910, or 6.5%, to $294,852,943 at September 30, 2005 from $276,887,033 at December 31, 2004.  This increase in total deposits was the net result of a $7,552,935 increase in
non-interest bearing deposits to $58,347,516, and a $10,412,975 increase in interest bearing deposits to $236,505,427.
23

Other Borrowings
Other Borrowings are mainly comprised of fixed rate convertible advances from the Federal Home Loan Bank (FHLB) and overnight funds purchased. These borrowings are primarily used to fund asset growth not supported by
deposit generation. FHLB advances are fully secured by marketable securities and qualifying one-to-four family mortgage loans. The balance of other borrowings at September 30, 2005 consisted of fixed rate term FHLB borrowings of $23,500,000. The
balance of other borrowings at December 31, 2004 consisted of fixed rate term FHLB borrowings of $15,500,000 and overnight funds purchased of $9,700,000.
Shareholders Equity And Dividends
Shareholders equity at September 30, 2005 totaled $28,819,987, an increase of $2,029,603, or 7.6%, from $26,790,384 at December 31, 2004. Book value per common share rose to $8.82 at September 30, 2005 from
$7.31 at December 31, 2004.
The increase in shareholders equity and book value per share resulted primarily from net income of $3,365,771 less the effect of stock buybacks and the increase in unrealized holding losses on securities.
The Companys stock is listed for trading on the Nasdaq National Market System, under the symbol FCCY.
On March 12, 2001, the Company announced that the Board of Directors authorized a stock repurchase program allowing for the repurchase of a limited number of the Companys common shares at managements discretion on the
open market. The Company undertook this repurchase program in order to increase shareholder value. The Company completed its previous common stock repurchase program in July 2005. On July 21, 2005, the Board of Directors authorized a new common
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 the date of the approval of the stock repurchase program. A table disclosing repurchases
of Company shares made during the three months ended September 30, 2005 is set forth under Part II, Item 2 of this report,Unregistered Sales of Equity Securities and Use of Proceeds.
The table below presents the actual capital amounts and ratios of the Company for the periods indicated:
24

Capital RatiosAmount
RatioAs of September 30, 2005 -Total capital to risk weighted assets
$36,538,781
13.75%Tier1capital to risk weighted assets
34,273,160
12.90%Tier1 capital to average assets
34,273,160
9.74%As of December 31, 2004 -Total capital to risk weighted assets
$33,898,932
13.99%Tier1 capital to risk weighted assets
31,893,763
13.17%Tier1 capital to average assets
31,893,763
10.16%
The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1 capital to risk weighted assets ratio of 4.0% and a total capital to
risk weighted assets ratio of 8.0% .  To be considered well capitalized, an institution must have a minimum Tier 1 leverage ratio of 5.0% . At September 30, 2005, the ratios of the Company exceeded the ratios required to be considered
well capitalized. It is managements goal to monitor and maintain adequate capital levels to continue to support asset growth and continue its status as a well-capitalized institution.
Liquidity
At September 30, 2005, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors withdrawal requirements, and other operational and customer credit needs could be
satisfied.
Liquidity measures the ability to satisfy current and future cash flow needs as they become due. Liquidity management refers to the Companys ability to support asset growth while satisfying the borrowing needs and deposit
withdrawal requirements of customers.  In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a banks ability to meet its liquidity needs. On the asset side,
liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based liquidity is
derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities.  On the liability side, the primary source of liquidity is the ability to generate core deposits. Short-term
borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earnings assets.
The Company has established a borrowing relationship with the FHLB which further supports and enhances liquidity.
The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities.  At September 30, 2005, the balance of cash and cash equivalents was $13,329,947.
25

Net cash provided by operating activities totaled $1,399,324 in the nine months ended September 30, 2005 compared to $9,270,858 in the nine months ended September 30, 2004. The primary sources of funds are net income from
operations adjusted for provision for loan losses, depreciation expenses, and net proceeds from sales of loans held for sale.
Net cash used in investing activities totaled $14,442,859 in the nine months ended September 30, 2005 compared to $45,414,790 used in investing activities in the nine months ended September 30, 2004. The current period
amount was the result of a lower volume of securities purchases and loan originations for the nine months ended September 30, 2005.
Net cash provided by financing activities amounted to $18,449,073 in the nine months ended September 30, 2005 compared to $33,288,608 provided by financing activities in the nine months ended September 30, 2004. The amount
for the nine months ended September 30, 2005 resulted primarily from a lower level of deposit growth combined with a higher level in FHLB borrowings during from this period compared to the nine months ended September 30, 2004.
The securities portfolio is also a source of liquidity, providing cash flows from maturities and periodic repayments of principal. During the nine months ended September 30, 2005, maturities and prepayments of investment
securities totaled $15,330,023. Another source of liquidity is the loan portfolio, which provides a steady flow of payments and maturities.
Interest Rate Sensitivity Analysis
The largest component of the Companys total income is net interest income, and the majority of the Companys financial instruments are composed of interest rate-sensitive assets and liabilities with various terms and
maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk.  Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit
withdrawals, and differences in lending and funding rates. Management actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities.
The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost-effective, and
therefore, has focused its efforts on increasing the Companys spread by attracting lower-cost retail deposits.
26

Item 3. Quantitative and Qualitative Disclosures About Market Risk
To measure the impacts of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (EVPE) models. The modified duration of
equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to
dynamically model the present value of asset and liability cash flows, with rates ranging up or down 200 basis points. The economic value of equity is likely to be different as interest rates change. Results falling outside prescribed ranges require
action by management. At September 30, 2005 and December 31, 2004, the Companys variance in the economic value equity as a percentage of assets with an instantaneous and sustained parallel shift of 200 basis points is within the negative 3%
guideline, as shown in the tables below.
The market capitalization of the Company should not be equated to the EVPE, which only deals with the valuation of balance sheet cash flows using conservative assumptions. Calculated core deposit premiums may be less than what is
available in an outright sale. The model does not consider potential premiums on floating rate loan sales, the impact of overhead expense, non-interest income, taxes, industry market price multiples and other factors reflected in the market
capitalization of a company.
Market Risk AnalysisSeptember 30, 2005Change in Interest Rates
Flat
-200bp
+200bpEconomic Value of Portfolio Equity
$43,629,000
$41,221,000
$41,199,000Change

($2,408,000)
($2,430,000)Change as a Percentage of Assets

(-0.68%)
(-0.68%)December 31, 2004Change in Interest Rates
Flat
-200bp
+200bpEconomic Value of Portfolio Equity
$38,221,000
$34,681,000
$35,641,000Change

(3,540,000)
(2,580,000)Change as a Percentage of Assets

(-1.05%)
(-0.77%)27

Item 4.         Controls and Procedures.
The Companys chief executive officer and chief financial officer, with the assistance of other members of the Companys management, have evaluated the effectiveness of the 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 Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such
evaluation, the Companys chief executive officer and chief 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 on Form
10-Q.
The Companys chief executive officer and chief financial officer have also concluded that there have not been any changes in the Companys internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
28

PART II. OTHER INFORMATION
Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
On March 12, 2001, the Company announced that the Board of Directors authorized a stock repurchase program allowing for the repurchase of a limited number of the Companys shares at managements discretion on the open
market.  On July 21, 2005, the Board of Directors terminated the stock repurchase program and authorized a new common 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 September 30, 2005.
Issuer Purchases of Equity Securities(1)MaximumTotal Number of
Number ofShares Purchased
Shares ThatTotal

As Part of
May Yet beNumber
Average
Publicly
Purchasedof Shares
Price Paid
Announced Plan
Under the PlanPeriod
Purchased
Per Share
or Program
or Program (2)Beginning
EndingJuly 1, 2005
July 31, 2005
293
$19.73
293
165,360August 1, 2005
August 31, 2005
1,089
$19.95
1,089
164,271September 1, 2005
September 31, 2005
0
-
0
164,271Total
1,382
$19.90
1,382
164,271(1)
The Companys previous common stock repurchase program covered a maximum of 140,290 shares of common stock of the Company, representing 5% of the outstanding common stock of the Company on December 31, 2000. The
Companys current common stock repurchase program covers a maximum of 165,350 shares of common stock of the Company, representing 5% of the outstanding common stock of the Company on July 21, 2005.(2)
The information in this column has been adjusted to reflect the shares available under the common stock repurchase plan authorized by the Board of Directors on July 21, 2005.29

Item 6.
Exhibits3(i)

Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3(i) to the Companys Form 10-K filed with the SEC on March 24, 2005)3(ii)

Bylaws of the Company (incorporated by reference to Exhibit 3(ii) to the Companys Form 10-QSB filed with the SEC on May 14, 2003)31.1
*
Certification of Robert F. Mangano, chief executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)31.2
*
Certification of Joseph M. Reardon, chief financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)32
*
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, chief executive officer of the Company, and Joseph M. Reardon, chief financial officer of the Company* Filed herewith30

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
1STCONSTITUTION BANCORPDate: November 14, 2005

By:
ROBERT F. MANGANORobert F. Mangano
President and Chief Executive Officer
(Principal Executive Officer)Date: November 14, 2005

By:
JOSEPH M. REARDONJoseph M. Reardon
Senior Vice President and Treasurer
(Principal Accounting Officer)31