Item 1.      Description of Business

1st Constitution Bancorp

      1st Constitution Bancorp (the “Company”) is a New Jersey state chartered bank holding company organized in February, 1999. The Company was incorporated for the purpose of acquiring all of the issued and outstanding stock of 1st Constitution Bank (the “Bank”) 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 investment in the Bank, the Company currently conducts no other significant business activities.

      As of December 31, 2001, the Company, on a consolidated basis, had total assets of approximately $223.2 million, total deposits of approximately $184.3 million, total loans of approximately $124.9 million and total shareholders’ equity of approximately $17.4 million.

      The main office of the Company and the Bank is located at 2650 Route 130 North, Cranbury, New Jersey 08512, and the telephone number is (609) 655-4500.

1st Constitution Bank

      The Bank, a commercial bank formed under the laws of the State of New Jersey, engages in the business of commercial and retail banking. As a community bank, the Bank offers a wide range of services (including demand, savings and time deposits and commercial and consumer/installment loans) to individuals, small businesses and not-for-profit organizations principally in Middlesex, Mercer and Somerset Counties, New Jersey. The Bank conducts its operations through its main office located in Cranbury, New Jersey, and four branch offices in downtown Cranbury, Hamilton Square, Plainsboro and Montgomery Township, New Jersey. The Bank’s deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”).

      The Bank began operations in August 1989 during a period of slower economic expansion and a severe downturn in the real estate market in New Jersey The Bank experienced modest profitability in the early years of operation, but lagged behind its competition in performance. In September 1996, the Board of Directors designated a new management team to change the direction of the Bank. Management efforts have focused on positioning the Bank to meet the needs of the community in Middlesex, Mercer and Somerset Counties and to provide financial services to individuals, families, institutions and small businesses. To achieve this goal, the Bank is focusing its efforts on:

	•	personal service;
	•	expansion of its branch network;
	•	innovative product offerings; and
	•	technological advances and e-commerce

      Personal Service. The Bank provides a wide range of commercial and consumer banking services to individuals, families, institutions and small businesses in central New Jersey. The Bank’s focus is to understand the needs of the community and the customers and tailor products, services and advance to meet those needs. The Bank seeks to provide a high level of personalized banking services, emphasizing quick and flexible responses to customer demands.

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      Expansion of Branch Banking. The Bank continually evaluates opportunities for branch bank expansion, either mini branches or full service banks, to continue to grow and meet the needs of the community. During the first quarter of 2002, the Bank is scheduled to open a sixth branch banking office located at The Windrows at Princeton, New Jersey. Negotiations are also underway to open a seventh office in eastern Middlesex County, which, if negotiations are successful, is projected to open in the last half of 2002. The Company can provide no assurance that negotiations will be successful or, if successful, will be completed on the current schedule.

      Significant bank merger activity has occurred in recent years. During 2001, the state’s largest bank, Summit, merged with Fleet, a Northeast super regional bank with locations in New Jersey. This merger resulted in the closing of several branch locations throughout the Bank’s market area. Where appropriate, the Bank evaluates the potential acquisition of one or more of these branches.

      Innovative Product Offerings. During the fourth quarter of 2001, the Bank entered into an agreement to provide discount brokerage services to customers through AmeriVest Online Brokerage Services. A link on the Bank’s website will enable customers to carry out discounted securities trading, with the Bank sharing in the commissions generated. This added feature to the Bank’s website allows the Bank to offer sophisticated financial services to its customers, thereby adding value and convenience.

      In 2000, the Bank introduced “1st Choice Banking”, a seamless cash management solution that links checking and investments into one account for customers. With a minimum balance of $10,000, customers enjoy all the flexibility of a free checking account while earning an investment rate of return which keeps pace with the current short-term money markets.

      Technological Advances and e-Commerce. The Bank recognizes that customers want to receive service via their most convenient delivery channel, be it the traditional branch office, by telephone, ATM, or the Internet. For this reason, the Bank continues to enhance e-Commerce capabilities. At www.1stconstitution.com, customers have easy account access to online banking and bill payment system. Consumers can apply online for loans, execute trades through the Bank’s brokerage affiliate, and interact with senior management through the e-mail system. Business customers have access to cash management information and transaction capability through the Bank’s online Business Express, product offering. This overall expansion in electronic banking offers the Bank’s customers another means to access the Bank’s services easily and at their own convenience.

COMPETITION

      The Bank experiences substantial competition in attracting and retaining deposits and in making loans. In attracting deposits and borrowers, the Bank competes with commercial banks, savings banks, and savings and loan associations, as well as regional and national insurance companies and non-bank banks, regulated small loan companies and local credit unions, regional and national issuers of money market funds and corporate and government borrowers. Within the direct market area of the Bank, there are a significant number of offices of competing financial institutions. In New Jersey generally, and in the Bank’s local market specifically, large commercial banks, as well as savings banks and savings and loan associations, hold a dominant market share and there has been significant merger activity in the last few years, creating even larger competitors. Locally, the Bank’s most direct competitors include Fleet Bank, PNC Bank and Sovereign Bank. The Bank is at a competitive disadvantage compared with these larger regional commercial and savings banks. By virtue of their larger capital, asset size or reserves, many of such institutions have substantially greater lending limits (ceilings on the amount of credit a bank may provide to a single customer that are linked to the institution’s capital) and other resources than the Bank. In addition, many such institutions are empowered to offer a wider range of services, including trust services, than the Bank and, in some

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      In addition to having established deposit bases and loan portfolios, these institutions, particularly the large regional commercial and savings banks, have the ability to finance extensive advertising campaigns and to allocate considerable resources to locations and products perceived as profitable.

      Furthermore, in recent years non-bank financial institutions have begun to offer services which compete for deposits with the Bank, such as brokerage firms and insurance companies offering such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities. It is expected that competition in these areas will continue to increase. Some of these competitors are not subject to the same degree of regulation and supervision as the Company and the Bank and therefore may be able to offer customers more attractive products than the Bank.

      However, management of the Bank believes that loans to small and mid-sized businesses and professionals are not always of primary importance to the larger banking institutions, whereas they represent the main commercial loan business of the Bank. The Bank competes for this segment of the market by providing responsive personalized services, local decision-making and knowledge of its customers and their businesses.

Lending Activities

      The Company’s lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources including real estate broker referrals, mortgage loan companies, direct solicitation by the Company’s loan officers, existing depositors and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Company has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loan.

     Commercial Lending

      The Bank offers a variety of commercial loan services including term loans, lines of credit, equipment and receivable financing loans. A broad range of short-to-medium term commercial loans, both secured and unsecured are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition and development of real estate and improvements), and the purchase of equipment and machinery. At times, the Company also makes construction loans to real estate developers for the acquisition, development and construction of residential subdivisions.

      Commercial loans are granted based on the borrower’s ability to generate cash flow to support its debt obligations and other cash related expenses. A borrower’s ability to repay commercial loans is substantially dependent on the success of the business itself and on the quality of its management. As a general practice, the Bank takes as collateral a security interest in any available real estate, equipment, inventory, receivables or other personal property of its borrowers, although occasionally the Bank makes commercial loans on an unsecured basis. Generally, the Bank requires personal guaranties of its commercial loans to offset the risks associated with such loans.

     Residential Consumer Lending

      A portion of the Bank’s lending activities consists of the origination of fixed and adjustable rate residential mortgage loans secured by owner-occupied property located in the Bank’s primary market areas. Home mortgage lending is unique in that a broad geographic territory may be services by originators working from strategically

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placed offices either within the Bank's traditional banking facilities or from affordable storefront locations in commercial buildings. In addition, the Bank offers construction loans, second mortgage home improvement loans and home equity lines of credit.

      The Bank finances the construction of individual, owner-occupied houses on the basis of written underwriting and construction loan management guidelines. First mortgage construction loans are made to solvent and competent contractors on both a pre-sold and a “speculation” basis. Such loans are also made to qualified individual borrowers and are generally supported by a take-out commitment from a permanent lender. The Bank makes residential construction loans to individuals who intend to erect owner occupied housing on a purchased parcel of real estate. The construction phase of these loans have certain risks, including the viability of the contractor, the contractor’s ability to complete the project and changes in interest rates.

      In most cases, the Bank will sell its mortgage loans with terms of 15 years or more in the secondary market. The sale to the secondary market allows the Bank to hedge against the interest rate risks related to such lending operations. This brokerage arrangement allows the Bank to accommodate its clients’ demands while eliminating the interest rate risk for the 15 to 30 year period generally associated with such loans.

      The Bank in most cases requires title, fire, extended casualty insurance, and where required by applicable regulations, flood insurance to be obtained by the borrower. The Bank maintains its own errors and omissions insurance policy to protect against loss in the event of failure of a mortgagor to pay premiums on fire and other hazard insurance policies. Mortgage loans originated by the Bank customarily include a “due on sale’’ clause giving the Bank the right to declare a loan immediately due and payable in the event, among other matters, that the borrower sells or otherwise disposes of the real property subject to a mortgage. In general, the Bank enforces due on sales clauses. Borrowers are typically permitted to refinance or repay loans at their option without penalty.

    Non-Residential Consumer Lending

      Non-residential consumer loans made by the Bank include loans for automobiles, recreation vehicles, boats, personal (secured and unsecured) and deposit account secured loans. The Bank also conducts various indirect lending activities through established retail companies in its market areas. Non-residential consumer loans are attractive to the Bank because they typically have a shorter term and carry higher interest rates than that charged on other types of loans. Non-residential consumer loans, however, do pose additional risk of collectibility when compared to traditional types of loans granted by commercial banks such as residential mortgage loans.

      Consumer loans are granted based on employment and financial information solicited from prospective borrowers as well as credit records collected from various reporting agencies. Stability of the borrower, willingness to pay and credit history are the primary factors to be considered. The availability of collateral is also a factor considered in making such a loan. The Bank seeks collateral that can be assigned and has good marketability with a clearly adequate margin of value. The geographic area of the borrower is another consideration, with preference given to borrowers in the Bank's primary market areas.

Supervision and Regulation

      Banking is a complex, highly regulated industry. The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of monetary policy. In furtherance of those goals, Congress has created several largely autonomous regulatory agencies and enacted myriad legislation that governs banks, bank holding companies and the banking industry. This regulatory

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The Company

      State and Federal Bank Holding Company Regulations

      The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHCA”). As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may also make examinations of the Company and its subsidiaries. In addition, the Company is subject to capital standards similar to, but separate from, those applicable to the Bank.

      Under the BHCA, bank holding companies that are not financial holding companies (as defined below) generally may not acquire the ownership or control of more than 5% of the voting shares, or substantially all the assets, of any company, including a bank or another bank holding company, without the Federal Reserve Board’s prior approval. The Company is not a financial holding company and did obtain such approval to acquire the shares of the Bank. A bank holding company that does not qualify as a financial holding company is generally limited in the types of activities in which it may engage to those that the Federal Reserve Board has recognized as permissible for bank holding companies prior to the date of enactment of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”). At present, the Company does not engage in any significant activity other than owning a bank.

      A holding company and its banking subsidiary are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services.

      The GLBA was enacted in November 1999 and most provisions of which became effective in March 2000, permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as “financial holding company”. A financial holding company essentially is a bank holding company with significantly expanded powers. The Company has not elected to become a financial holding company. The Company believes that the GLBA will not have a material adverse effect on its operations in the near-term. However, to the extent that it permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets that the Company currently serves.

      In addition to Federal bank holding company regulation, the Company is registered as a bank holding company with the New Jersey Department of Banking and Insurance (the “Department”). The Company is required to file with the Department copies of the reports it files with the Federal banking and securities regulators.

      Capital Adequacy

      The Company is required to comply with minimum capital adequacy standards established by the Federal Reserve. There are two basic measures of capital adequacy for bank holding companies and the depository institutions that they own: a risk based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be considered in compliance.

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      The risk-based capital guidelines for bank holding companies, such as the Company currently require a minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, less goodwill. The remainder (Tier 2 capital) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance. At December 31, 2001, the Company maintained a Tier 1 capital ratio of 11.86% and total qualifying capital ratio of 12.82%.

      In addition to the risk-based capital guidelines, the Federal banking regulators established minimum leverage ratio (Tier 1 capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company’s leverage ratio at December 31, 2001 was 7.57%.

      Restrictions on Dividends

      The primary source of dividends paid to the Company’s stockholders is dividends paid to the Company by the Bank. Dividend payments by the Bank to the Company are subject to the New Jersey Banking Act of 1948 (the “Banking Act”) and the Federal Deposit Insurance Act (the “FDIA”). Under the Banking Act and the FDIA, the Bank may not pay any dividends, if after paying the dividend, it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

      It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividend that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary.

      The Bank has never paid a cash dividend, and the Bank’s Board of Directors does not plan to pay a cash dividend in the foreseeable future. The Bank paid a stock dividend every year from 1993 to 1999 when it was acquired by the Company. The Company has paid a 5% stock dividend every year since its formation in 1999, and anticipates the consideration of stock dividends in the future.

      Priority on Liquidation

      The Company is a legal entity separate and distinct from the Bank. The rights of the Company as the sole shareholder of the Bank, and therefore the rights of the Company’s creditors and shareholders, to participate in the distributions and earnings of the Bank when the Bank is not in bankruptcy, are subject to various state and federal law restrictions as discussed above under the heading “Restrictions of Dividends.” Under state corporation and other laws and federal bankruptcy laws, the Company’s right as shareholder to participate in the distribution of assets of the Bank upon the Bank’s liquidation or reorganization will be subject to the prior claims of creditors of the Bank. In the event of a liquidation or other resolution of an insured depository institution such as the Bank, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over

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The Bank

      The Bank, a New Jersey-chartered commercial bank, is subject to supervision and examination by the New Jersey Department of Banking and Insurance. In addition, because the deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) the Bank is subject to regulation by the FDIC.

      The Bank must comply with various requirements and restrictions under Federal and state law, including the maintenance of reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, limitations on the types of investments that may be made and the services that may be offered, and restrictions on dividends as described in the preceding section. Consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board which influence the money supply and credit availability in the national economy.

      Community Reinvestment Act

      Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with CRA. CRA requires the FDIC to assess an institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the applicable institution. The CRA requires public disclosure of an institution’s CRA rating and requires that the FDIC provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. An institution’s CRA rating is considered in determining whether to grant charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions. Performance less than satisfactory may be the basis for denying an application. The Bank is currently rated “satisfactory” under CRA.

      Insurance of Deposits

      The Bank’s deposits are insured up to a maximum of $100,000 per depositor under the Bank Insurance Fund (“BIF”). The Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”) is applicable to depository institutions and deposit insurance. FDICIA requires the FDIC to establish a risk-based assessment system for all insured depository institutions. Under this legislation, the FDIC is required to establish an insurance premium assessment system based upon: (i) the probability that the insurance fund will incur a loss with respect to the institution, (ii) the likely amount of the loss, and (iii) the revenue needs of the insurance fund. In compliance with this mandate, the FDIC has developed a matrix that sets the assessment premium for a particular institution in accordance with its capital level and overall rating by the primary regulator. Under the matrix as currently in effect, the assessment rate ranges from 0 to 27 basis points of assessed deposits. The Bank is also subject to a quarterly FICO assessment.

Employees

      The Company is a bank holding company and has two paid employees. Banking operations are conducted by the Bank, and as of December 31, 2001, the Bank had 48

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full-time employees and 9 part-time employees. The Bank’s employees are not represented by any collective bargaining group. The Bank considers its relations with such employees to be good.

Special Factors

     The Common Stock of the Company is speculative in nature and involves a significant degree of risk. The special factors below are not listed in order of importance.

Competition

     The Company faces significant competition from many other banks, savings institutions and other financial institutions which have branch offices or otherwise operate in the Company’s market area. Non-bank financial institutions, such as securities brokerage firms, insurance companies and money market funds, have also recently been permitted to engage in activities which compete directly with traditional bank business which has also led to greater competition. Many of these competitors have substantially greater financial resources than the Company, including larger capital bases that allow them to attract customers seeking larger loans than the Company is able to accommodate and the ability to aggressively advertise their products. There can be no assurance that the Company and the Bank will be able to successfully compete in the future. See “DESCRIPTION OF BUSINESS—Competition.”

Economic Conditions and Related Uncertainties

     Commercial banking is affected, directly and indirectly, by local, domestic, and international economic and political conditions, and by government monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, scarce natural resources, real estate values, international conflicts and other factors beyond the control of the Company may adversely affect the potential profitability of the Company. Management does not expect any particular factor to affect the Company’s results of operations. However, a downtrend in several areas, such as real estate, construction and consumer spending, could have a material adverse impact on the Company’s ability to maintain or increase profitability.

Federal and State Government Regulation

      The operations of the Company and the Bank are heavily regulated and will be affected by present and future legislation and by the policies established from time to time by various Federal and state regulatory authorities. In particular, the monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the past and are expected to continue to do so in the future. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives is changes in the discount rate charged on bank borrowings. It is not possible to predict what changes, if any, will be made to the monetary policies of the Federal Reserve Board or to existing Federal and state legislation or the effect that such changes may have on the future business and earnings prospects of the Company.

      The Company and the Bank are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Compliance with the rules and regulations of these agencies may be costly and may limit growth and restrict certain activities, including payment of dividends, investments, loans and interest rate charges, interest rates paid on deposits, and location of offices. The Bank is also subject to capitalization guidelines set forth in federal legislation. See “BUSINESS — Supervision and Regulation.”

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     The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the impact of these changes on our business and profitability. Because government regulation greatly effects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect the Company’s ability to operate profitably.

Forward Looking Statements

     When used in this and in future filings by the Company with the Securities and Exchange Commission, 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 likely result,” “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 above under “Special Factors”, 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; and technological changes. 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 have an adverse effect on profitability. Such risks and other aspects of the Company’s business and operations are described in “Description of the Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company has no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Item 2.      Description of Property

General

     The Company’s and the Bank’s principal office in Cranbury, New Jersey (the “Principal Office”) which it occupies under a lease, was sold in December 2000 by Constitution Center, LLC, a limited liability company which includes certain Company and Bank directors as members, to an unrelated third party. See “Certain Relationships and Related Transactions.” The new building owner assumed the existing lease and terms. The current lease provides for an aggregate monthly rental of $17,428 subject to annual rental increases plus real estate taxes and certain common space charges allocated by the landlord and expires in December 2010. The Bank has 2 additional 5 year renewal periods. The Bank also has the right of first refusal to purchase the premises of which the Principal Office is a part on the same terms and conditions as contained in any bona fide offer.

     The Bank also leases approximately 2,400 square feet for its branch office in Montgomery Township, New Jersey for an aggregate monthly rental of $5,362. This lease expires on September 30, 2004.

     The Bank also leases approximately 3,780 square feet for its branch office in downtown Cranbury, New Jersey for an aggregate monthly rental of $3,460 per month. This lease expires on August 15, 2002 and the Bank may renew the lease for two five (5) year periods at aggregate monthly rental rates adjusted based on the consumer price index. The Bank has the right of first refusal to purchase this branch office on the same terms and conditions as contained in any bona fide offer. Notwithstanding receipt of a bona fide offer, the Bank also has the option to purchase this branch

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office at any time during the initial term or renewal term provided the Bank has exercised its option to renew the lease for the branch office.

      In March 1998, the Bank entered into a lease for the branch located in Plainsboro, New Jersey. This lease expires on June 8, 2003 and provides for the rental of approximately 2,000 square feet. The Bank has three five (5) year renewal options for this space. The aggregate monthly payment for this lease is $2,810 with annual escalations.

      The Bank entered into a lease for the branch located in Hamilton Square, New Jersey in April 1999. This lease expires in July, 2014 and provides for a rental of approximately 4,170 square feet. The Bank has two five year renewal options for this space. The aggregate monthly rental payment for this lease is $8,320 with annual escalations.

      Management believes the foregoing facilities are suitable for the Company’s and the Bank’s present and projected operations.

Item 3.      Legal Proceedings.

      None.

Item 4.      Submission of Matters to a Vote of Security Holders.

      No matters were submitted for a vote of the Company’s shareholders during the fourth quarter of 2001.

PART II

Item 5.      Market for Registrant’s Common Equity and Related Shareholder Matters.

      The common stock of the Company commenced trading on the NASDAQ national market system under the trading symbol FCCY on December 28, 2001. Prior to that time, the Company’s common stock was traded in the over the counter market and bid and ask prices were available from the OTC Bulletin Board. Following are the high and low bid prices for 2000 and 2001, based on information obtained from the OTC Bulletin Board. All such bid prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

		2001								2000
		High Bid				Low Bid				High Bid				Low Bid
First Quarter		$	15.60			$	9.52	(1)		$	16.55			$	14.29	(1)(2)
Second Quarter		$	13.57			$	12.32	(1)		$	15.19			$	10.20	(1)(2)
Third Quarter		$	17.33			$	13.23	(1)		$	11.33			$	9.07	(1)(2)
Fourth Quarter		$	20.95			$	15.38	(1)		$	10.77			$	7.67	(1)

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(1)	Prices have been retroactively adjusted for the 5% stock dividend paid January 31, 2002.
(2)	Prices have been retroactively adjusted for the 5% stock dividend paid January 31, 2001.

      There are approximately 421 registered holders of the Company’s common stock.

      The Company paid a 5% stock dividend on January 31, 2002 and January 31, 2001. The Company has never paid a cash dividend and there are no plans to pay a cash dividend at this time. The Company will retain its earnings in order to provide capital for growth of the Bank.

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Item 6.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

      This information is incorporated by reference from the Company’s 2001 Annual Report to Shareholders on pages 21-35 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 7.	Financial Statements and Supplementary Data

      The Consolidated Financial Statements, Notes to Consolidated Financial Statements and Independent Auditor’s Report thereon is incorporated by reference from pages 4-20 of the 2001 Annual Report to Shareholders.

 

Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

Part III

 

Item 9.	Directors and Executive Officers of the Registrant

      The information required by this item is incorporated by reference from pages 3-5 under the caption “Directors and Executive Officers” of the Company’s Proxy Statement for its 2002 Annual Meeting of Shareholders.

 

Item 10.	Executive Compensation

      The information required by this item is incorporated by reference from pages 6-8 under the caption “Executive Compensation” of the Company’s Proxy Statement for its 2002 Annual Meeting of Shareholders.

 

Item 11.	Security Ownership of Certain Beneficial Owners and Management

      The information required by this item is incorporated by reference from pages 4-5 under the caption “Stock Ownership of Management and Principal Shareholders” of the Company’s Proxy Statement for its 2002 Annual Meeting of Shareholders.

 

Item 12.	Certain Relationships and Related Transactions

      This information required by this item is incorporated by reference from page 9 under the caption “Certain Transactions with Management” of the Company’s Proxy Statement for its 2002 Annual Meeting of Shareholders.

 

Item 13.	Exhibits, Financial Statements Schedules, and Reports on Form 8-K

      (a) Financial Statements and Financial Statement Schedules

      The following documents are filed as part of this report:

	1.	Financial Statements of 1st Constitution Bancorp.
		Consolidated Statements of Condition — December 31, 2001 and 2000.
		Consolidated Statements of Income — Years Ended December 31, 2001, 2000 and 1999.

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                Consolidated Statements of Changes in Shareholders’ Equity — Years Ended December 31, 2001, 2000 and 1999.

                Consolidated Statements of Cash Flows — Years Ended December 31, 2001, 2000, and 1999.

                Independent Auditor’s Report.

These statements are incorporated by reference to the Company’s Annual Report to Shareholders for the year ended December 31, 2001.

	2.	All schedules are omitted because either they are inapplicable or not required, or because the information required therein is included in the Consolidated Financial Statements and Notes thereto.
	3.	Exhibits

Exhibit
Number				Description
	3.1			Certificate of Incorporation of the Company(1)
	3.2			Bylaws of the Company(1)
	4.1			Specimen Share of Common Stock
	10.1			Amended and Restated 1990 Employees Stock Option Plan, as amended(1)
	10.2			1996 Employee Stock Option Plan, as amended(1)
	10.3			2000 Employee Stock Option Plan (1)
	10.4			Stock Option Plan for Non-Employee Directors(1)
	10.5			Employment Agreement between the Company and Robert F. Mangano dated April 22, 1999(1)
	13.1			2001 Annual Report to Security Holders
	21			Subsidiaries of the Registrant

	(1)	Incorporated by reference to the Registrants Form 10-SB filed with the Securities and Exchange Commission on June 15, 2001.

14

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Table of Contents

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.

	/s/ ROBERT F. MANGANO
	Robert F. Mangano
	President and Chief Executive Officer

March 21, 2002

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Capacity		Date
/s/ EDWARD D. KNAPP Edward D. Knapp		Director and Chairman of the Board		March 21, 2002
/s/ ROBERT F. MANGANO Robert F. Mangano		President and Chief Executive Officer and Director		March 21, 2002
/s/ CHARLES S. CROW, III Charles S. Crow, III		Director		March 21, 2002
/s/ WILLIAM M. RUE William M. Rue		Director		March 21, 2002
/s/ FRANK E. WALSH, III Frank E. Walsh, III		Director		March 21, 2002
/s/ JOSEPH M. REARDON Joseph M. Reardon		Principal Accounting Officer		March 21, 2002

 

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Table of Contents

1ST CONSTITUTION BANCORP

INDEX TO EXHIBITS

Exhibit
Number				Description
	3.1			Certificate of Incorporation of the Company(1)
	3.2			Bylaws of the Company(1)
	4.1			Specimen Share of Common Stock
	10.1			Amended and Restated 1990 Employees Stock Option Plan, as amended(1)
	10.2			1996 Employee Stock Option Plan, as amended(1)
	10.3			2000 Employee Stock Option Plan (1)
	10.4			Stock Option Plan for Non-Employee Directors(1)
	10.5			Employment Agreement between the Company and Robert F. Mangano dated April 22, 1999(1)
	13.1			2001 Annual Report to Security Holders
	21			Subsidiaries of the Registrant

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(1)	Incorporated by reference to the Registrants Form 10-SB filed with the Securities and Exchange Commission on June 15, 2001.

 

NUMBER		Exhibit 4.1

See Reverse for certain definitions

INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY

1ST CONSTITUTION BANCORP

 

	TOTAL AUTHORIZED ISSUE	See Reverse for
	10,000,000 SHARES WITHOUT PAR VALUE COMMON STOCK	Certain Definitions

 

 

 

 

 

This is to Certify that  __________________________________________________________  is the owner of

______________________________________________________________________________  fully paid and
non-assessable shares of the above Corporation transferrable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed.
Witness , the seal of the Corporation and the signatures of its duly authorized officers.
Dated

 

SECRETARY		PRESIDENT

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      The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM		• as tenants in common		UNIF GIFT MIN ACT- ...................... Custodian .....................                                             (Cust)                            (Minor)
TEN ENT		• as tenants by the entireties		under Uniform Gifts to Minors Act ...................                                                             (State)
JT TEN		• as joint tenants with right of survivorship and not as tenants in common
		Additional abbreviations may also be used though not in the above list

For value received                hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER

IDENTIFYING NUMBER OF ASSIGNEE

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(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)

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                                                                                                                                                         Shares

represented by the within Certificate, and do hereby irrevocably constitute and appoint

                                                                                                                                                         Attorney

to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises.

      Dated                                                  

                                         In presence of

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NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE

NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR

WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

 

Financial Highlights

																							Four Year
																							Compounded
																							Growth Rate
For years ended December 31			2001				2000				1999				1998				1997				1997-2001
Highlights
	Net income		$	2,152,001			$	1,729,778			$	1,446,842			$	1,000,097			$	592,539				38.0	%
	Return on average assets			1.03	%			1.08	%			1.03	%			0.89	%			0.68	%
	Return on average equity			13.17	%			13.09	%			11.74	%			10.84	%			10.01	%
	Net interest margin			4.04	%			4.75	%			4.29	%			4.36	%			4.34	%
Income Statement Data
	Net interest income		$	8,054,847			$	7,167,837			$	5,629,062			$	4,611,737			$	3,563,314				22.6	%
	Provision for loan losses			300,000				215,875				188,875				178,000				169,000
	Non-interest income			1,505,222				865,878				1,270,868				1,004,970				452,137
	Non-interest expenses			5,870,931				5,095,732				4,425,213				3,859,510				2,949,623
Balance Sheet Data at December 31
	Total Assets		$	223,183,463			$	178,565,375			$	146,802,481			$	129,808,511			$	101,697,119				21.8	%
	Total Deposits			184,264,796				135,017,427				123,383,354				108,740,055				88,207,007				20.2	%
	Total Loans			124,937,483				110,356,471				84,917,615				77,272,145				64,254,810				18.2	%
	Shareholders’ Equity			17,432,944				15,220,830				12,479,498				12,261,223				6,372,540				28.6	%
	Intangible Assets			0				16,355				33,629				50,903				68,177
	Allowance for Loan Losses			1,414,495				1,132,555				941,556				775,530				627,722				22.5	%
Share Information (1)
	Earnings per share - Basic		$	1.54			$	1.23			$	1.03			$	0.87			$	0.65				24.1	%
	Earnings per share - Diluted		$	1.48			$	1.21			$	1.00			$	0.85			$	0.64				23.3	%
	Book value per share		$	12.47			$	10.83			$	8.88			$	8.75			$	6.99				15.5	%
	Average diluted shares outstanding			1,452,296				1,427,934				1,449,583				1,180,954				921,630				12.0	%
Capital Ratios
	Total capital to risk-weighted assets			12.82	%			13.46	%			15.14	%			15.21	%			14.06	%
	Tier 1 capital to risk-weighted assets			11.86	%			12.53	%			14.17	%			14.30	%			13.05	%
	Tier 1 capital to average assets			7.57	%			8.61	%			9.44	%			9.63	%			7.58	%

⁽¹⁾  All share information has been restated for the effect of a 5% stock dividend declared in December 2001.

1

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2001

ANNUAL

REPORT

PRESIDENT’S MESSAGE

To Our Shareholders:

      I am pleased to report that 2001 resulted in record earnings for 1 ^st  Constitution Bancorp. For the year ended December 31, 2001, the corporation reported net income of $2,152,001, or $1.48 per diluted share, which represents a 24.4 percent increase in earnings when compared to net income of $1,729,778, or $1.21 per diluted share reported last year. All per share amounts have been adjusted to give effect to a 5 percent stock dividend which was declared on December 20, 2001.

      The growth in earnings is primarily attributable to a 12.4 percent increase in net interest income, a 27.2 percent growth in core deposits, and the continued broadening of non-interest income, which reached record proportions for the year, up 73.8 percent. The growth in net interest income was primarily due to the expansion of consumer and commercial lending activities, coupled with the company’s ability to control its interest expense. Increases in core deposits and non-interest income were driven by management’s ability to expand its overall client base, and through the generation of other fees related to 1 ^st  Constitution’s retail lending activities. Our year-end assets reached $223.2 million, compared with $178.6 million just a year ago, representing another milestone for the Company.

      Our record net income generated a return on average assets of 1.03 percent and provided a 13.17 percent return on average equity for the year 2001. The growth in net income over the years 1997 — 2001 reflects a four-year compounded growth rate of 38.0 percent, which continues to be driven by loans, deposits and non-interest income.

      I am equally pleased to share with you the positive growth in our common stock, which closed on December 31, 2001 at $22.00 per share, up 100 percent from the previous year end. On August 15, 2001, 1 ^st  Constitution Bancorp became a U.S. Securities and Exchange Commission reporting company and, subsequently, on December 28, 2001, began trading on the NASDAQ® National Market. This action to move from the Over-the-Counter market to the NASDAQ® National Market is part of a long-term business plan to improve communication and reporting to current shareholders and to expand that base to other interested parties.

      For the year 2001, all categories of loans grew by a combined total of $14.5 million, to $124.9 million or by 13.2 percent, while non-performing loans remained well below state and nationwide averages at 0.49 percent of total loans. The allowance for loan losses was increased during the year through provisions totaling $300,000. This brought the allowance for loan losses to $1,414,495, or 1.13 percent of total loans at December 31, 2001.

      Through its community banking business, 1 ^st  Constitution offers a range of deposit, brokerage, and credit products, as well as electronic and remote banking services. In 2001, community banking continued its efforts to build a customer-focused franchise. Initiatives to strengthen deposits and increase revenue contributed by fee-based sources helped to expand earnings growth during the year. Targeted sales and marketing campaigns designed to attract new business and retain existing customer relationships led community banking to increase its deposits by $49.2 million to $184.3 million, a 36.5 percent increase over last year. Overall these efforts helped boost the sale of fee-based products, and fuel the growth in non-interest income, which increased by 73.8 percent to $1.5 million for the year. Community banking also leveraged 1 ^st  Constitution’s position in technology to improve productivity and streamline a variety of sales and services. This ongoing focus combined with our commitment to managing cost improved the operating efficiency of the company. During the first quarter of 2002, we are scheduled to open our sixth branch banking office located at The Windrows at Princeton Forrestal, Princeton, NJ. We are also in the process of concluding negotiations to open a seventh office in eastern Middlesex County which, if negotiations are successful, is projected to open in the last half of the year.

      Moving into 2002, technology will continue to play a key role in community banking strategy to enhance its customer experience and help drive revenue growth. At www.1stconstitution.com, clients or perspective clients can review a full range of product offerings and interact directly with 1 ^st  Constitution staff through an E-Mail system. A state of the art bill payment system further supports online banking and stands ready to pay customer’s bills twenty four hours a day, seven days a week, either by predetermined entry, or through access at anytime a customer may choose.

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The consumer continues to represent an important aspect of our business, being the driving source for core deposits and the basis for a substantial portion of our lending activities. Our product offerings to serve this important group have been developed with the thought of convenience and easy access. 1st Constitution also recognizes that customers want to receive service via their most convenient delivery channel, be it the traditional branch office, by telephone, ATM, or the Internet. For this reason we continue to enhance our e-Commerce capabilities. This overall expansion in electronic banking offers our client base another means to access 1st Constitution in an efficient straightforward manner which, in our view, adds value.

Small business is a fundamental concentration of business which 1st Constitution considers an important initiative within its market place. During 2001, we expanded our account officer base and concentrated our business development activities toward focused marketing and sales programs. We refined our cash management system which we offer to small business and focused a concerted effort in upgrading our lockbox function. On the credit side, commercial lending and construction lending continue to be primary lines of business for the Company. The small business lending function through state agencies and at the federal level along with Business Manager©, a hybrid between asset based financing and factoring are two specialty lending functions which differentiate 1st Constitution from its competitors. The goal of our small business strategy is to continue to be in a position to serve clients in an efficient manner and at a reasonable cost, while providing the kinds of innovative services which meet their needs in a changing environment.

Although 2001 was a year of substantial success for 1st Constitution Bancorp, it was a year in which our country was shocked and devastated by the World Trade Center Disaster. We at 1st Constitution want to express our sympathy to all the families who lost loved ones and acknowledge all of the police, fire, emergency services personnel, and other volunteers for their courageous efforts. We will continue to do our part in cooperating with U.S. government officials and regulatory agencies in order to provide ongoing assistance to help defeat terrorism.

As we enter 2002, we remain committed to achieving the highest standards of financial performance and customer service throughout our organization. The banking industry will continue to experience a significant change in the years ahead and we at 1st Constitution are determined to be in a position to compete successfully in this changing environment.

Our commitment, therefore, is to maintain a clear focus on the communities we serve, provide a superior level of service to our client base, and continue to offer products which add value. I am certain that the year ahead will bring many new challenges and opportunities. Although current economic conditions raise some uncertainty concerning near term growth in the economy, we remain cautiously optimistic that our markets will continue to provide an attractive economic base for 1st Constitution to expand.

We are pleased to share with you our progress thus far, but recognize that if we want to compete in the current environment successfully, our performance has to continue to improve. The progress to date was made possible by the extraordinary efforts of our employees. Their ability to adjust to an ever changing environment and meet the challenges of the past year played an important role in our successes. Our directors also played a significant role as our best link to the communities we serve. We want to express our appreciation to them, and to our shareholders and customers for their long-term loyalty and continued confidence in us.

Robert F. Mangano

President & Chief Executive Officer

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CONSOLIDATED STATEMENTS OF CONDITION

DECEMBER 31, 2001 AND 2000

					2001				2000
ASSETS
CASH AND DUE FROM BANKS					$	8,173,550			$	6,839,966
FEDERAL FUNDS SOLD/SHORT TERM INVESTMENTS						13,754,664				700,000
			Total cash and cash equivalents			21,928,214				7,539,966
SECURITIES (Notes 2 and 8):
	Available for sale, at market value					61,605,057				48,537,571
	Held to maturity (market value of $6,103,760 and $8,528,995 in 2001 and 2000, respectively)					6,034,927				8,503,675
			Total securities			67,639,984				57,041,246
LOANS HELD FOR SALE (Note 3)						7,158,950				1,306,806
LOANS (Notes 3, 4, 5 and 8)						124,937,483				110,356,471
	Less — Allowance for loan losses					(1,414,495	)			(1,132,555	)
		Net loans				123,522,988				109,223,916
PREMISES AND EQUIPMENT, net (Note 6)						998,744				939,838
ACCRUED INTEREST RECEIVABLE						1,047,670				1,287,741
OTHER ASSETS (Note 9)						886,913				1,225,862
Total assets					$	223,183,463			$	178,565,375
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
	Deposits (Note 7)
		Non-interest bearing			$	32,633,895			$	31,462,624
		Interest bearing				151,630,901				103,554,803
			Total deposits			184,264,796				135,017,427
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note 8)						3,808,183				11,011,044
OTHER BORROWINGS (Note 8)						15,500,000				15,500,000
ACCRUED INTEREST PAYABLE						1,557,392				1,541,439
ACCRUED EXPENSES AND OTHER LIABILITIES						620,148				274,635
			Total liabilities			205,750,519				163,344,545
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS’ EQUITY (Notes 9, 10 and 13):
	Common stock, no par value; 10,000,000 shares authorized; 1,404,895 and 1,337,995 shares issued and 1,398,395 and 1,336,105 outstanding as of December 31, 2001 and 2000, respectively					15,198,339				13,912,814
	Retained earnings					2,360,437				1,496,268
	Treasury Stock, at cost, 6,500 shares and 1,890 shares at December 31, 2001 and 2000					(83,190	)			(20,204	)
	Accumulated other comprehensive loss					(42,642	)			(168,048	)
			Total shareholders’ equity			17,432,944				15,220,830
Total liabilities and shareholders’ equity					$	223,183,463			$	178,565,375

See accompanying notes to consolidated financial statements.

4

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CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

					2001				2000				1999
INTEREST INCOME:
	Interest on loans				$	10,555,037			$	9,323,088			$	7,350,998
	Interest on securities:
		Taxable				3,671,869				3,129,830				2,540,109
		Tax-exempt				156,805				99,264				72,787
	Interest on Federal funds sold and short-term investments					412,274				240,055				168,684
			Total interest income		$	14,795,985			$	12,792,237			$	10,132,578
INTEREST EXPENSE:
	Interest on deposits					5,702,633				4,729,848				4,125,281
	Interest on securities sold under agreements to repurchase					199,010				589,986				209,271
	Interest on other borrowings					839,495				304,566				168,964
			Total interest expense			6,741,138				5,624,400				4,503,516
			Net interest income			8,054,847				7,167,837				5,629,062
PROVISION FOR LOAN LOSSES (Note 4)						300,000				215,875				188,875
			Net interest income after provision for loan losses			7,754,847				6,951,962				5,440,187
NON-INTEREST INCOME:
	Service charges on deposit accounts					402,312				326,441				451,829
	Gain on sale of loans held for sale					721,563				285,681				600,628
	Gain on sale of securities available for sale					131,436				26,247				17,149
	Other income					249,911				227,509				201,262
			Total other income			1,505,222				865,878				1,270,868
NON-INTEREST EXPENSES:
	Salaries and employee benefits					3,032,710				2,510,713				2,238,497
	Occupancy expense (Note 11)					724,088				709,169				589,886
	Other operating expenses (Note 12)					2,114,133				1,875,850				1,596,830
			Total other expenses			5,870,931				5,095,732				4,425,213
			Income before income taxes			3,389,138				2,722,108				2,285,842
INCOME TAXES (Note 9)						1,237,137				992,330				839,000
			Net income		$	2,152,001			$	1,729,778			$	1,446,842
NET INCOME PER SHARE
	Basic				$	1.54			$	1.23			$	1.03
	Diluted				$	1.48			$	1.21			$	1.00
WEIGHTED AVERAGE SHARES OUTSTANDING
	Basic					1,399,508				1,404,825				1,404,885
	Diluted					1,452,296				1,427,934				1,449,583

See accompanying notes to consolidated financial statements.

5

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

																Accumulated
																Other				Total
				Common				Retained				Treasury				Comprehensive				Shareholders’
				Stock				Earnings				Stock				(Loss) Income				Equity
BALANCE, December 31, 1998				$	12,060,737			$	133,444				—			$	67,042			$	12,261,223
Exercise of stock options (5,044 shares)					41,306				—								—				41,306
5% stock dividend declared in December, 1999 (60,528 shares)					1,084,963				(1,084,963	)							—				—
Comprehensive income:
	Net income — 1999				—				1,446,842								—				1,446,842
	Other comprehensive loss
		Unrealized loss on securities available for sale, net of tax benefit of $660,326			—				—								(1,258,894	)			(1,258,894	)
		Less reclassification adjustment for gains included in net income, net of tax of ($6,170)			—				—								(10,979	)			(10,979	)
Comprehensive income					—				—								—				176,969
BALANCE, December 31, 1999				$	13,187,006			$	495,323				—			$	(1,202,831	)		$	12,479,498
Treasury Stock, 1,890 shares,
	At cost												(20,204	)							(20,204	)
5% stock dividend declared in December, 2000 including fractional share cash payments (63,723 shares)					725,808				(728,833	)											(3,025	)
Comprehensive income:
	Net income — 2000								1,729,778												1,729,778
	Other comprehensive income
		Unrealized gain on securities available for sale, net of tax expense of $541,994															1,052,106				1,052,106
		Less reclassification adjustment for gains included in net income, net of tax of ($8,924)															(17,323	)			(17,323	)
Comprehensive income																					2,764,561
BALANCE, December 31, 2000				$	13,912,814			$	1,496,268			$	(20,204	)		$	(168,048	)		$	15,220,830
Treasury Stock, 4,610 shares,
	At cost												(62,986	)							(62,986	)
5% stock dividend declared in December, 2001 including fractional share cash payments (66,900 shares)					1,285,525				(1,287,832	)											(2,307	)
Comprehensive income:
	Net income — 2001								2,152,001												2,152,001
	Other comprehensive income
		Unrealized gain on securities available for sale, net of tax expense of $109,290															212,154				212,154
		Less reclassification adjustment for gains included in net income, net of tax of ($44,688)															(86,748	)			(86,748	)
Comprehensive income																					2,277,407
BALANCE, December 31, 2001				$	15,198,339			$	2,360,437			$	(83,190	)		$	(42,642	)		$	17,432,944

6

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

					2001				2000				1999
OPERATING ACTIVITIES:
	Net income				$	2,152,001			$	1,729,778			$	1,446,842
		Adjustments to reconcile net income to net cash (used in) provided by operating activities —
		Provision for loan losses				300,000				215,875				188,875
		Depreciation and amortization				221,716				218,268				209,233
		Net amortization (accretion) on securities				55,241				(4,351	)			33,065
		Gain on sale of loans held for sale				(721,563	)			(285,681	)			(600,628	)
		Gain on sale of securities available for sale				(131,436	)			(26,247	)			(17,149	)
		Originations of loans held for sale				(61,706,352	)			(40,834,113	)			(59,458,042	)
		Proceeds from sales of loans held for sale				56,575,771				40,727,145				65,793,682
		Decrease (increase) in accrued interest receivable				240,071				(435,195	)			9,359
		Decrease (increase) in other assets				209,054				141,785				(489,545	)
		Increase in accrued interest payable				15,593				612,663				101,500
		Increase (decrease) in accrued expenses and other liabilities				345,513				142,834				(492,174	)
			Net cash (used in) provided by operating activities			(2,444,031	)			2,202,761				6,725,018
INVESTING ACTIVITIES:
	Purchases of securities — Available for sale					(53,656,400	)			(15,039,088	)			(24,969,454	)
		Held to maturity				(2,829,268	)			(1,365,000	)			(654,469	)
	Proceeds from maturities and prepayments of securities —
		Available for sale				33,742,940				1,948,157				7,283,842
		Held to maturity				5,298,016				1,253,109				385,442
	Proceeds from sales of securities available for sale					7,112,177				3,504,450				6,128,600
	Net increase in loans					(14,599,072	)			(25,738,732	)			(7,668,319	)
	Capital expenditures					(280,622	)			(183,623	)			(508,361	)
			Net cash used in investing activities			(25,212,229	)			(35,620,727	)			(19,992,719	)
FINANCING ACTIVITIES:
	Issuance of common stock, net					—				—				41,306
	Net increase in demand, savings and time deposits					49,247,369				11,634,073				14,643,299
	Net (decrease) increase in securities sold under agreements to repurchase					(7,202,861	)			4,406,992				1,523,070
	Net increase in other borrowings					—				12,500,000				1,000,000
			Net cash provided by financing activities			42,044,508				28,541,065				17,207,675
			Increase (decrease) in cash and cash equivalents			14,388,248				(4,876,901	)			3,939,974
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR						7,539,966				12,418,867				8,476,893
CASH AND CASH EQUIVALENTS AT END OF YEAR					$	21,928,214			$	7,539,966			$	12,416,867
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Cash paid during the year for —
			Interest		$	6,725,185			$	5,011,737			$	4,402,016
			Income taxes			1,658,493				866,397				1,040,498

7

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999

(1) Summary of Significant Accounting Policies

General-

      1 ^st Constitution Bancorp, a New Jersey state chartered bank holding company is parent to 1st Constitution Bank, a state chartered commercial bank which commenced operations in July 1989. The Bank provides community banking services to a broad range of customers, including corporations, individuals, partnerships and other community bodies in the area. The Bank operates five branches in Cranbury, Hamilton Square, Plainsboro and Princeton, New Jersey.

Principles of Consolidation-

      The accompanying consolidated financial statements include the accounts of 1st Constitution Bancorp (the “Company”) and its wholly-owned subsidiary 1 ^st Constitution Bank (the “Bank”) and its wholly-owned subsidiaries, 1 ^st Constitution Investment Company and FCB Assets Holdings, Inc. All significant intercompany amounts have been eliminated.

Use of Estimates in the Preparation of Financial Statements-

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Securities-

      Securities which the Bank has the intent and ability to hold until maturity, are classified as held to maturity and are recorded at cost, adjusted for amortization of premiums and accretion of discounts using the interest method.

      Securities which are held for indefinite periods of time, which management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, increased capital requirements or other similar factors, are classified as available for sale and are carried at estimated market value, except for Federal Home Loan Bank stock which is carried at cost. Unrealized gains and losses on such securities are recorded as a separate component of shareholders’ equity. Realized gains and losses, which are computed using the specific identification method, are recognized on a trade date basis.

Allowance for Loan Losses-

      The allowance for loan losses is a valuation reserve available for losses incurred or expected on extensions of credit. Credit losses primarily arise from the loan portfolio, but may also be derived from other credit-related sources including commitments to extend credit. Additions are made to the allowance through periodic provisions which are charged to expense. All losses of principal are charged to the allowance when incurred or when a determination is made that a loss is expected. Subsequent recoveries, if any, are credited to the allowance.

      The adequacy of the allowance for loan losses is determined through a periodic review of outstanding loans and commitments to extend credit. The impact of current economic conditions on the creditworthiness of the borrowers is considered, as well as loan loss experience, changes in the composition and volume of the loan portfolio and management’s assessment of the risks inherent in the loan portfolio. These and other factors are used in assessing the overall adequacy of the allowance for loan losses and the resulting provision for loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based upon changes in economic conditions. In addition, various regulatory agencies periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based upon their judgment of information available to them at the time of their examination.

8

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Premises and Equipment

      Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on the straight-line method over the estimated useful lives of the assets. Furniture and fixtures, equipment and leasehold improvements are depreciated or amortized over the estimated useful lives of the assets or lease terms, as applicable. Estimated useful lives of furniture and fixtures and equipment are three to fifteen years, and three to twenty five years for leasehold improvements. Maintenance and repairs are charged to expense as incurred.

Loans-

      Loans are stated at the principal amount outstanding, net of unearned income. Unearned income is recognized over the lives of the respective loans, principally using the effective interest method. Income from direct financing leases is recorded over the life of the lease under the financing method of accounting. The investment includes the sum of aggregate rentals receivable and the estimated residual value of leased equipment, less deferred income. Interest income is generally not accrued on loans, including impaired loans, where interest or principal is 90 days or more past due, unless the loans are adequately secured and in the process of collection, or on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations. When it is probable that, based upon current information, the Bank will not collect all amounts due under the contractual terms of the loan, the loan is reported as impaired. Smaller balance homogenous type loans, such as residential loans and loans to individuals, which are collectively evaluated are excluded from consideration for impairment. Loan impairment is measured based upon the present value of the expected future cash flows discounted at the loan’s effective interest rate or the underlying value of collateral for collateral dependent loans. When a loan, including an impaired loan, is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Non-accrual loans are generally not returned to accruing status until principal and interest payments have been brought current and full collectibility is reasonably assured. Cash receipts on non-accrual and impaired loans are applied to principal, unless the loan is deemed fully collectible. Loans held for sale are carried at the aggregate lower of costs or market value.

Income Taxes-

      Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Other Real Estate-

      Other real estate is carried at the lower of fair value of the related property, as determined by current appraisals less estimated costs to sell, or the recorded investment in the property. Write-downs on these properties, which occur after the initial transfer from the loan portfolio, are recorded as operating expenses. Costs of holding such properties are charged to expense in the current period. Gains, to the extent allowable, and losses on the disposition of these properties are reflected in current operations. The Bank held no other real estate at December 31, 2001 and 2000.

Stock-Based Compensation-

      Stock-based compensation is accounted for under the intrinsic value based method as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Included in these Notes to the Consolidated Financial Statements are the pro forma disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation,” which assumes the fair value based method of accounting had been adopted.

9

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Cash and Cash Equivalents-

      Cash and cash equivalents includes cash on hand, interest and non-interest bearing amounts due from banks, Federal funds sold and short-term investments. Generally, Federal funds are sold and short-term investments are made for a one or two-day period.

Reclassifications-

      Certain reclassifications have been made to the prior period amounts to conform with the current period presentation.

Net Income per Share-

      Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus the weighted-average number of net shares that would be issued upon exercise of dilutive stock options and grants pursuant to the treasury stock method. Options to purchase 25,115 shares of common stock at a weighted average price of $13.63 per share were outstanding during 2000, and 5,094 shares of common stock at a weighted average price of $13.39 were outstanding in 1999, but were not considered in the computation of diluted net income per share because the options’ exercise price exceeded the average market price of the Bank’s common shares for the period. The options expire through June, 2009. Options in the amount of 52,788, 23,109 and 44,698 for 2001, 2000, and 1999, respectively, are included in the diluted weighted average shares outstanding. All share information reported in the statements of income reflects a 5% stock dividend declared December 20, 2001.

Comprehensive Income-

      Comprehensive income consists of net income and net unrealized gains (losses) on securities available for sale and is presented in the consolidated statements of changes in shareholders’ equity.

(2) Securities

      Information relative to the Bank’s securities portfolio as of December 31, is as follows:

							Gross				Gross				Estimated
			Amortized				Unrealized				Unrealized				Market
2001			Cost				Gains				Losses				Value
Available for sale—
	U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	27,365,288			$	215,858			$	346,486			$	27,234,660
	Mortgage backed securities			25,989,690				164,218				64,258				26,089,650
	FHLB stock and other securities			8,314,689				37,169				71,111				8,280,747
			$	61,669,667			$	417,245			$	481,855			$	61,605,057
Held to maturity—
	Mortgage backed securities		$	2,806,334			$	77,797			$	0			$	2,884,131
	Obligations of State and Political subdivisions			3,228,593				24,700				33,664				3,219,629
			$	6,034,927			$	102,497			$	33,664			$	6,103,760

10

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							Gross				Gross				Estimated
			Amortized				Unrealized				Unrealized				Market
2000			Cost				Gains				Losses				Value
Available for sale—
	U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	45,928,517			$	104,990			$	356,288			$	45,677,219
	Mortgage backed securities			1,453,305				—				3,320				1,449,985
	FHLB stock and other securities			1,410,367				—				—				1,410,367
			$	48,792,189			$	104,990			$	359,608			$	48,537,571
Held to maturity—
	U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	8,109,394			$	37,461			$	14,726			$	8,132,129
	Mortgage backed securities			394,281				2,585				—				396,866
			$	8,503,675			$	40,046			$	14,726			$	8,528,995

      The amortized cost and estimated market value of debt securities at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

								Estimated				Weighted
				Amortized				Market				Average
				Cost				Value				Yield*
Available for sale—
	Due in one year or less			$	11,014,844			$	11,096,399				5.27	%
	Due after one year through five years				33,390,515				33,475,098				5.78	%
	Due after five years through ten years				12,990,238				12,827,033				5.30	%
	Due after ten years				4,274,070				4,206,527				4.89	%
		Total		$	61,699,667			$	61,605,057				5.55	%
Held to maturity—
	Due in one year or less			$	296,718			$	300,981				4.93	%
	Due after one year through five years				3,488,136				3,585,220				6.26	%
	Due after five years through ten years				832,724				829,677				4.23	%
	Due after ten years				1,417,349				1,387,882				5.13	%
		Total		$	6,034,927			$	6,103,760				5.55	%

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*	computed on a tax equivalent basis.

      Gross gains on securities sales were $131,436 in 2001, $26,247 in 2000, and $17,149 in 1999.

      As of December 31, 2001 and 2000, securities having a book value of $21,218,473 and $29,920,801, respectively, were pledged to secure public deposits, repurchase agreements, other borrowings, and for other purposes as required by law.

11

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(3) Loans and Loans Held for Sale

      Loans outstanding by classification at December 31, 2001 and 2000 are as follows:

		2001				2000
Construction loans		$	29,385,096			$	17,957,852
Residential real estate loans			11,634,097				14,854,583
Commercial and commercial real estate			62,442,753				54,974,300
Loans to individuals			15,587,772				14,767,100
Lease financing			6,117,261				7,809,845
All other loans			169,939				152,776
			125,336,918				110,516,456
Less: Deferred origination fees, net			(399,435	)			(159,985	)
		$	124,937,483			$	110,356,471

      The Bank’s business is concentrated in New Jersey, particularly Middlesex, Mercer and Somerset counties. A significant portion of the total loan portfolio is secured by real estate or other collateral located in these areas.

      The Bank had residential mortgage loans held for sale of $7,158,950 at December 31, 2001 and $1,306,806 at December 31, 2000. The Bank currently sells loans, servicing released.

(4) Allowance for Loan Losses

      A summary of the allowance for loan losses is as follows:

		2001				2000				1999
Balance, beginning of year		$	1,132,555			$	941,556			$	775,530
Provision charged to expense			300,000				215,875				188,875
Loans charged off			(20,973	)			(28,158	)			(26,662	)
Recoveries			2,913				3,282				3,813
Balance, end of year		$	1,414,495			$	1,132,555			$	941,556

      The amount of loans which were not accruing interest amounted to $618,102 and $106,959 at December 31, 2001 and 2000, respectively. Impaired loans totaled $609,237 and $35,927 at December 31, 2001 and 2000, respectively. There was a valuation allowance on impaired loans of $212,500 at December 31, 2001 and no valuation allowance on impaired loans at December 31, 2000. There were no loans 90 days or more past due and still accruing at December 31, 2001. Loans 90 days or more past due and still accruing totaled $471,040 at December 31, 2000.

      Additional income before taxes amounting to $15,214, $9,966 and $12,590 would have been recognized in 2001, 2000 and 1999, respectively, if interest on all loans had been recorded based upon original contract terms. No interest was recognized on non-accrual loans in 2001, 2000 or 1999.

      The average recorded investment in impaired loans for the years ended December 31, 2001, 2000 and 1999, was approximately $322,500, $46,000, and $66,000, respectively.

12

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(5) Loans to Related Parties

      Activity related to loans to directors, executive officers and their affiliated interests during 2001 is as follows:

Balance, beginning of year		$	3,162,397
Loans granted			1,130,535
Repayments of loans			(406,136	)
Balance, end of year		$	3,886,796

      All such loans were made under customary terms and conditions and were current as to principal and interest payments as of December 31, 2001 and 2000.

(6) Premises and Equipment

      Premises and equipment consist of the following as of December 31, 2001 and 2000:

		2001				2000
Leasehold improvements		$	771,033			$	550,912
Furniture and equipment			1,359,127				1,292,695
			2,130,160				1,843,607
Less — Accumulated depreciation			(1,131,416	)			(903,769	)
		$	998,744			$	939,838

(7) Deposits

      Deposits at December 31, 2001 and 2000 consist of the following:

			2001				2000
Demand
	Non-interest bearing		$	32,633,895			$	31,462,624
	Interest bearing			64,307,535				42,002,479
Savings				11,344,218				10,244,003
Time				75,979,148				51,308,321
			$	184,264,796			$	135,017,427

      Individual time deposits $100,000 or greater amounted to $20,885,020 and $6,617,511 at December 31, 2001 and 2000, respectively. As of December 31, 2001, time deposits mature as follows: $57,446,383 in 2002; $14,284,007 in 2003; $3,060,360 in 2004; $386,898 in 2005; and $801,500 in 2006.

(8) Securities Sold Under Agreements to Repurchase and Other Borrowings

      Securities sold under agreements to repurchase are summarized as follows:

		2001				2000				1999
Balance outstanding at year end		$	3,808,183			$	11,011,044			$	6,604,052
Weighted average interest rate at year end			2.00	%			2.50	%			3.91	%
Average daily balance outstanding during year		$	4,303,963			$	9,286,884			$	6,045,493
Weighted average interest rate during year			4.50	%			5.67	%			3.20	%
Highest month-end outstanding balance		$	4,452,285			$	6,751,903			$	6,660,601

13

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      Collateral underlying the agreements is held by an outside custodian.

      During 2000, the Bank purchased three ten-year fixed rate convertible advances from the Federal Home Loan Bank of New York (“FHLB”). These advances, in the amounts of $2,500,000; $5,000,000; and $5,000,000 bear interest at the rates of 5.50%; 5.34%; and 5.06%, respectively. These advances are convertible at the end of 1 year; 2 years; and 3 years and quarterly thereafter. During 1999, the Bank purchased a $3,000,000 ten-year fixed rate advance convertible at the end of three years, and quarterly thereafter, from the FHLB. The interest rate on this advance is 5.815%. In 1999, the FHLB called $2,000,000 in ten-year fixed rate convertible advances which were purchased in 1998.

      These advances are fully secured by marketable securities and qualifying one-to-four family mortgage loans.

(9) Income Taxes

      The components of income tax expense (benefit) are summarized as follows:

			2001				2000				1999
Federal —
	Current		$	1,145,517			$	952,790			$	789,716
	Deferred			(82,780	)			(89,470	)			(61,216	)
				1,062,737				863,320				728,500
State —
	Current			188,862				144,641				121,196
	Deferred			(14,462	)			(15,631	)			(10,696	)
				174,400				129,010				110,500
			$	1,237,137			$	992,330			$	839,000

      A comparison of income tax expense at the Federal statutory rate in 2001, 2000 and 1999 to the Company’s provision for income taxes is as follows:

			2001				2000				1999
Federal income tax			$	1,152,307			$	925,517			$	777,186
Add (deduct) effect of:
	State income taxes net of federal income tax effect			115,104				85,147				72,930
	Tax-exempt interest income			(53,314	)			(33,750	)			(24,748	)
	Other items, net			23,040				15,416				13,632
Provision for income taxes			$	1,237,137			$	992,330			$	839,000

      The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets are as follows:

			2001				2000
Deferred tax assets —
	Allowance for loan losses		$	564,949			$	452,342
	Other			5,014				20,379
Unrealized loss on securities available for sale				21,968				86,570
Total deferred tax assets			$	591,931			$	559,291

14

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      Based upon the current facts, management has determined that it is more likely than not that based upon taxes paid in the carryback period and projections of future taxable income the deferred tax asset will be realized. However, there can be no assurances about the level of future earnings.

(10) Shareholders’ Equity

      The Company's shareholders have approved a stock option plan for key employees. The Company has also entered into an employment agreement pursuant to which additional options were awarded to its President. The Bank accounts for the award of stock options in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these option awards been determined consistent with FASB Statement No. 123, the Bank's net income and net income per share for 2001, 2000 and 1999 would have been reduced to the following pro forma amounts:

				2001				2000				1999
Net income -
	As reported			$	2,152,001			$	1,729,778			$	1,446,842
	Pro forma				2,151,750			$	1,719,778			$	1,385,159
Net income per share -
	As reported -
		Basic		$	1.54			$	1.23			$	1.03
		Diluted		$	1.48			$	1.21			$	1.00
	Pro Forma -
		Basic		$	1.54			$	1.23			$	0.99
		Diluted		$	1.48			$	1.21			$	0.95

      The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2001 and 1999: dividend yield of 0%; expected volatility of 25%; risk-free interest rates of 4.75% and 5.50%, respectively; and expected lives of 5 years. No options were granted in 2000.

      A summary of the status of the Bank’s stock options at December 31, 2001, 2000 and 1999 and changes during the years then ended is presented below:

				2001						2000								1999
							Weighted								Weighted								Weighted
			Shares				Avg. Price				Shares				Avg. Price				Shares				Avg. Price
Outstanding, at beginning of year				119,147			$	9.15				125,739			$	10.05				86,952			$	8.18
Granted				8,400				18.52				—				—				44,348				13.39
Exercised				—								—				—				(5,561	)			7.43
Forfeited				(2,507	)			10.89				(6,592	)			11.51				—				—
Outstanding, at end of year				125,040			$	10.46				119,147			$	9.15				125,739			$	10.05
	(2001 Range of Exercise Prices - $6.96-$18.52)
Exercisable, at end of year				116,640			$	9.86				101,735			$	10.00				103,975			$	9.45
	(2001 Range of Exercise Prices - $6.96-$13.39)
Weighted average remaining contractual life								6.7 years								6.8 years								7.8 years
Weighted average fair value of options granted during the year							$	5.89							$	0							$	4.06

15

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      In December 2001, 2000 and 1999, the Bank declared a 5%, stock dividend to shareholders. All amounts in the table above and elsewhere in these notes have been adjusted to reflect such stock dividends.

(11) Commitments and Contingencies

      The Bank’s main office is leased at a monthly rental of $14,340 plus real estate taxes and certain common space charges allocated by the landlord. The lease contains renewal options for two additional five-year terms at the Bank’s discretion.

      As of December 31, 2001, future minimum rental payments under noncancellable operating leases are as follows:

2002		$	3666,959
2003		$	300,392
2004		$	297,680
2005		$	307,745
2006		$	317,994
Thereafter		$	1,887,567

      Rent expense aggregated $497,483, $512,805 and $426,883 for the years ended December 31, 2001, 2000 and 1999, respectively.

Commitments with Off-Balance Sheet Risk

      The statement of condition does not reflect various commitments relating to financial instruments which are used in the normal course of business. Management does not anticipate that the settlement of those financial instruments will have a material adverse effect on the Bank’s financial position. These instruments include commitments to extend credit and letters of credit. These financial instruments carry various degrees of credit risk, which is defined as the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. As these off-balance sheet financial instruments have essentially the same credit risk involved in extending loans, the Bank generally uses the same credit and collateral policies in making these commitments and conditional obligations as it does for on-balance sheet investments. Additionally, as some commitments and conditional obligations are expected to expire without being drawn or returned, the contractual amounts do not necessarily represent future cash requirements.

      Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the borrower. The Bank receives a fee for providing a commitment. The Bank was committed to advance $26,828,000 to its borrowers as of December 31, 2001. At December 31, 2001, the Bank was contingently liable for outstanding letters of credit to customers in the amount of $1,812,858.

Litigation

      The Bank may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. The Bank may also have various commitments and contingent liabilities which are not reflected in the accompanying consolidated statement of condition. Management is not aware of any present legal proceedings or contingent liabilities and commitments that would have a material impact on the Bank’s financial position or results of operations.

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(12) Other Operating Expenses

      The components of other operating expenses for the years ended December 31, 2001, 2000 and 1999 are as follows:

		2001				2000				1999
Equipment expense		$	310,702			$	286,632			$	242,714
Marketing			190,233				208,294				190,807
Computer services			494,686				415,627				314,970
Regulatory, professional and other fees			384,720				304,263				206,720
Office expense			330,358				255,387				233,908
All other expenses			403,434				405,647				407,711
		$	2,114,133			$	1,875,850			$	1,596,830

(13) Regulatory Requirements

      The Bank is subject to various regulatory capital requirements administered by the Federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

      Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject.

      To be categorized as adequately capitalized the Bank must maintain minimum total risk-based; tier I risk-based, and tier I leverage ratios as set forth in the table. As of December 31, 2001, the most recent notification from the Bank’s primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. Certain bank regulatory limitations exist on the availability of Bank assets available for the payment of dividends without prior approval of bank regulatory authorities.

      The Bank’s actual capital amounts and ratios as of December 31, 2001 and 2000 are as follows:

																			To Be Well Capitalized
																			Under Prompt
											For Capital								Corrective
			Actual								Adequacy Purposes								Action Provisions
			Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2001 —
	Total capital (to Risk Weighted Assets)		$	18,890,081				12.82	%		$	11,787,840				> or =8	%		$	14,734,800				> or =10	%
	Tier I Capital (to Risk Weighted Assets)			17,475,586				11.86	%			5,893,920				> or =4	%			8,840,880				> or =6	%
	Tier I Capital (to Average Assets)			17,475,586				7.57	%			9,229,600				> or =4	%			11,537,000				> or =5	%
As of December 31, 2000 —
	Total capital (to Risk Weighted Assets)		$	16,505,078				13.46	%		$	9,811,360				> or =8	%		$	12,264,200				> or =10	%
	Tier I Capital (to Risk Weighted Assets)			15,372,523				12.53	%			4,905,680				> or =4	%			7,358,520				> or =6	%
	Tier I Capital (to Average Assets)			15,372,523				8.61	%			7,140,120				> or =4	%			8,925,150				> or =5	%

17

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      The primary source of dividends paid to the Company’s shareholders is dividends paid to the Company by the Bank. Dividend payments by the Bank to the Company are subject to the New Jersey Banking Act of 1948 (the “Banking Act”) and the Federal Deposit Insurance Act (the “FDIA”). Under the Banking Act and the FDIA, the Bank may not pay any dividends, if after paying the dividend, it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

(14) Estimated Fair Value of Financial Instruments

      The following is a summary of fair value versus the carrying value of the Bank’s financial instruments. For the Bank, as for most financial institutions, the bulk of its assets and liabilities are considered financial instruments. Many of the Bank’s financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used by the Bank for the purpose of this note. Changes in assumptions could significantly affect these estimates.

      Estimated fair values have been determined by the Bank using the best available data and an estimation methodology suitable for each category of financial instruments. Financial instruments, such as securities available for sale and securities held to maturity, actively traded in the secondary market have been valued using available market prices. Carrying values of cash and cash equivalents and securities sold under agreements to repurchase approximate fair value due to the short-term nature of these instruments. Other borrowings are valued on a discounted cash flow method utilizing current discount rates for instruments of similar remaining terms.

      Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. For those loans and deposits with floating interest rates, it is assumed that estimated fair values generally approximate the recorded book balances.

      The estimated fair values, and the recorded book balances, were as follows:

		December 31, 2001								December 31, 2000
		Carrying				Estimated				Carrying				Estimated
		Value				Fair Value				Value				Fair Value
Cash and cash equivalents		$	21,928,214			$	21,928,214			$	7,539,966			$	7,539,966
Securities available for sale			61,605,057				61,605,057				48,537,571				48,537,571
Securities held to maturity			6,034,927				6,103,760				8,503,675				8,528,995
Loans held for sale			7,158,950				7,176,847				1,306,806				1,307,000
Gross loans			124,937,483				126,934,000				110,356,471				111,692,000
Deposits			184,264,796				184,578,000				135,017,427				135,291,386
Securities sold under agreements to repurchase			3,808,183				3,808,183				11,011,044				11,011,044
Other borrowings			15,500,000				17,659,000				15,500,000				15,694,000

      Loan commitments and standby letters of credit as of December 31, 2001 and 2000 are based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit is nominal.

18

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(15) Condensed Financial Statements of 1st Constitution Bancorp (Parent Company Only)

      The following information of the Company only financial statements as of and for the year ended December 31, 2001 and 2000 should be read in conjunction with the notes to the consolidated financial statements.

Statements of Condition

				December 31,				December 31,
				2001				2000
ASSETS:
	Investment in Subsidiary			$	17,432,944			$	15,220,830
		Total Assets		$	17,432,944			$	15,220,830
SHAREHOLDERS’ EQUITY
	Common Stock			$	15,198,339			$	13,912,814
	Retained Earnings				2,360,437				1,496,268
	Treasury Stock				(83,190	)			(20,204	)
	Accumulated Other Comprehensive Loss Net of Income Tax				(42,642	)			(168,048	)
		Total Shareholders’ Equity			17,432,944				15,220,830
		Total Liabilities and Shareholders’ Equity		$	17,432,944			$	15,220,830

Statements of Income

			Year Ended December 31,
			2001				2000
Equity in Undistributed Earnings of Bank			$	2,152,001			$	1,729,778
	Net Income		$	2,152,001			$	1,729,778

Statements of Cash Flows

			Year Ended December 31,
				2001				2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net Income			$	2,152,001			$	1,729,778
	Less Equity in Undistributed Earnings				(2,152,001	)			(1,729,778	)
		Net Cash Provided by Operating Activities			—				—
	Net increase in Cash and Cash Equivalents				—				—
	Cash and Cash Equivalents at Beginning of Period				—				—
	Cash and Cash Equivalents at End of Period				—				—

19

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INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors of 1st Constitution Bancorp:

      We have audited the accompanying consolidated statements of condition of 1 ^st Constitution Bancorp and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1 ^st Constitution Bancorp and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

Short Hills, New Jersey

January 11, 2002

20

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Management’s Discussion and Analysis
of Consolidated Financial Condition and
Results of Operations

This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. Throughout the following sections, the "Bank" is defined as 1 ^st Constitution Bancorp and its wholly owned subsidiary 1 ^st Constitution Bank. The purpose of this discussion and analysis is to assist in the understanding and evaluation of the Bank’s financial condition, changes in financial condition and results of operations.

2001 Overview

The Bank’s record earnings for 2001 reflect continuing momentum across a broad range of products and services offerings. Increased lending activity, coupled with a rise in demand deposits fueled record earnings and balance sheet growth.

The Bank has positioned itself for continued success with the combination of a strong capital base, a commitment to provide exceptional customer service and a commitment to maintain the technology necessary to provide its clients with easy access to financial products and services.

Summary of Financial Performance

Net income amounted to a new record level of $2,152,001, a 24.4% increase, compared to the previous record results of $1,729,778 reported in 2000. Earnings were primarily enhanced by commercial loan and demand deposits growth experienced throughout the year. On a diluted per share basis, net income increased 22.3% to $1.48 in 2001 from $1.21 in 2000.

Driven by commercial loan growth, the Bank’s loan portfolio increased 13.2% in 2001 compared to 2000. At December 31, 2001, total loans outstanding reached $124,937,483 compared to $110,356,471 at the end of 2000. Asset quality remained strong in 2001 as illustrated by the ratio of nonperforming loans to total loans of 0.49% in 2001 and 0.52% in 2000. The allowance for loan losses totaled $1,414,495 or 1.13% of total loans, covering 228.8% of total nonperforming loans. The Bank’s deposit base increased 36.5% to total $184,264,796 at December 31, 2001. Deposit products were competitively priced throughout the year to fund loan growth.

Return on average assets (ROA) was 1.03% in 2001 compared to 1.08% in 2000. For 2001 The Bank’s return on average equity (ROE) was 13.17% compared to 13.09% in 2000. This measurement indicates how effectively a company can generate net income on the capital invested by its shareholders.

Results of Operations

The Bank reported record earnings of $2,152,001 or $1.48 per share (diluted) for the year ended December 31, 2001 compared to $1,729,778 or $1.21 per share (diluted) in 2000. Net income and diluted earnings per share grew 24.4% and 22.3%, respectively, in 2001. The Bank posted net income of $1,446,842 or $1.00 per share (diluted) in 1999.

Net Interest Income

Net interest income, the Bank’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 84.3% of the Bank’s net revenues in 2001. Net interest income also depends upon the relative amount of interest earnings assets, interest-bearing liabilities, and the interest rate earned or paid on them.

The following tables set forth the Bank’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on related items, and the Bank’s average yield or rate for the years ended December 31, 2001, 2000, 1999, 1998 and 1997. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.

Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, interest bearing liabilities, related yields, and associated funding costs. The Rate/Volume table demonstrates the impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in interest rates earned and paid.

The Bank’s net interest income totaled $8,054,847 in 2001, an increase of 12.4% from the $7,167,837 reported in 2000. As indicated in the Rate/Volume Table, the principal factor contributing to the 2001 increase in net interest income was an increase in the tax-equivalent interest income of $2,031,370 resulting from increased loan and investment securities volumes. This was partially offset by decreases in both loan and investment securities yields due to the lower interest rate environment in 2001.

The Bank’s net interest income totaled $7,167,837 in 2000, an increase of 27.3% from the $5,629,062 reported in 1999. As indicated in the Rate/Volume Table, the principal factor contributing to the 2000 increase in net interest income was an increase in the tax-equivalent interest income of $2,672,367 resulting from increased loan and investment securities volumes. This was supplemented by increases in both loan and investment securities yields due to the higher interest rate environment in 2000.

21

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Average Balance Sheets with Resultant Interest and Rates
(Yields on a tax-equivalent basis)

				2001												2000
				Average								Average				Average								Average
				Balance				Interest				Rate				Balance				Interest				Rate
Assets:
Federal Funds Sold/Short-Term Investments				$	12,982,838			$	412,274				3.18	%		$	3,758,186			$	240,055				6.39	%
Investment Securities:
	U.S. Treasury Bonds				164,096				8,407				5.12	%			494,042				25,592				5.18	%
	Collateralized Mortgage Obligations				61,040,382				3,663,462				6.00	%			45,961,785				3,104,238				6.75	%
	States and Political Subdivisions				3,312,135				232,075				7.01	%			2,184,257				146,911				6.73	%
	Total				64,516,613				3,903,943				6.05	%			48,640,084				3,276,741				6.74	%
Loan Portfolio:
	Commercial				23,804,565				2,532,392				10.64	%			25,892,635				2,809,913				10.85	%
	Installment				14,755,091				1,182,582				8.01	%			15,158,706				1,179,061				7.78	%
	Commercial Mortgages and Construction Wholesale				58,004,941				4,472,315				7.71	%			34,840,215				3,062,187				8.79	%
	Residential Mortgages and Construction Retail				19,842,072				1,545,547				7.79	%			17,690,917				1,411,992				7.98	%
	All Other Loans				7,537,883				822,201				10.91	%			5,889,591				859,934				14.60	%
	Total				123,944,552				10,555,037				8.52	%			99,472,064				9,323,088				9.37	%
		Total Interest-Earning Assets			201,444,003				14,871,254				7.38	%			151,870,334				12,839,884				8.45	%
Allowance for Loan Losses					(1,271,319	)											(1,029,538	)
Cash and Due From Banks					6,476,212												5,610,092
Other Assets					2,833,836												3,513,307
Total Assets				$	209,482,732											$	159,964,195
Liabilities and Shareholders’ Equity:
Interest-Bearing Liabilities:
	Money Market and NOW Accounts			$	50,474,834			$	1,264,832				2.51	%		$	42,898,014			$	1,396,912				3.26	%
	Savings Accounts				10,738,835				252,584				2.35	%			10,600,178				288,724				2.72	%
	Certificates of Deposit				52,943,869				2,952,410				5.58	%			43,590,728				2,533,022				5.81	%
	Certificates of Deposit of $100,000 and Over				26,149,741				1,232,808				4.71	%			8,446,002				511,190				6.05	%
	Federal Funds Purchased/Other Borrowed Funds				19,924,483				1,038,504				5.21	%			13,903,824				894,552				6.43	%
		Total Interest-Bearing Liabilities			160,231,762				6,741,138				4.21	%			119,438,746				5,624,400				4.71	%
		Net Interest Spread											3.17	%											3.74	%
Demand Deposits					30,209,573												25,596,993
Other Liabilities					2,704,081												1,715,203
Total Liabilities					193,145,416												146,750,942
Shareholders’ Equity					16,337,316												13,213,254
Total Liabilities and Shareholders’ Equity				$	209,482,732											$	159,964,196
		Net Interest Margin						$	8,130,116				4.04	%						$	7,215,484				4.75	%

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		1999												1998												1997
		Average								Average				Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
		$	3,426,114			$	168,684				4.92	%		$	4,044,708			$	240,854				5.95	%		$	1,125,534			$	61,969				5.51	%
			835,475				46,620				5.58	%			3,907,312				240,942				6.17	%			6,219,310				369,744				5.95	%
			39,076,271				2,493,490				6.38	%			24,091,551				1,503,969				6.24	%			19,644,110				1,331,752				6.78	%
			1,582,653				107,724				6.81	%			1,349,601				93,359				6.92	%			1,269,688				88,799				6.99	%
			41,494,399				2,647,834				6.38	%			29,348,464				1,838,270				6.26	%			27,133,108				1,790,295				6.60	%
			21,115,219				2,019,239				9.56	%			14,255,298				1,606,989				11.27	%			10,433,994				1,095,217				10.50	%
			13,542,197				1,020,378				7.53	%			13,460,119				1,026,494				7.63	%			8,490,340				659,750				7.77	%
			30,339,251				2,503,163				8.25	%			26,115,001				2,036,951				7.80	%			19,617,329				1,616,877				8.24	%
			17,263,568				1,313,025				7.61	%			15,967,516				1,201,698				7.53	%			13,192,869				1,040,387				7.89	%
			4,885,578				495,192				10.14	%			3,112,159				409,417				13.16	%			2,740,231				412,031				15.04	%
			87,145,813				7,350,998				8.44	%			72,910,093				6,281,549				8.62	%			54,474,763				4,824,262				8.86	%
			132,066,326				10,167,516				7.70	%			106,303,265				8,360,673				7.86	%			82,733,405				6,676,526				8.07	%
			(871,581	)											(706,169	)											(538,114	)
			5,954,894												4,822,809												2,843,097
			2,644,170												1,829,821												1,205,008
		$	139,793,809											$	112,249,726											$	86,243,396
		$	33,681,758			$	1,137,997				3.38	%		$	28,185,714			$	1,046,425				3.71	%		$	19,075,543			$	576,702				3.02	%
			9,956,583				271,485				2.73	%			8,815,710				244,689				2.78	%			8,643,343				255,419				2.96	%
			43,300,649				2,348,077				5.42	%			29,907,645				1,671,748				5.59	%			25,816,637				1,435,735				5.56	%
			6,969,581				367,723				5.28	%			8,469,513				481,104				5.68	%			9,500,186				538,773				5.67	%
			9,489,603				378,234				3.99	%			7,814,622				274,692				3.52	%			149,718				275,211				183.82	%
			103,398,174				4,503,516				4.36	%			83,193,204				3,718,658				4.47	%			63,185,427				3,081,840				4.88	%
											3.34	%											3.39	%											3.19	%
			21,842,138												18,298,818												11,528,701
			2,232,419												1,529,266												1,114,718
			127,472,731												103,021,288												75,828,846
			12,321,077												9,228,438												5,919,325
		$	139,793,808											$	112,249,726											$	81,748,171
						$	5,664,000				4.29	%						$	4,642,015				4.36	%						$	3,594,686				4.34	%

23

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Rate/Volume Table

					Amount of Increase (Decrease)
					2001 versus 2000												2000 versus 1999
					Due to Change in:												Due to Change in:
					Volume				Rate				Total				Volume				Rate				Total
(Tax-equivalent basis)
Interest Income:
	Loans:
		Commercial			$	(224,851	)		$	(52,670	)		$	(277,521	)		$	493,046			$	297,628			$	790,674
		Installment				(31,372	)			34,893				3,521				123,555				35,128				158,683
		Commercial Mortgages and Construction — Wholesale				1,911,291				(501,163	)			1,410,128				385,409				173,615				559,024
		Residential Mortgages and Construction —Retail				169,415				(35,860	)			133,555				34,038				64,929				98,967
		All Other Loans				210,120				(247,854	)			(37,734	)			128,379				236,363				364,742
			Total Loans			2,034,603				(802,654	)			1,231,949				1,164,427				807,664				1,972,090
	Investment Securities:
		U.S. Treasury Bonds				(16,990	)			(195	)			(17,185	)			(18,014	)			(3,014	)			(21,028	)
		Collat. Mortg. Obligations/ Mortg. Backed Securities				960,871				(401,647	)			559,224				455,583				155,165				610,748
		States and political subdivisions				77,477				7,686				85,163				40,576				(1,390	)			39,186
			Total Investment Securities			1,021,358				(394,156	)			627,202				478,145				150,761				628,906
	Federal Funds Sold/ Short-Term Investments					441,156				(268,937	)			172,219				17,459				53,912				71,371
			Total Interest Income			3,497,117				(1,465,747	)			2,031,370				1,660,031				1,012,337				2,672,367
Interest Expense:
	Money Market and NOW Accounts					215,807				(347,887	)			(132,080	)			116,617				(59,902	)			56,915
	Savings Accounts					3,426				(39,566	)			(36,140	)			18,075				(836	)			17,239
	Certificates of Deposit					531,532				(112,144	)			419,388				15,957				168,988				184,945
	Certificates of Deposit of $100,000 And Over					952,935				(231,317	)			721,618				85,892				57,575				143,467
	Federal Funds Purchased/ Other Borrowed Funds					350,354				(206,402	)			143,952				516,150				202,167				718,317
			Total interest expense			2,054,054				(937,316	)			1,116,738				752,891				367,991				1,120,883
Net Interest Income					$	1,443,063			$	(528,431	)		$	914,632			$	907,140			$	644,346			$	1,551,484

      Average interest earning assets increased by $49,573,669 or 32.6% for 2001 with increases of $24,472,488 in loans and $15,876,529 in investment securities. Led by commercial mortgages and construction loans, the Bank’s average loan portfolio grew by 24.6% and loan yields averaged 8.52% in 2001, 85 basis points lower than 2000. This decrease was primarily the result of 2001 loan growth at lower yields amid a decreasing interest rate environment for the majority of the year. The Bank’s average investment securities portfolio grew 32.6%, and the yield on that portfolio decreased 69 basis points when comparing 2001 to 2000. Overall, the yield on interest earning assets decreased 107 basis points to 7.38% in 2001 from 8.45% in 2000.

      Average interest-earning assets increased by $19,804,008 or 15.0% for 2000 primarily as a result of increases of $12,326,251 in loans and $7,145,685 in investment securities. Led by commercial loans, the Bank’s average loan portfolio grew by 14.1% and loan yields averaged 9.37% in 2000 or 93 basis points higher than 1999. This increase was primarily the result of 2000 loan growth at higher yields amid a rising interest rate environment for the majority of the year. The Bank’s average investment securities portfolio grew 17.2%, and the yield on that portfolio increased 36 basis points when comparing 2000 to 1999. Overall, the yield on interest-earning assets increased 75 basis points to 8.45% in 2000 from 7.70% in 1999.

      Interest expense was $6,741,138 for 2001, an increase of $1,116,738 or 19.9% from $5,624,400 a year ago. This increase in interest expense is principally attributable to higher levels of money market and NOW deposits and other borrowed funds. Certificates of deposit of $100,000 and over were aggressively priced throughout 2001 to contribute to the funding of loan growth. The cost on these deposits decreased 134 basis points in 2001 from 2000. Average interest bearing liabilities rose 34.2% in 2001 from 2000. The cost of total interest bearing liabilities decreased 50 basis points to 4.21% in 2001 from 4.71% in 2000.

      Interest expense was $5,624,400 for 2000 an increase of $1,120,884 or 24.9% from $4,503,516 reported in 1999. This increase in interest expense is principally attributable to a rising interest rate environment combined with higher levels of money market and NOW deposits and other borrowed funds. Certificates of deposit of $100,000 and over were aggressively priced throughout 2000 to contribute in the funding of loan growth. The cost of these deposits increased 77 basis points in 2000 from 1999. Average interest-bearing liabilities rose 15.5% in 2000 from 1999. The cost of total interest-bearing liabilities increased 35 basis points to 4.71% in 2000 from 4.36% in 1999.

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      Net interest income was $8,054,847 in 2001, an increase of 12.4% from $7,167,837 in 2000. The principal factor contributing to the improvement was an increase in interest income due to increased loan and security volumes. This was partially offset by decreases in loan and security yields and an increase in interest expense resulting from increased volumes of certificates of deposit and other borrowed funds.

      The net interest margin (tax equivalent basis), which is net interest income divided by average interest earning assets, was 4.04% in 2001 compared with 4.75% in 2000 and 4.29% in 1999. The principal factor causing the decrease in the Bank’s net interest margin was the sharp decline in market interest rates during 2001. This resulted in yields on short-term investments and floating rate loans tied to the prime rate to decline more quickly than those of the Bank’s interest-bearing liabilities. As a result of the interest rate movement, the yield on the Bank’s total interest-earning assets declined 107 basis points and the cost of interest-bearing liabilities decreased 50 basis points compared to 2000, as depositors sought higher yields in certificate of deposit accounts.

      Average non-interest bearing demand deposits increased 18.0% to $30,209,573 in 2001 from $25,596,993 in 2000. Business checking accounts and expanding new business relationships have generated most of this increase. Throughout the comparative periods, increases in average non-interest bearing deposits contributed to the increases in net interest income.

Non-Interest Income

      Non-interest income amounted to $1,505,222 in 2001 compared to $865,878 the prior year, an increase of $639,344 or 73.8%. Non-interest income in 2000 decreased by $404,990, or 31.9% from 1999’s posted total of $1,270,868.

      Service charges on deposit accounts represent a significant source of non-interest income. Service charge revenues in 2001 totaled $402,312, an increase of 23.2% compared to $326,441 in 2000. Service charge income totaled $451,829 in 1999. This component of non-interest income represented 26.7%, 37.7% and 35.6% of the total non-interest income in 2001, 2000 and 1999, respectively. Service charge income increased in 2001 as a result of the Bank’s increasing deposit base and growing number of new accounts subject to service charges. Service charge income decreased in 2000 principally due to the decrease in income from overdraft fees. Management continues to utilize a strategy of requiring compensating balances from its commercial customers. Those who meet balance requirements are not assessed service charges.

      The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit rentals, wire transfer service fees and Automated Teller Machine fees for non-customers. Deposit and service fee charges are monitored annually by Management to reflect current costs amid the Bank’s competitive market.

      Gains on sales of loans, net, increased significantly in 2001 to $721,563 from $285,681 in 2000. Gains on sales of loans, net, totaled $600,628 in 1999. The declining interest rate environment that existed during 2001 and 1999 greatly fueled the volume of mortgage loan originations and subsequent secondary market mortgage loan sales. In 2000, a higher rate environment existed that resulted in the lesser levels of reported gains on loan sales for that year.

      The Bank recorded net securities gains of $131,436, $26,247 and $17,149 in 2001, 2000 and 1999, respectively. These gains were primarily the result of modest portfolio restructurings. Their purpose was to improve the Bank’s longer-term interest rate risk position.

Non-Interest Expense

      Non-interest expense totaled $5,870,931 in 2001, an increase of $775,199 or 15.2%, compared to $5,095,732 in 2000. Non-interest expense in 2000 increased 15.2% from $4,425,213 in 1999. The largest increase in non-interest expense in 2001 compared to 2000 was in salaries and employees benefits. To a lesser extent, occupancy, and other non-interest expense also reflect increases for the comparable periods. The largest increase in non-interest expense in 2000 compared to 1999 was in salaries and employee benefits and, to a lesser extent, net occupancy expense.

      The following table presents the major components of non-interest expense for the years indicated.

      Salaries and employee benefits, which represent the largest portion of non-interest expense, increased $521,997 or 20.8% in 2001 compared to 2000. These expenses increased in 2000 by $272,216 or 12.2% over 1999. The 2001 increase reflects the increase in staffing for the mortgage loan origination function plus normal salary increases. In past years, the Bank engaged independent contractors to originate mortgage loans that are sold in the secondary market. In January 2001, the Bank employed four full-time mortgage originators and ceased using independent contractors for this function. The increase in the level of salaries and employee benefits for 2000 versus 1999 was due to an increase in staffing levels to support the Bank’s strong balance sheet growth and opening an additional Bank branch office. Salaries and employee benefits as a percent of average assets were 1.45% in 2001, 1.57% in 2000 and 1.60% in 1999.

      During 2001, net occupancy expense increased $14,919 to $724,088 from $709,169 reported in 2000. The increase in occupancy expenses in 2001 compared to 2000 was due primarily to contractual rent increases at most of the Bank’s branch offices. Net occupancy expenses increased by $119,283 or 20.2% in 2000 over 1999 primarily as a result of branch expansion costs related to the Hamilton branch that opened in late 1999.

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      The occupancy expense component of total non-interest expense as a percentage of average assets was 0.35% in 2001, 0.44% in 2000 and 0.42% in 1999, respectively.

      Regulatory, professional and other fees increased $80,457 in 2001 or 26.4% over 2000. These expenses increased in 2000 by $97,543 or 47% over 1999. During 2001, the Bank applied for listing on the National Market System of the Nasdaq to provide quotations for its shares and provide improved share liquidity. An increased level of legal and accounting fees were incurred in order to successfully achieve this listing in late 2001.

      Equipment expenses increased $24,070 or 8.4% to $310,702 in 2001 from $286,632 in 2000. Equipment expense includes depreciation on furniture and equipment as well as maintenance on that equipment. Throughout 2001 and 2000, Management continued to upgrade equipment thereby increasing processing capability to enhance productivity. The Bank’s enhanced technology has allowed Management to further diversify business and consumer product lines. The increase in equipment expenses in 2000 compared to 1999 was the result of Management’s efforts to upgrade the Bank’s technology capacity to increase productivity and provide quality customer service.

      The Bank’s ratio of non-interest expense to average assets improved to 2.80% for 2001 compared to 3.19% for 2000 and 3.17% for 1999.

      An important industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources. The Bank’s efficiency ratio decreased in 2001 to 61.4% compared to 63.4% in 2000, and 64.1% in 1999.

Non-interest Expenses

			2001				2000				1999				1998				1997
Salaries and employee benefits			$	3,032,710			$	2,510,713			$	2,238,497			$	1,970,901			$	1,519,456
Occupancy expense				724,088				709,169				589,886				476,172				405,128
Equipment expense				310,702				286,632				242,714				155,446				187,853
Marketing				190,233				208,294				190,807				178,143				94,876
Computer services				494,686				415,627				314,970				299,690				170,320
Regulatory, professional and other fees				384,720				304,263				206,720				226,085				127,849
Office expense				330,358				255,387				233,908				195,130				172,482
All other expenses				403,434				405,647				407,711				357,943				271,659
	Total		$	5,870,931			$	5,095,732			$	4,425,213			$	3,859,510			$	2,949,623

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Financial Condition

Interest-Earning Assets and Interest-Bearing Liabilities

      Average interest-earning assets totaled $201,444,003 in 2001, an increase of $49,573,669, or 32.6%, compared to 2000, reflecting growth in the loan and investment securities portfolios. Loans increased $24,472,488, or 24.6%, to average $123,944,003, while investment securities increased $15,876,529, or 32.6%, to average $64,516,613. The growth in interest-earning assets was funded by increases in certificates of deposit, demand deposits, other borrowed funds and shareholders' equity.

      As a result of interest rates decreasing in the latter part of 2000 and continuing through the year 2001, the annual average rate earned on interest-earning assets decreased 107 basis points to 7.38% in 2001 from 8.45% in 2000.

      Average interest-bearing liabilities totaled $160,231,762 in 2001, an increase of $40,793,016, or 34.2%, compared to 2000. The increase resulted primarily from growth in money market and NOW accounts as well as certificates of deposit of $100,000 and over. The average balance of money market and NOW accounts increased $7,576,820, or 17.7%, to $50,474,834. The average balance of certificates of deposit of $100,000 and over increased $17,703,739 or 209.6%, to $26,149,741 in 2001 primarily due to customers seeking a secure investment for their funds during a period of economic turbulence and falling interest rates. The average interest rate paid on interest-bearing liabilities decreased 50 basis points to 4.21% in 2001.

Cash and Cash Equivalents

      At December 31, 2001, cash and cash equivalents totaled $21,928,214 compared to $7,539,966 at December 31, 2000. Cash and cash equivalents at December 31, 2001 consisted of cash and due from banks of $8,173,550 and Federal funds sold/short-term investments of $13,754,664. The corresponding balances at December 31, 2000 were $6,839,966 and $700,000, respectively. The higher balances of cash and cash equivalents at December 31, 2001 were primarily due to increased interest-bearing deposits balances raised to fund loan growth and manage the Bank’s liquidity position.

Securities

      The Bank’s investment securities portfolio amounted to $67,639,984, or 30.2% of total assets at December 31, 2001 compared to $57,041,246, or 31.9% of total assets at December  31, 2000. On an average balance basis, the investment securities portfolio represented 32.0% of average interest-earning assets for the years ended December 31, 2001 and 2000. The average yield earned on the portfolio was 6.05% in 2001, a decrease of 69 basis points from 6.74% earned in 2000.

      Securities available for sale are investments that may be sold in response to changing market and interest rate conditions or for other business purposes. Securities available for sale consist primarily of U.S. Government and Federal agency securities as well as mortgage-backed securities. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create economically more attractive returns. At December 31, 2001, available-for-sale securities amounted to $61,605,057, an increase of $13,067,486 or 26.9% from year-end 2000.

      Sales of securities available for sale generated a gain of $131,436 in 2001, compared to a gain of $26,247 in 2000. Maturities of securities available for sale amounted to $33,742,940 in 2001 and $1,948,157 in 2000. At December 31, 2001, the portfolio had a level of net unrealized losses of $64,610, compared to net unrealized losses of $254,618 at the end of the prior year as a result of decreasing interest rates in the latter part of 2000 that continued throughout 2001. These unrealized gains/(losses) are reflected net of tax in shareholders’ equity as other comprehensive income or loss.

      Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive intent and ability to hold to maturity. The held-to-maturity portfolio consists primarily of obligations of states and political subdivisions. At December 31, 2001, securities held to maturity totaled $6,034,927, a decrease of $2,468,748, or 29.0%, from $8,503,675 the prior year. The market value of the held-to-maturity portfolio at year-end 2001 was $6,103,760, resulting in a net unrealized gain of $68,833.

Loans

      The loan portfolio, which represents the Bank’s largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. The Bank’s primary lending focus continues to be commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans. Total loans averaged $123,944,552 during 2001, an increase of $24,472,488, or 24.6%, compared to an average of $99,472,064 in 2000. Growth in the average loan portfolio balance was generated primarily by an increase of $23,164,726 or 66.5%, in commercial mortgage and construction wholesale loans. At December 31, 2001, total loans amounted to $124,937,483 compared to $110,356,471 the prior year, an increase of $14,581,012 or 13.2%. The average yield earned on loan portfolio was 8.52% in 2001 compared to 9.37% in 2000, a decrease of 85 basis points. This decrease is primarily due to the lower interest rate environment that existed throughout 2001.

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      Commercial loans averaged $23,804,565 for 2001, a modest decrease of 8.1% compared to 2000. Commercial loans are made to small to middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower. The average yield on the commercial loan portfolio decreased 21 basis points to 10.64% in 2001 from 10.85% the prior year. The declining interest rate environment that existed throughout 2001, especially the lower average prime rate, and competitive pricing resulted in the decreased yield on this portfolio.

      Commercial mortgages and construction wholesale loans averaged $58,004,941 for 2001, an increase of 66.5% compared to 2000. Generally, these loans represent owner-occupied or investment properties and complement a broader commercial relationship with the borrower. Construction loans are strictly underwritten with advances made only after work is completed and inspected by qualified professionals. The average yield on the commercial mortgages and construction wholesale loan portfolio decreased 108 basis points to 7.71% from 8.79% the prior year.

      Residential mortgages and construction retail loans averaged $19,842,072 for 2001, an increase of 12.2% compared to 2000. These loans consist primarily of residential mortgage loans, home equity loans and business loans secured by residential real estate. The average yield on this portfolio decreased 19 basis points to 7.79% for 2001 from 7.98% the prior year.

      The following table provides information concerning the interest rate sensitivity of the Bank's commercial and commercial real estate loans and construction loans at December 31, 2001.

				Maturity Range
								After One
				Within				But				After
				One				Within				Five
Type				Year				Five Years				Years				Total
Commercial & Commercial real estate				$	29,169,401			$	28,970,325			$	4,303,027			$	62,442,753
Construction Loans					29,020,631				364,465				0				29,385,096
		Total		$	58,190,032			$	29,334,790			$	4,303,027			$	91,827,849
Fixed rate loans				$	7,292,350			$	7,242,581			$	0			$	14,534,931
Floating rate loans					50,897,682				22,092,209				4,303,027				77,292,918
		Total		$	58,190,032			$	29,334,790			$	4,303,027			$	91,827,849

Non-Performing Assets

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

      The Bank's policy with regard to non-accrual loans varies by the type of loan involved. Generally, 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. Subsequent payments are credited to income only if collection of principal is not in doubt.

      Non-performing loans totaled $618,102 at December 31, 2001, an increase of $40,103 from the $577,999 reported at December 31, 2000. The following table sets forth non-performing assets and risk elements in the Bank's portfolio by type for the years indicated. As the table demonstrates, loan quality and ratios remain strong. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.

      Non-performing assets increased $40,103 to $618,102 at December 31, 2001 compared to $577,999 at December 31, 2000. Non-performing assets represented 0.28% of total assets at December 31, 2001 and 0.32% at December 31, 2000. Non-performing assets as a percentage of total loans were 0.49% at December 31, 2001, compared to 0.52% at December 31, 2000. There is no assurance this positive trend will continue in the future.

      The Bank had no restructured loans, other real estate owned or potential problem loans at December 31, 2001 and 2000.

      At December 31, 2001 the Bank had no loans that were 90 days or more past due but still accruing interest income compared to $471,040, or 0.43% of total loans at December 31, 2000. Management's decision to accrue income on these loans was based on the level of collateral and the status of collection efforts.

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Non-Performing Assets and Loans

			2001				2000				1999				1998				1997
Non-Performing loans:
	Loans 90 days or more past due and still accruing		$	0			$	471,040			$	135,598			$	0			$	222,124
	Non-accrual loans			618,102				106,959				501,756				95,693				162,824
	Total non-performing			618,012				577,999				637,354				95,693				386,948
Other real estate owned				0				0				0				0				155,482
	Total non-performing assets		$	618,102			$	577,999			$	637,354			$	95,693			$	542,482
Non-performing loans to total loans				0.49%				0.52%				0.75%				0.12%				0.60%
Non-performing assets to total assets				0.28%				0.32%				0.43%				0.07%				0.53%

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Allowance for Loan Losses and Related Provision

      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.

      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 Bank’s internal loan review specialist. A formal loan review function, independent of loan origination, is used to identify and monitor risk classifications. The following table presents, for the years indicated, an analysis of the allowance for loan losses and other related data.

      At December 31, 2001, the allowance for loan losses was $1,414,495 compared to $1,132,555 at the end of the prior year, an increase of $281,940, or 24.9%. The ratio of the allowance for loan losses to total loans at December 31, 2001 and 2000 was 1.13% and 1.02%, respectively. The allowance for loan losses as a percentage of non-performing loans was 228.84% at December 31, 2001, compared to 195.94% at the end of 2000. The quality of the loan portfolio remains strong and it is Management’s assessment that the allowance for loan losses is adequate in relation to credit risk exposure levels.

      The provision for loan losses was $300,000 for the year ended December 31, 2001, an increase of $84,125, or 39.0%, from $215,875 recorded in 2000. While the quality of the loan portfolio remains sound, the increase in the provision for loan losses was due to loan growth, the increase in non-accrual loans and the current economic conditions in the Bank’s marketplace. Net charge offs in 2001 amounted to $18,060 compared to $24,876 recorded in 2000.

Allowance for Loan Losses

			2001				2000				1999				1998				1997
Balance, beginning of period			$	1,132,555			$	941,556			$	775,530			$	627,722			$	444,815
Provision charged to operating expenses				300,000				215,875				188,875				178,000				169,000
Loans charged off				(20,973	)			(28,158	)			(26,662	)			(32,971	)			(7,953	)
Recoveries				2,913				3,282				3,813				2,779				21,860
Net (charge offs)/recoveries				(18,060	)			(24,876	)			(22,849	)			(30,192	)			13,907
Balance, end of period			$	1,414,495			$	1,132,555			$	941,556			$	775,530			$	627,722
Loans:
	At year end		$	124,937,483			$	110,356,471			$	84,917,615			$	77,272,145			$	64,254,810
	Average during the year			123,944,552				99,472,064				87,145,813				72,910,093				54,474,763
	Net charge offs to average loans outstanding			(0.01	)%			(0.03	)%			(0.03	)%			(0.04	)%			0.03	%
Allowance for loan losses to:
	Total loans at year end			1.13	%			1.02	%			1.11	%			1.00	%			0.98	%
	Non-performing loans			228.84	%			195.94	%			147.73	%			810.44	%			162.20	%

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      The following table describes the allocation of the allowance for loan losses among the various categories of loans and certain other information as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.

Allocation of the Allowance for Loan Losses

				December 31, 2001								December 31, 2000								December 31, 1999
								% of loans								% of loans								% of loans
								in each								in each								in each
								category to								category to								category to
				Amount				total loans				Amount				total loans				Amount				total loans
Balance at end of period applicable to:
	Domestic:
		Commercial, financial, and agricultural		$	707,248				51	%		$	577,603				50	%		$	480,194				50	%
		Real estate — construction			325,334				23	%			271,813				16	%			225,973				16	%
		Real estate — residential mortgage			127,305				9	%			135,907				14	%			112,987				13	%
		Installment loans to individuals			169,739				12	%			79,279				13	%			65,909				14	%
		Lease financing			70,725				5	%			45,302				7	%			37,662				7	%
	Unallocated				14,144								22,651								18,831
				$	1,414,495				100	%		$	1,132,555				100	%		$	941,556				100	%

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 Bank offers a variety of products designed to attract and retain customers, with the Bank’s primary focus being on building and expanding long-term relationships. Deposits in 2001 averaged $170,516,851, an increase of $39,384,937, or 30.0% compared to the 2000 average. At December 31, 2001, total deposits were $184,264,796, an increase of $49,247,369, or 36.5%, from year-end 2000. The average rate paid on the Bank’s deposit balances in 2001 was 3.34% decreasing from the 3.61% average rate for 2000.

      A significant contributor to the record level of deposit growth in the year 2001 were demand deposits (interest bearing and non-interest bearing) which increased $23,476,327, or 32.0%, from year-end 2000 to $96,941,430 at December 31, 2001. Average non-interest bearing demand deposits were $30,209,573 for 2001, an increase of $4,12,580, or 18.0%, from the prior year. Non-interest bearing demand deposits represent a stable, interest-free source of funds. Growth in business and personal checking accounts generated most of the increase, primarily due to competitive minimum balance requirements.

      Interest bearing demand deposits, which include interest-bearing checking, money market and the Bank’s premier money market product, 1st Choice accounts, increased $7,576,820, or 17.7%, to an average of $50,474,834 in 2001. The average cost of interest-bearing demand deposits decreased 74 basis points to 2.51% in 2001 compared to 2.71% in 2000. Other time deposits, which consist primarily of retail certificates of deposit, increased $9,353,141, or 21.5%, in 2001 to average $52,943,869. The average cost of other time deposits decreased 23 basis points to 5.58% in 2001 from 5.81% in 2000.

      Certificates of deposit $100,000 and over are primarily used as an additional funding source to support balance sheet growth and as an alternative to other sources of borrowed funds. These deposits averaged $26,149,741 during 2001, an increase of $17,703,739 or 209.6%, from 2000. The average cost of these deposits decreased 134 basis points during the year to 4.71% compared with 6.05% in 2000.

      The following table illustrates the components of average total deposits for the past five years.

Average Deposit Balances

			2001								2000								1999								1998								1997
			Average				Percentage				Average				Percentage				Average				Percentage				Average				Percentage				Average				Percentage
			Balance				of Total				Balance				of Total				Balance				of Total				Balance				of Total				Balance				of Total
Non-interest bearing demand deposits			$	30,209,573				17.72	%		$	25,596,993				19.52	%		$	21,842,138				18.87	%		$	18,298,818				19.53	%		$	11,528,701				15.46	%
Interest bearing demand deposits				50,474,834				29.60	%			42,898,014				32.71	%			33,681,758				29.10	%			28,185,714				30.09	%			19,075,543				25.58	%
Savings deposits				10,738,835				6.30	%			10,600,178				8.08	%			9,956,583				8.60	%			8,815,710				9.41	%			8,643,343				11.59	%
Certificates of deposit of $100,000 or more				26,149,741				15.34	%			8,446,002				6.44	%			6,969,581				6.02	%			8,469,513				9.04	%			9,500,186				12.74	%
Other time deposits				52,943,869				31.04	%			43,590,728				33.25	%			43,300,649				37.41	%			29,907,645				31.93	%			25,816,637				34.62	%
	Total		$	170,516,852				100.00	%		$	131,131,915				100.00	%		$	115,750,709				100.00	%		$	93,677,400				100.00	%		$	74,564,410				100.00	%

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Other Borrowed Funds

Other borrowed funds are mainly comprised of repurchase agreements and Federal Home Loan Bank ("FHLB") borrowings. These borrowings are primarily used to fund asset growth not supported by deposit generation. During 2001, the average balance of other borrowed funds was $19,924,483, an increase of $6,020,659, or 43.3% from the average balance of $13,903,824 for 2000.

The balances of other borrowed funds was $15,500,000 at both December 31, 2001 and 2000. The average cost of other borrowed funds decreased 122 basis points during the year to 5.21% compared with 6.43% in 2000.

During 2000, the Bank purchased three ten-year fixed rate convertible advances from the FHLB. These advances, in the amounts of $2,500,000; $5,000,000; and $5,000,000 bear interest at the rates of 5.50%; 5.34%; and 5.06%, respectively. These advances are convertible at the end of 1 year; 2 years; and 3 years and quarterly thereafter and reduce the Bank's exposure to rising interest rates.

These advances are fully secured by marketable securities and qualifying one-to-four family mortgage loans.

Shareholders' Equity and Dividends

Shareholders' equity at December 31, 2001 was $17,432,944, an increase of $2,212,114, or 14.5%, compared to the prior year. Book value per common share rose to $12.47 compared to $10.83 at December 31, 2000. The increase in shareholders' equity and book value per share resulted from net income of $2,152,001, less the effect of stock buybacks and net unrealized holding losses on securities.

In 2000, the Board of Directors authorized a stock buyback program that allows for the repurchase of a limited number of the Bank's shares at management's discretion on the open market. The Bank undertook this repurchase program in order to increase shareholder value. During 2001, 4,610 shares of common stock were purchased on the open market and, during 2000, 1,890 shares were purchased on the open market under this program. Treasury stock totaled $83,190 at December 31, 2001 compared to $20,204 at December 31, 2000.

During the period 1997-2001, the Bank has achieved a four year compounded growth rate for shareholders' equity of 28.6%. In addition, the Bank's book value per share has increased over this period at a compounded growth rate of 15.5%. In lieu of cash dividends, the Bank has declared a stock dividend every year since 1992, which has been paid every year since 1993. A 5% stock dividend was declared in the years 2001, 2000 and 1999.

During December 2001, the Bank's stock became listed for trading on the NASDAQ National Market System, under the symbol "FCCY".

1 ^st Constitution Bancorp and its bank subsidiary are subject to various regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation. For information on regulatory capital, see Note 13 of the Notes to Consolidated Financial Statements.

Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due.

Liquidity management refers to the Bank'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 banks' ability to meet its liquidity needs. On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities. On the liability side, the primary source of liquidity is the ability to generate core deposits. Short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earnings assets.

The Bank has established borrowing relationship with the FHLB and its correspondent banks which further support and enhance liquidity.

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At December 31, 2001, the balance of cash and cash equivalents was $21,928,214.

Net cash used in operating activities totaled $2,144,031 in 2001 compared to $2,202,761 in cash provided by operating activities in 2000. The primary source of funds is net income from operations adjusted for provision for loan losses, depreciation expenses, and amortization of intangibles.

Net cash used in investing activities totaled $25,512,229 in 2001 compared to $35,620,727 in 2000. The increase in usage resulted from an increase in loans and available for sale securities.

Net cash provided by financing activities amounted to $42,044,508 in 2001 compared to $28,541,065 in 2000. The increase in 2001 resulted primarily from an increase in deposits.

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The securities portfolios are also a source of liquidity, providing cash flows from maturities and periodic repayments of principal. During 2001, maturities of investment securities totaled $39,040,956. Contractual and anticipated principal payments from the securities portfolios are expected to be approximately $11,096,399 in 2002. 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 Bank's total income is net interest income, and the majority of the Bank'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 following tables set forth certain information relating to the Bank's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity or repricing and the instruments fair value at December 31, 2001.

The Bank 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 Bank's spread by attracting lower-costing retail deposits.

In addition to utilizing the gap ratio for interest rate risk assessment, management utilizes simulation analysis whereby the model estimates the variance in net income with a change in interest rates of plus or minus 300 basis points over a twelve and twenty-four month period. Given recent simulations, net interest income would be within policy guidelines regardless of the direction of market rates.

Market Risk Analysis

To measure the impacts of longer-term asset and liability mismatches beyond two years, the Bank 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 December 31, 2001 and 2000, the Bank'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 Bank 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.

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Market Risk Analysis

		December 31, 2001
Change in Rates		Flat				-200bp				+200bp
Economic Value of		$	22,128,000			$	21,465,000			$	19,109,000
Portfolio Equity Change							(663,000	)			(3,019,000	)
Change as a % of assets							(0.30%	)			(1.35%	)
		December 31, 2000
Change in Rates		Flat				-200bp				+200bp
Economic Value of		$	22,759,000			$	19,559,000			$	19,727,000
Portfolio Equity Change							(3,200,000	)			(3,032,000	)
Change as a % of assets							(1.79%	)			(1.70%	)

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INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 2001

($ in thousands)

																											Non-interest
			Interest Sensitivity Period																Total				One Year				Sensitive
																			Within				To				and Over
			30 Day				90 Day				180 Day				365 Day				One Year				Two Years				Two Years				Total
			($ in thousand)
Earning Assets:
	Total Investment Securities		$	5,370			$	3,308			$	2,905			$	6,902			$	18,485			$	13,028			$	36,127			$	67,640
	Loans			56,665				2,341				3,188				5,626				67,820				12,225				45,467				125,512
	Other Interest-earning assets			20,914																20,914								9,692				30,606
				82,949				5,649				6,093				12,528				107,219				25,253				91,286				223,758
Source of Funds:
	Savings and time deposits			9,596				16,590				15,345				18,162				59,693				16,020				10,691				86,404
	Other interest-bearing liabilities			41,472				393				589				1,178				43,632				2,356				38,546				84,534
	Non-interest-bearing sources			3,832																3,832								48,988				52,820
				54,900				16,983				15,934				19,340				107,157				18,376				98,225				223,758
Asset (Liability) Sensitivity Gap:
	Period Gap		$	28,049			$	(11,334	)		$	(9,841	)		$	(6,812	)		$	62			$	6,877			$	(6,939	)		$	0
	Cumulative Gap		$	28,049			$	16,715			$	(6,874	)		$	62			$	62			$	6,939
	Cumulative Gap to Total Assets			12.5	%			7.5	%			3.1	%			0.0	%			0.0	%			3.1	%

Recent Accounting Pronouncements

      On October 3, 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, it retains many of the fundamental provisions of that Statement. The Statement is effective for fiscal years beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not have a significant impact on the Company’s consolidated financial statements.

      In August, 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. The Company is required to adopt the provisions of SFAS No. 143 for fiscal years beginning after June 15, 2002. The Company does not anticipate that SFAS No. 143 will significantly impact the Company’s consolidated financial statements.

      On July 20, 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and periodically reviewed for impairment.

      SFAS No. 142 requires that goodwill and any intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142.

      The Company adopted the provisions of SFAS No. 141 in July, 2001. The initial adoption of SFAS No. 141 had no impact on the Company’s consolidated financial statements. The Company is required to adopt SFAS No.

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142 effective January 1, 2002. The Company currently has no recorded goodwill or core deposit intangible assets and, therefore, the initial adoption of SFAS Nos. 142 had no impact on the Company’s consolidated financial statements.

Forward-Looking Statements

      This annual report contains certain forward-looking statements, either expressed or implied, which are provided to assist the reader in understanding anticipated future financial performance. These forward-looking statements involve certain risks, uncertainties, estimates and assumptions made by Management.

      One of the Bank’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify the line of financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Bank which can impede our ability to achieve these goals.

      Factors that may cause results to differ from those results expressed or implied, include, but are not limited to, 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; and technological changes. 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 have an adverse effect on profitability.

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Unaudited Quarterly Financial Data

		2001
		Dec. 31				Sept. 30				June 30				March 31
Summary of Operations
Interest income		$	3,608,314			$	3,768,826			$	3,783,782			$	3,635,063
Interest expense			1,554,971				1,698,477				1,810,506				1,677,184
Net interest income			2,053,343				2,070,349				1,973,276				1,957,879
Provision for loan losses			120,000				60,000				60,000				60,000
Net interest income after provision for loan losses			1,933,343				2,010,349				1,913,276				1,897,879
Non-interest income			486,881				410,553				328,852				278,936
Non-interest expense			1,523,276				1,514,054				1,414,865				1,418,736
Income before income taxes			896,948				906,848				827,263				758,079
Federal and state income taxes			333,994				329,160				296,158				277,825
Net income		$	562,954			$	577,688			$	531,105			$	480,254
Net income per Common Share:
Basic		$	0.40			$	0.41			$	0.38			$	0.34
Diluted		$	0.39			$	0.40			$	0.37			$	0.33
Operating Ratios (annualized)
Return on average assets			0.97	%			1.07	%			1.10	%			1.05	%
Return on average equity			12.74	%			13.81	%			13.72	%			12.71	%
Balance Sheet Data (at period end)
Assets		$	223,758,463			$	221,211,884			$	222,429,336			$	207,151,954
Deposits			184,264,796				163,660,816				168,523,032				152,264,496
Loans			124,937,483				124,695,411				121,513,703				117,118,450
Shareholders' equity			17,432,944				17,431,828				16,381,264				15,878,609
Allowance for loan losses			(1,414,495	)			(1,314,582	)			(1,253,646	)			(1,193,336	)

		2000
		Dec. 31				Sept. 30				June 30				March 31
Summary of Operations
Interest income		$	3,674,102			$	3,268,411			$	2,988,578			$	2,861,146
Interest expense			1,653,486				1,482,616				1,307,449				1,180,849
Net interest income			2,020,616				1,785,795				1,681,129				1,680,297
Provision for loan losses			80,875				45,000				45,000				45,000
Net interest income after provision for loan losses			1,939,741				1,740,795				1,636,129				1,635,297
Non-interest income			219,379				241,670				255,718				149,111
Non-interest expense			1,314,244				1,323,198				1,254,758				1,203,532
Income before income taxes			844,876				659,267				637,089				580,876
Federal and state income taxes			312,030				236,100				231,500				212,700
Net income		$	532,846			$	423,167			$	405,589			$	368,176
Net income per Common Share:
Basic		$	0.38			$	0.30			$	0.29			$	0.27
Diluted		$	0.37			$	0.30			$	0.29			$	0.26
Operating Ratios (annualized)
Return on average assets			1.19	%			1.10	%			1.10	%			1.02	%
Return on average equity			14.80	%			13.16	%			12.93	%			11.83	%
Balance Sheet Data (at period end)
Assets		$	178,840,375			$	167,035,360			$	163,140,756			$	151,836,027
Deposits			129,193,041				128,451,438				127,997,450				115,402,456
Loans			110,356,471				105,342,311				103,688,923				92,007,637
Shareholders' equity			15,220,830				13,969,004				13,271,418				12,806,567
Allowance for loan losses			(1,132,555	)			(1,069,775	)			(1,025,241	)			(980,229	)

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DIRECTORS, ADVISORY BOARD & OFFICERS

DIRECTORS OF 1ST CONSTITUTION BANCORP

     Charles S. Crow, III

     Edward D. Knapp — Chairman

     Robert F. Mangano, President & CEO

     William M. Rue, C.P.C.U.

     Frank E. Walsh, III

DIRECTORS OF 1ST CONSTITUTION BANK

     C. Malcolm Bash

     Peter A. Cantu

     Charles S. Crow, III

     Harvey W. Gleeksman

     Robert H. Greenwood, Esq., Bank Counsel

     Edward D. Knapp — Chairman

     Robert F. Mangano, President & CEO

     William M. Rue, C.P.C.U.

     Roy D. Tartaglia

     Frank E. Walsh, III

     Barry Weshnak

ADVISORY BOARD

     John R. Boag

     Thomas R. Farino, Jr., Esq.

     Edward A.M. Furfey

     Thomas Jay Hall, Esq.

     Sam Juffe

     Russell T. Kivler, Esq.

     Dean P. Koehler, C.P.A.

     Gerald F. Metzheiser, Chairman

     Jerry Wagner

     Anthony Wilcenski

     Barbara Wright

OFFICERS

     Robert F. Mangano, President & CEO

     Jeffrey Apostolou, Vice President, Residential Mortgages

     Richard S. Copeland, Vice President, Construction Lending

     Patricia Rantowich, Vice President, Operations

     Joseph M. Reardon, Vice President & Treasurer

     Kenneth Rowinsky, Vice President & Auditor

     Beverly J. Tindall, Vice President, Operations

     Irving W. Wischik, Vice President, Commercial Lending

     Andrew M. Glatz, Assistant Vice President, SBA Lending

     Andrea Pagiazitis, Assistant Vice President, Retail Banking

     Lawrence C. Pleus, Jr., Assistant Vice President, Retail Lending

     Amer Saleem, Assistant Vice President, Commercial Lending

     Jeffrey R. Wittes, Assistant Vice President

     Elaine C. Homoky, Assistant Treasurer

     Marie Rapisarda, Assistant Treasurer

 

MAIN OFFICE		2650 Route 130, P.O. Box 634, Cranbury, New Jersey 08512 Phone: 609-655-4500          Fax: 609-655-5653
VILLAGE OFFICE		74 North Main Street, Cranbury, New Jersey 08512 Phone: 609-395-0605          Fax: 609-860-0128
MONTGOMERY OFFICE		947 State Road, Princeton, New Jersey 08540 Phone: 609-683-9090          Fax: 609-683-5313
PLAINSBORO OFFICE		Plainsboro Plaza Shopping Center 10 Schalks Crossing Road, Plainsboro, NJ 08536 Phone: 609-750-0200          Fax: 609-750-0188
HAMILTON OFFICE		3659 Nottingham Way, Hamilton, NJ 08690 Phone: 609-631-0400          Fax: 609-631-9003
COMING SOON:		The Windrows @ Princeton Forrestal 2000 Windrow Drive, Princeton, New Jersey
ANNUAL MEETING		The Annual Meeting of Stockholders of 1st Constitution Bancorp shall be held at the Bank’s principal office located at 2650 Route 130 North, Cranbury, New Jersey on Thursday, May 16, 2002 at 3:30 P.M.
ADDITIONAL INFORMATION:		Stockholders, investors, analysts, and others seeking financial data are requested to contact Robert F. Mangano or Joseph M. Reardon at 609-655-4500.
STOCK LISTING:		The Company Stock is traded on the Nasdaq National Market under the trading symbol FCCY.
MARKET MAKERS:		Advest, Inc. 49 Route 202, P.O. Box 733, Far Hills, NJ 07931, 908-719-0900 F.J. Morrissey & Co., Inc., 1700 Market Street, Suite 1420, Philadelphia, PA 19103, 215-563-8500 Ryan, Beck & Company, 220 South Orange Avenue, Livingston, NJ 07039, 973-597-6000

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1st Constitution Bancorp Subsidiaries                                                                Exhibit 21
	1.		1st Constitution Bank
	2.		1st Constitution Investment Company (wholly-owned subsidiary of Bank)
	3.		FCB Assets Holdings, Inc. (wholly-owned subsidiary of Bank)