The purpose of this discussion and analysis of the operating results and financial condition at June 30, 2009 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three month and six month periods ended June 30, 2009 are not necessarily indicative of results to be attained for any other period.

This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Company's Form 10-K (Management's Discussion and Analysis of Financial Condition and Results of Operations) for the year ended December 31, 2008, as filed with the Securities and Exchange Commission (the "SEC") on March 27, 2009.

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 1st Constitution Capital Trust II; the "Bank" refers to 1st Constitution Bank; "Trust II" refers to 1st Constitution Capital Trust
II. Trust II is not included in the Company's consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary.

The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of the Bank, a full service commercial bank which began operations in August 1989, and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.

The Bank operates eleven branches, and manages an investment portfolio through 1st Constitution Investment Company of Delaware, Inc., its subsidiary. FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.

Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company to raise additional regulatory capital.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. When used in this and in future filings by the Company with the SEC, in the Company's press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "will," "will likely result," "could," "anticipates," "believes," "continues," "expects," "plans," "will continue," "is anticipated," "estimated," "project" or "outlook" or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify forward-looking statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.

Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to, those listed under "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K filed with the SEC on March 27, 2009, such as the overall economy and the interest rate environment; the ability of customers to repay their obligations; the adequacy of the allowance for loan losses; competition; significant changes in accounting, tax or regulatory practices and requirements; certain interest rate risks; risks associated with investments in mortgage-backed securities; and risks associated with speculative construction lending. Although management has taken certain steps to mitigate any negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and could have an adverse effect on profitability. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as required by law.

Recent Developments

There have been historical disruptions in the financial system during the past year and many lenders and financial institutions have reduced, modified or ceased to provide certain types of funding to borrowers, including other lending institutions. The availability of credit and confidence in the entire financial sector have been adversely affected and there has been increased volatility in financial markets. These disruptions have had and are likely to continue to have a material impact on institutions in the U.S. banking and financial industries. The Federal Reserve System has been providing vast amounts of liquidity into the banking systems to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserve's activities or capacity could reduce liquidity in the markets, thereby potentially increasing funding costs to the Bank or reducing the availability of funds to the Bank to finance its existing operations.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008

Summary

The Company realized net income of $534,610 for the three months ended June 30, 2009, a decrease of 25.5% from the $717,846 reported for the three months ended June 30, 2008. The decrease is due primarily to increases in non-interest expenses relating to other operating expenses (primarily professional fees and expenses related to operating the Bank's other real estate owned properties), FDIC insurance premiums and salaries and employee benefits and to an increase in the loan loss provision for the three months ended June 30, 2009, which resulted from a higher level of non-performing assets during the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Net income for the three months ended June 30, 2009 benefited from an income tax benefit realized in the quarter and increases in total interest income and non-interest income when compared to the three months ended June 30, 2008. Diluted net income per common share was $0.08 for the three months ended June 30, 2009 compared to $0.17 per diluted common share for the three months ended June 30, 2008. The reduction in net income per diluted common share for the three months ended June 30, 2009 was also impacted by the dividends on, and accretion on, preferred stock of the Company issued to the Treasury on December 23, 2008. All prior year per common share information has been adjusted for the effect of a 5% stock dividend declared on December 18, 2008 and paid on February 2, 2009 to shareholders of record on January 20, 2009.

Key performance ratios declined for the three months ended June 30, 2009 due to lower net income for that period compared to the three months ended June 30, 2008. Return on average assets and return on average equity were 0.35% and 3.81% for the three months ended June 30, 2009 compared to 0.59% and 6.90%, respectively, for the three months ended June 30, 2008.

A significant factor impacting the Company's net interest income has been the continued low level of market interest rates on loans and the resulting compression of the Company's net interest margin. The net interest margin for the three months ended June 30, 2009 was 3.40% as compared to the 3.60% net interest margin recorded for the three months ended June 30, 2008, a reduction of 20 basis points. The Federal Reserve has decreased the discount rate by 400 basis points since January 1, 2008, which has resulted in lower market interest rates on loans. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging interest rate environment.

The Company has a significant investment in federal agency-backed collateralized mortgage obligations and trust preferred securities. The Company does not have any investments in private issuer collateralized mortgage obligations. At June 30, 2009, the Company held collateralized mortgage obligations with an aggregate market value of $5,957,124 in the available for sale portfolio. These securities had an unrealized loss of $172,105. The Company held trust preferred securities in the available for sale portfolio with an aggregate market value of $1,381,387 and an unrealized loss of $1,074,655 at June 30, 2009. The Company also held trust preferred securities in the held to maturity portfolio with a cost of $992,904 and an unrealized loss of $809,442 at June 30, 2009. Several financial institutions have reported significant write-downs of the value of mortgage-related and trust preferred securities. Management has considered the severity and duration of the unrealized losses within the Company's collateralized mortgage obligations and trust preferred securities portfolios, and evaluated recent events specific to the issuers of these securities and their industries, as well as external credit ratings and downgrades thereto. Based on these considerations and evaluations, management does not believe that any of the Company's collateralized mortgage obligations or trust preferred securities are other-than-temporarily impaired as of June 30, 2009. Certain of these types of securities may also not be marketable except at significant discounts. While management of the Company is, as of the date of this report, unaware of any other-than-temporarily impairment in the Company's portfolio of these securities, market, entity or industry conditions could further deteriorate and result in the recognition of future impairment losses related to these securities.

Earnings Analysis

Net Interest Income

Net interest income, the Company's largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 82.6% of the Company's net revenues for the three-month period ended June 30, 2009 and 83.3% of net revenues for the three-month period ended June 30, 2008. Net interest income also depends upon the relative amount of interest-earning assets, interest-bearing liabilities, and the interest rate earned or paid on them.

The Company's net interest income increased by $508,427, or 12.7%, to $4,519,200 for the three months ended June 30, 2009 from the $4,010,773 reported for the three months ended June 30, 2008. The increase in net interest income was attributable to increased volume, which was more than sufficient to offset the reduced interest spread and margin.

Average interest earning assets increased by $85,338,512, or 18.7%, to $540,887,770 for the quarter ended June 30, 2009 from $455,549,258 for the quarter ended June 30, 2008. Overall, the yield on interest earning assets on a tax-equivalent basis, decreased 74 basis points to 5.67% for the quarter ended June 30, 2009 when compared to 6.41% for the quarter ended June 30, 2008.

Average interest bearing liabilities increased by $98,030,859, or 27.0%, to $460,492,354 for the quarter ended June 30, 2009 from $362,461,495 for the quarter ended June 30, 2008. Overall, the cost of total interest bearing liabilities decreased 85 basis points to 2.68% for the three months ended June 30, 2009 compared to 3.53% for the three months ended June 30, 2008.

The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.40% for the three months ended June 30, 2009 compared to 3.60% the three months ended June 30, 2008.

Non-Interest Income

Total non-interest income for the three months ended June 30, 2009 was $952,924, an increase of $148,020, or 18.4%, over non-interest income of $804,904 for the three months ended June 30, 2008.

Service charges on deposit accounts represents a significant source of non-interest income. Service charge revenues increased by $18,679, or 9.5%, to $216,235 for the three months ended June 30, 2009 from the $197,556 for the three months ended June 30, 2008. This increase was the result of a higher volume of uncollected funds and overdraft fees collected on deposit accounts during the second quarter of 2009 compared to the second quarter of 2008.

Gain on sales of loans increased by $55,434, or 19.4%, to $340,993 for the three months ended June 30, 2009 when compared to $285,559 for the three months ended June 30, 2008. The Bank sells both residential mortgage loans and SBA loans in the secondary market. The volume of mortgage loan sales increased for the second quarter of 2009 compared to the second quarter of 2008, and the margin earned as a result of these sales in the second quarter of 2009 decreased from that of the second quarter of 2008 due to the lower level of interest rates in the first quarter of 2009. The lower interest rate environment that continued throughout 2008 and into the second quarter of 2009 has significantly decreased the volume of sales transactions in the 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 $102,305 for the three months ended June 30, 2009 compared to $92,818 for the three months ended June 30, 2008. The Bank purchased tax-free BOLI assets to partially offset the cost of employee benefit plans and reduced the Company's overall effective tax rate.

The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rental, wire transfer service fees and Automated Teller Machine fees for non-Bank customers. Increased customer demand for these services contributed to the other income component of non-interest income amounting to $293,391 for the three months ended June 30, 2009, compared to $228,971 for the three months ended June 30, 2008.

Non-Interest Expense

Non-interest expenses increased by $1,184,547, or 32.7%, to $4,801,689 for the
three months ended June 30, 2009 from $3,617,142 for the three months ended June
30, 2008. The following table presents the major components of non-interest
expenses for the three months ended June 30, 2009 and 2008.

      Non-interest Expenses
                                                  Three months ended June 30,
                                                     2009               2008
      Salaries and employee benefits            $     2,294,066      $ 2,073,066
      Occupancy expenses                                443,007          432,423
      Equipment expense                                 167,358          153,583
      Marketing                                          42,773           73,206
      Data processing services                          276,197          217,811
      Regulatory, professional and other fees           358,547          273,191
      FDIC insurance expense                            704,025           46,635
      Office expense                                    142,999          144,526
      All other expenses                                372,717          202,701
                                                $     4,801,689      $ 3,617,142

Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $221,000, or 10.7%, to $2,294,066 for the three months ended June 30, 2009 compared to $2,073,066 for the three months ended June 30, 2008. The increase in salaries and employee benefits for the three months ended June 30, 2009 was a result of an increase in the number of employees, regular merit increases and increased health care costs. Staffing levels overall increased to 119 full-time equivalent employees at June 30, 2009 as compared to 108 full-time equivalent employees at June 30, 2008.

Regulatory, professional and other fees increased by $85,356, or 31.2%, to $358,547 for the three months ended June 30, 2009 compared to $273,191 for the three months ended June 30, 2008. During the second quarter of 2009, the Company incurred additional legal fees primarily in connection with the recovery of non-performing asset balances. The Bank also incurred additional fees in connection with examinations performed by independent consultants during the second quarter of 2009 to assess the effectiveness of internal controls as required by the Sarbanes-Oxley Act.

The cost of FDIC deposit insurance has increased from $46,635 for the three months ended June 30, 2008 to $704,025 for the three months ended June 30, 2009. The FDIC has recently increased significantly the assessment rate for deposit insurance industry-wide. In addition, during the second quarter of 2009, the FDIC announced that a special assessment to replenish the deposit insurance fund will be collected on September 30, 2009. The special assessment will be imposed on each insured institution's total assets minus its Tier 1 Capital as reported in its June 30, 2009 Report of Condition. The special assessment is capped at 10 basis points times the institution's assessment base as reported on June 30, 2009. Under U.S. generally accepted accounting principals, the full amount of the estimated special assessment was accrued as a liability and an expense in the quarter ended June 30, 2009. The Bank estimated and accrued the special assessment at June 30, 2009.

Data processing services increased by $58,386, or 26.8%, to $276,197 for the three months ended June 30, 2009 compared to $217,811 for the three months ended June 30, 2008. The increase in expense was primarily attributable to increased costs in enhancing the Bank's data security systems.

All other expenses increased by $170,016, or 83.9%, to $372,717 for the three months ended June 30, 2009 compared to $202,701 for the three months ended June 30, 2008. The primary cause for the current year increase was due to the costs incurred to maintain the Bank's other real estate owned properties. Other Real Estate owned expenses increased by $13,667 to $55,603 to for the three months ended June 30, 2009 compared to $41,936 for the three months ended June 30, 2008. Additional current year increases occurred in correspondent bank fees, maintenance agreements and ATM operating expenses. All other expenses are comprised of a variety of operating expenses and fees as well as expenses associated with lending activities.

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 87.7% for the three months ended June 30, 2009, compared to 75.1% for the three months ended June 30, 2008. The increase in the efficiency ratio is due to the above-noted increases in non-interest expenses.

Income Taxes

Income tax benefit was $189,175 for the three months ended June 30, 2009 compared to tax expense of $285,689 for the three months ended June 30, 2008. The current period benefit was primarily due to (1) a significantly lower level of pretax income in the second quarter of 2009 compared with the second quarter of 2008 and (2) the reversal of a prior year over-accrual of income taxes that coincided with the completion of an Internal Revenue Service examination of the Company's 2007 and 2006 Federal income tax returns.

Pretax income decreased to $345,435 for the three months ended June 30, 2009 from $1,003,535 for the three months ended June 30, 2008. The decrease is due primarily to current period increases in non-interest expenses relating to professional fees, FDIC insurance premiums and to an increase in the loan loss provision for the three months ended June 30, 2009, which loan loss provision increase resulted from a higher level of non-performing assets at June 30, 2009 compared to June 30, 2008.

During June 2009, the Internal Revenue Service completed an examination of the Company's 2007 and 2006 Federal tax returns and issued its Revenue Agent Report on June 30, 2009. The Company had deferred the annual process of adjusting the recorded Federal and State liability balances pending the completion of the examination, which began in September 2008. The examination adjustments were included in this annual process of adjusting recorded liabilities with balances per the tax returns and resulted in over-accrued Federal and State liabilities being reversed via a current period credit to income tax expense.

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008

Summary

The Company realized net income of $1,011,300 for the six months ended June 30, 2009, a decrease of 33.5% from the $1,520,043 reported for the six months ended June 30, 2008. The decrease is due primarily to increases in non-interest expenses relating to other operating expenses (primarily professional fees and expenses related to operating the Bank's other real estate owned properties), FDIC insurance premiums and salaries and employee benefits and to an increase in the loan loss provision for the six months ended June 30, 2009, which resulted from a higher level of non-performing assets during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Net income for the six months ended June 30, 2009 benefited from an income tax benefit realized in the six month period ended June 30, 2009 compared to income tax expense for the six month period ended June 30, 2008 and increases in total interest income and non-interest income when compared to the six months ended June 30, 2008. Diluted net income per common share was $0.15 for the six months ended June 30, 2009 compared to $0.36 per diluted common share for the six months ended June 30, 2008. The reduction in net income per diluted common share for the six months ended June 30, 2009 was also impacted by the dividends on, and accretion on, preferred stock of the Company issued to the Treasury on December 23, 2008. All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 18, 2008 and paid on February 2, 2009 to shareholders of record on January 20, 2009.

Key performance ratios declined for the six months ended June 30, 2009 due to lower net income for that period compared to the six months ended June 30, 2008. Return on average assets and return on average equity were 0.35% and 3.65% for the six months ended June 30, 2009 compared to 0.65% and 7.34%, respectively, for the six months ended June 30, 2008.

A significant factor impacting the Company's net interest income has been the continued low level of market interest rates on loans and the resulting compression of the Company's net interest margin. The net interest margin for the six months ended June 30, 2009 was 3.34% as compared to the 3.74% net interest margin recorded for the six months ended June 30, 2008, a reduction of 40 basis points. The Federal Reserve has decreased the discount rate by 400 basis points since January 1, 2008, which has resulted in lower market interest rates on loans. Since the majority of the Company's interest earning assets earn at floating rates, these interest rate reductions have resulted in a decreased yield. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging interest rate environment.

The Company has a significant investment in federal agency-backed collateralized mortgage obligations and trust preferred securities. The Company does not have any investments in private issuer collateralized mortgage obligations. At June 30, 2009, the Company held collateralized mortgage obligations with an aggregate market value of $5,957,124 in the available for sale portfolio. These securities had an unrealized loss of $172,105. The Company held trust preferred securities in the available for sale portfolio with an aggregate market value of $1,381,387 and an unrealized loss of $1,074,655 at June 30, 2009. The Company also held trust preferred securities in the held to maturity portfolio with a cost of $992,904 and an unrealized loss of $809,442 at June 30, 2009. Several financial institutions have reported significant write-downs of the value of mortgage-related and trust preferred securities. Management has considered the severity and duration of the unrealized losses within the Company's collateralized mortgage obligations and trust preferred securities portfolios, and evaluated recent events specific to the issuers of these securities and their industries, as well as external credit ratings and downgrades thereto. Based on these considerations and evaluations, management does not believe that any of the Company's collateralized mortgage obligations or trust preferred securities are other-than-temporarily impaired as of June 30, 2009. Certain of these types of securities may also not be marketable except at significant discounts. While management of the Company is, as of the date of this report, unaware of any other-than-temporarily impairment in the Company's portfolio of these securities, market, entity or industry conditions could further deteriorate and result in the recognition of future impairment losses related to these securities.

Earnings Analysis

Net Interest Income

Net interest income, the Company's largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 82.9% of the Company's net revenues for the six month period ended June 30, 2009 and 83.4% of net revenues for the six-month period ended June 30, 2008. Net interest income also depends upon the relative amount of interest-earning assets, interest-bearing liabilities, and the interest rate earned or paid on them.

The following table sets forth the Company's consolidated average balances of assets, liabilities and shareholders' equity as well as interest income and expense on related items, and the Company's average yield or rate for the six month periods ended June 30, 2009 and 2008, respectively. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.

Average Balance Sheets with Resultant Interest and Rates

(yields on a
tax-equivalent       Six months ended June 30, 2009    Six months ended June 30, 2008
basis)
. . .