Edgar Filing: 1ST CONSTITUTION BANCORP

COMMISSION FILE NO. 000-32891
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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AMENDMENT NO. 2

FORM 10-SB

GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g)
OF THE SECURITIES ACT OF 1934
1ST CONSTITUTION BANCORP
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

NEW JERSEY (STATE OR OTHER JURISDICTION OF 22-3665653 (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
2650 ROUTE 130, P.O. BOX 634, CRANBURY, NJ 08512 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(609) 655-4500
(ISSUER'S TELEPHONE NUMBER)

SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS TO BE REGISTERED
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NONE NONE

SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:

COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)

Copies of correspondence to:
Robert F. Mangano
President and Chief Executive Officer
1st Constitution Bancorp
2650 Route 130
Cranbury, New Jersey 08512
(609) 655-4500

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DESCRIPTION PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS..................................... 2
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
ITEM 3. DESCRIPTION OF PROPERTY..................................... 41
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 42
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS............................ 43
ITEM 6. EXECUTIVE COMPENSATION...................................... 44
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 46
ITEM 8. DESCRIPTION OF SECURITIES................................... 47

PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS............................. 48
ITEM 2. LEGAL PROCEEDINGS........................................... 49
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS............... 49
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES..................... 49
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 49

PART F/S.............................................................. 51

PART III
ITEM 1. INDEX TO EXHIBITS........................................... 80

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PART I

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, 2000, the Company, on a consolidated basis, had total
assets of approximately $178.8 million, total deposits of approximately $129.2
million, total loans of approximately $110.6 million and total shareholders'
equity of approximately $15.2 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 it 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 advice to meet
those needs. The Bank seeks to provide a high level of personalized banking
services, emphasizing quick and flexible responses to customer demands.

Expansion of Branch Banking. The Bank is strategically positioned in a
growth area of central New Jersey, easily accessible to an extensive
transportation network. Growth in the Bank's market area has resulted from
recent and ongoing construction of office complexes, relocation of employees,
expansion of retail trade, such as grocery stores and medical facilities and the
related population growth and housing development. Mercer County is the site of
construction of a 1.5 million-square-foot office complex in Hopewell for Merrill
Lynch called Southfields. Southfields is located on 450 acres and ranks among
the 20 largest office parks in New Jersey. The office complex will house
approximately 5500 employees. Aventis Pharmaceuticals is constructing two new
buildings at the Somerset Corporate Center to move 800 employees from temporary
quarters in Morris County. Robert Wood Johnson University Hospital is
constructing 2 facilities: a Bristol

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Myers Children's hospital wing and The Cancer Hospital of New Jersey, scheduled
for completion in early 2002. This recent commercial construction activity has
led to population growth and residential housing development. Steady growth in
population, personal income and employment in Middlesex, Mercer and Somerset
counties has resulted in increased demand for banking services.

This steady population and business growth fuels the need for more health
and personal services as well as work on schools, municipal buildings,
warehouses and roads. The Bank continually evaluates opportunities for branch
expansion, either mini branches or full services banks, to continue to grow and
meet the needs of the community.

Innovative Product Offerings. During the third quarter of 2000, the Bank
entered into an agreement to provide discount brokerage services to customers
through a joint venture agreement with National Discount Brokers Group,
Inc./ndb.com. 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.
As of June 30, 2000 (the most recent data available), in the counties where the
Bank's branches are located there were 14 FDIC insured banks and savings banks
with 30 branch offices. 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, Summit Bank
(recently merged with Fleet Bank), PNC National Bank and Sovereign Bank. The
Bank is at a competitive disadvantage compared with these larger regional
commercial savings banks. By virtue of their larger capital, asset size or
reserves, many such institutions have substantially greater lending limits 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.

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. These
institutions may have significantly larger 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, in certain cases, lower funding costs (the price a
bank must pay for deposits and other borrowed monies used to make loans to
customers) than the Bank.

Furthermore, in recent years non-bank financial institutions have begun to
offer more expanded services and it is expected that competition in these areas
will continue to increase. Some of these competitors are not

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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.

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 and agricultural 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 of 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, although such loans may also be made infrequently 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 serviced by originators
working from strategically 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

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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 collectability 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 framework is intended primarily for the protection of
depositors and not for the protection of the Company's stockholders.
Descriptions of and references to the statutes and regulations below are brief
summaries thereof, and do not purport to be complete. The descriptions are
qualified in their entirety by reference to the specific statutes and
regulations discussed.

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 it 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 had 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 the 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.

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The GLBA which 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.

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, 2000, the Company
maintained a Tier 1 capital ratio of 12.53% and total qualifying capital ratio
of 13.46%. As of March 31, 2001, these ratios were 10.98%, and 11.81%,
respectively.

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, 2000 was 8.61%. As of March 31,
2001, this ratio was 8.52%

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

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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 has
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 the claims of
holders of an obligation of the institution to its stockholders (the Company) or
any stockholder or creditor of the Company. The claims on the Bank by creditors
include obligations in respect of federal funds purchased and certain other
borrowings, as well as deposit liabilities.

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 such 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-

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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 March 31, 2001, the Bank had 48
full-time employees and 7 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.

LIMITED MARKET FOR COMMON STOCK

The Company's Common Stock is presently traded on the OTC Bulletin Board.
The Company is contemplating applying for listing on either the Nasdaq Small Cap
Market or the National Market System of the Nasdaq to provide quotations for its
shares, however, it is not anticipated that an active trading market in the
Common Stock will develop. Therefore, no assurance can be given that any active
trading market will develop in the future or that a stockholder will otherwise
be able to dispose of his or her shares of Common Stock. Each stockholder must
be prepared to bear the economic risk of any such investment. See "MARKET PRICE
OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER MATTERS."

ABSENCE OF CASH DIVIDENDS

Various federal and state regulations restrict the payment of dividends by
banks and bank holding companies. The Company and the Bank have never paid a
cash dividend on their respective Common Stock. The primary source of dividends
paid to the Company's stockholders is dividends paid to the Company by the Bank.
It is anticipated that the Board of Directors of the Bank will continue to
follow a policy of retaining earnings, if any, for the purpose of increasing the
Bank's capital for the foreseeable future. Therefore, it is unlikely that cash
dividends will be paid by the Company during the foreseeable future. However,
the Company has paid a stock dividend every year since formation in 1999 and
anticipates the consideration of stock dividends in the future. See "MARKET
PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER MATTERS."

EXPANSION

The Company has experienced growth fueled by the Bank's branch expansion
and the acquisition of large local competitors by out-of-market institutions.
Most recently the state's largest bank Summit Bank, merged with Fleet Bank, 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
creating opportunities for the Bank to acquire new depositors and borrowers. In
addition, the Bank continually evaluates the possibility of acquisition of one
or more of these branches as well as other opportunities as part of its ongoing
branch expansion strategy. If appropriate opportunities arise, the Bank is
interested in adding one branch location a year over the three-year period
2001-2003, either full service or mini branches, or a combination of both. To
date, the Company has not experienced any material problems as a result of this
expansion. The Company believes it has in place the management and systems,
including data processing systems, internal controls and a strong

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credit culture, to support continued growth. However, the Company's continued
growth and profitability depends on the ability of its officers and key
employees to manage such growth effectively, to attract and retain skilled
employees and to maintain adequate internal controls and a strong credit
culture. Accordingly, there can be no assurance that the Company will be
successful in managing its expansion, and the failure to do so could adversely
affect the Company's financial condition and results of operations.

A natural corollary of the Company's growth, particularly its branch
expansion strategy, is a significant increase in non-interest expense. These
costs are associated with branch construction or acquisition and the increased
staffing and equipment needs necessary to create the infrastructure to support
this growth. Because the Company expects growth to continue, in part because of
its ongoing branch expansion strategy, non-interest expenses of the Company are
expected to rise in the future, which may reduce net income in the near term.

ALLOWANCE FOR LOAN LOSSES

The Bank has established an allowance for loan losses which management
believes to be adequate to offset probable losses currently inherent in the
Bank's existing loans. However, there is no precise method of predicting loan
losses. There can be no assurance that any future declines in real estate market
conditions, general economic conditions or changes in regulatory policies will
not require the Bank to increase its allowance for loan losses. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Financial Condition."

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.

9
11

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."

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.

DILUTION

The Company has no present intention to issue additional stock, but may
attempt to do so in the future if additional capital is required or useful. The
Company has not attempted to determine whether additional capital should be
available or the terms on which such capital might be available. The Company's
Common Stock is not subject to any preemptive rights. Therefore, a stockholder's
percentage ownership of the Company will be diluted if the Company sells
additional shares of Common Stock, and as it grants stock awards, options or
other awards to hire or retain employees. "DESCRIPTION OF SECURITIES --
Preemptive Rights".

DEPENDENCE UPON KEY PERSONNEL

In September 1996, the Bank's Board of Directors designated a new
management team, headed by Mr. Robert F. Mangano, President and Chief Executive
Officer, to change the direction of the Bank. The Company's and the Bank's
growth and development since that time has been largely dependent upon the
services of Mr. Mangano. The Company has a three year employment agreement with
Mr. Mangano which expires in April 2004, subject to annual renewals. The loss of
Mr. Mangano could have a material adverse effect on the Company and the Bank.

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 my cause actual results to differ from those results expressed or implied,
include, but are no 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. 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.

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12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis is intended to provide information
about the financial condition and results of operations of the Company for the
years ended December 31, 2000 and 1999 and for the periods ended March 31, 2001
and 2000 and June 30, 2001 and 2000 and should be read in conjunction with the
Financial Statements of the Company and related notes included elsewhere herein.
Throughout the following sections, the Company is defined as 1st Constitution
Bancorp and its wholly owned subsidiary, 1st Constitution Bank and its wholly
owned subsidiaries, 1st Constitution Investment Company and FCB Asset Holdings,
Inc.

OVERVIEW

The Company's record earnings for 2000 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. Past performance, however, is not necessarily indicative of future
operating results or of future financial condition. Factors that may cause
actual results to differ from those results expressed or implied, include, but
are not limited to, those discussed under the heading "Special Factors" as well
as:

- the overall economy and the interest rate environment;

- the ability of customers to repay their obligations;

- the adequacy of the allowance for loan losses;

- competition;

- significant changes in accounting, tax or regulatory practices and
requirements; 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 following table presents selected financial data as of December 31,
2000 and 1999, respectively, and for the years then ended. This table should be
read in conjunction with the Company's financial statements and the notes
thereto included herein.

AT OR FOR THE YEARS
ENDED DECEMBER 31
----------------------------
2000 1999
------------ ------------

HIGHLIGHTS
Net income................................................ $ 1,729,778 $ 1,446,842
Return on average assets.................................. 1.08% 1.03%
Return on average equity.................................. 13.09% 11.74%
Net interest margin....................................... 4.75% 4.29%
INCOME STATEMENT DATA
Net interest income....................................... $ 7,167,837 $ 5,629,062
Provision for loan losses................................. 215,875 188,875
Non-interest income....................................... 865,878 1,270,868
Non-interest expenses..................................... 5,095,732 4,425,213

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AT OR FOR THE YEARS
ENDED DECEMBER 31
----------------------------
2000 1999
------------ ------------

BALANCE SHEET DATA
Total Assets.............................................. $178,840,375 $146,802,481
Total Deposits............................................ 129,193,041 117,933,572
Total Loans............................................... 110,631,471 84,917,615
Shareholders' Equity...................................... 15,220,830 12,479,498
Intangible Assets......................................... 16,355 33,629
Allowance for Loan Losses................................. 1,132,555 941,556
SHARE INFORMATION*
Earnings per share -- Basic............................... $ 1.29 $ 1.08
Earnings per share -- Diluted............................. $ 1.27 $ 1.05
Book value per share...................................... $ 11.37 $ 9.32
Average diluted shares outstanding........................ 1,359,937 1,380,556
CAPITAL RATIOS
Total capital to risk-weighted assets..................... 13.46% 15.14%
Tier 1 capital to risk-weighted assets.................... 12.53% 14.17%
Tier 1 capital to average assets.......................... 8.61% 9.44%

---------------
* All per share data has been restated to reflect the five percent stock
dividends paid in the first quarter of fiscal 2000 and 2001.

The Company reported earnings of $1,729,778 or $1.27 per share (diluted)
for the year ended December 31, 2000 compared to $1,446,842 or $1.05 per share
(diluted) in 1999. Net income and earnings per share grew 19.6% and 21.0%,
respectively, in 2000. The increase in earnings per share in 2000 is principally
attributable to increased loan originations, deposits and fee income.

Net income totaled $480,254 for the three months ended March 31, 2001, an
increase of 30.4% over the $368,176 for the same period in 2000. On a diluted
per share basis, net income for the first quarter of 2001 was $0.35 per share
compared to $0.27 per share for the first quarter of 2000. All per share amounts
have been restated to give effect to a 5% stock dividend declared on December
21, 2000.

Return on average assets and return on average equity for the first quarter
of 2001 were 1.05% and 12.71%, respectively, compared to 1.02% and 11.83%,
respectively, for the same 2000 period.

NET INTEREST INCOME

The following tables set forth the Company's consolidated average balances
of assets, liabilities and shareholders' equity as well as interest income and
expense on related items, and the Company's average rate for the years ended
December 31, 2000 and 1999 and for the three months ended March 31, 2001 and
2000. The average rates are derived by dividing interest income and expense by
the average balance of assets or liabilities.

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14

AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES
(YIELDS ON A TAX-EQUIVALENT BASIS)

2000 1999
------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ----------- ------- ------------ ----------- -------

ASSETS:
Federal Funds Sold/Short-Term Investments...... $ 3,758,186 $ 240,055 6.39% $ 3,426,114 $ 168,684 4.92%
Investment Securities:
U.S. Treasury Bonds.......................... 494,042 25,592 5.18% 835,475 46,620 5.58%
Collateralized Mortgage Obligations.......... 45,961,785 3,104,238 6.75% 39,076,271 2,493,490 6.38%
States and Political Subdivisions............ 2,184,257 146,911 6.73% 1,582,653 107,724 6.81%
------------ ----------- ----- ------------ ----------- -----
Total........................................ 48,640,084 3,276,741 6.74% 41,494,399 2,647,834 6.38%
Loan Portfolio:
Commercial................................... 25,892,635 2,809,913 10.85% 21,115,219 2,019,239 9.56%
Installment.................................. 15,158,706 1,179,061 7.78% 13,542,197 1,020,378 7.53%
Commercial Mortgages and Construction
Wholesale.................................. 34,840,215 3,062,187 8.79% 30,339,251 2,503,163 8.25%
Residential Mortgages and Construction
Retail..................................... 17,690,917 1,411,992 7.98% 17,263,568 1,313,025 7.61%
All Other Loans.............................. 5,889,591 859,934 14.60% 4,885,578 495,192 10.14%
------------ ----------- ----- ------------ ----------- -----
Total........................................ 99,472,064 9,323,088 9.37% 87,145,813 7,350,998 8.44%
------------ ----------- ----- ------------ ----------- -----
TOTAL INTEREST-EARNING ASSETS.............. $151,870,334 $12,839,884 8.45% $132,066,326 $10,167,516 7.70%
===== =====
Allowance for Loan Losses...................... (1,029,538) (871,581)
Cash and Due From Bank......................... 5,610,092 5,954,894
Other Assets................................... 3,513,307 2,644,170
------------ ------------
TOTAL ASSETS............................... $159,964,195 $139,793,809
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Money Market and NOW Accounts................ $ 33,113,533 $ 897,502 2.71% $ 28,862,160 $ 840,587 2.91%
Savings Accounts............................. 10,600,178 288,724 2.72% 9,956,583 271,485 2.73%
Certificates of Deposit...................... 43,590,728 2,533,022 5.81% 43,300,649 2,348,076 5.42%
Certificates of Deposit of $100,000 and
over....................................... 8,446,002 511,190 6.05% 6,969,581 367,723 5.28%
Federal Funds Purchased/Other Borrowed
Funds...................................... 23,688,305 1,393,962 5.88% 14,309,202 675,645 4.72%
------------ ----------- ----- ------------ ----------- -----
TOTAL INTEREST-BEARING LIABILITIES........... $119,438,746 $ 5,624,400 4.71% $103,398,174 $ 4,503,516 4.36%
============ =========== ===== ============ =========== =====
NET INTEREST SPREAD........................ 3.74% 3.34%
===== =====
Demand Deposits................................ 25,596,993 21,842,138
Other Liabilities.............................. 1,715,203 2,232,419
------------ ------------
Total Liabilities.............................. 146,750,942 127,472,731
Shareholders' Equity........................... 13,213,254 12,321,077
------------ ------------
Total Liabilities and Shareholders' Equity..... $159,964,196 $139,793,809
============ ============
NET INTEREST MARGIN........................ $ 7,215,484 4.75% $ 5,664,000 4.29%
=========== ===== =========== =====

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AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES -- (CONTINUED)
(YIELDS ON A TAX-EQUIVALENT BASIS)

THREE MONTHS ENDED MARCH 31, 2001 THREE MONTHS ENDED MARCH 31, 2000
----------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ---------- ------- ------------ ---------- -------

ASSETS
Fed funds Sold/Short Term Investments............ $ 4,842,594 $ 59,140 4.95% $ 2,871,436 $ 43,186 6.03%
Investment Securities:
U.S. Treasury Bonds............................ 499,489 6,358 5.16% 492,292 6,391 5.21%
Collateralized Mortgage Obligations............ 54,479,932 917,510 6.74% 43,996,055 728,785 6.63%
States and Political Subdivisions.............. 2,749,251 46,699 6.79% 1,579,205 26,866 6.80%
------------ ---------- ----- ------------ ---------- -----
Total.......................................... 57,728,672 970,567 6.73% 46,067,552 762,042 6.62%
Loan Portfolio:
Commercial..................................... 24,759,297 716,520 11.74% 25,266,467 634,937 10.08%
Installment.................................... 15,441,222 300,156 7.88% 13,835,794 259,237 7.52%
Commercial Mortgages & Construction
Wholesale.................................... 49,327,016 1,026,058 8.44% 29,319,867 617,788 8.45%
Residential Mortgage & Construction Retail..... 18,714,433 375,309 8.13% 14,058,778 264,057 7.53%
All Other Loans................................ 7,313,061 202,460 11.07% 5,421,311 288,612 14.60%
------------ ---------- ----- ------------ ---------- -----
Total.......................................... 115,555,029 2,620,503 9.20% 87,902,217 2,064,631 9.42%
------------ ---------- ----- ------------ ---------- -----
TOTAL INTEREST-EARNING ASSETS................ 178,126,295 3,650,210 8.31% 136,841,205 2,869,859 8.41%
===== =====
Allowance for Loan Losses........................ (1,166,649) (967,750)
Cash and Due from Bank........................... 5,681,361 5,614,183
Other Assets..................................... 3,045,830 3,240,383
------------ ------------
TOTAL ASSETS................................. $185,686,837 $144,728,021
============ ============
Interest-Bearing Liabilities:
Money Market and NOW Accounts.................. $ 32,987,168 $ 239,368 2.94% $ 27,449,921 $ 168,484 2.46%
Savings Accounts............................... 10,515,075 70,139 2.71% 10,427,937 68,837 2.65%
Certificates of Deposit........................ 48,583,317 740,488 6.18% 43,748,762 586,939 5.38%
Certificates of Deposit of $100,000 and Over... 17,318,100 255,690 5.99% 8,535,003 110,508 5.19%
Fed Funds Purchases/Other Borrowed Funds....... 28,769,902 371,499 5.24% 17,876,675 246,081 5.52%
------------ ---------- ----- ------------ ---------- -----
TOTAL INTEREST-BEARING LIABILITIES............. 138,173,562 1,677,184 4.92% 108,038,298 1,180,849 4.38%
============ ========== ===== ============ ========== =====
NET INTEREST SPREAD.......................... 3.39% 4.03%
===== =====
Demand Deposits.................................. 29,532,862 22,665,847
Other Liabilities................................ 2,650,325 1,501,762
------------ ------------
Total Liabilities................................ 170,356,749 132,205,907
Shareholder's Equity............................. 15,330,088 12,522,114
------------ ------------
Total Liabilities and Shareholders' Equity....... 185,686,837 144,728,021
============ ============
NET INTEREST MARGIN.......................... $1,973,026 4.49% $1,689,010 4.95%
========== ===== ========== =====

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RATE/VOLUME TABLE
(TAX-EQUIVALENT BASIS)

TWELVE MONTHS ENDED MARCH 31, 2001
DECEMBER 31, 2000 VERSUS 1999 VERSUS MARCH 31, 2000
DUE TO CHANGE IN: DUE TO CHANGE IN:
------------------------------------ -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
---------- ---------- ---------- -------- --------- --------
AMOUNT OF INCREASE (DECREASE) AMOUNT OF INCREASE (DECREASE)

Interest Income:
Loans:
Commercial......................... $ 493,046 $ 297,628 $ 790,674 $(12,781) $ 94,363 $ 81,582
Installment........................ 123,555 35,128 158,683 29,326 11,595 40,921
Commercial Mortgages and
Construction -- Wholesale........ 385,409 173,615 559,024 409,000 (733) 408,267
Residential Mortgages and
Construction -- Retail........... 34,038 64,929 98,967 88,903 22,349 111,252
All Other Loans.................... 128,379 236,363 364,742 18,406 (104,558) (86,152)
---------- ---------- ---------- -------- --------- --------
Total loans................... 1,164,427 807,664 1,972,090 532,854 23,016 555,870
---------- ---------- ---------- -------- --------- --------
Investment Securities:
U.S. Treasury Bonds................ (18,014) (3,014) (21,028) 94 (127) (33)
Collateralized Mortgage
Obligations...................... 455,583 155,165 610,748 175,198 13,527 188,725
States and Political
Subdivisions..................... 40,576 (1,390) 39,186 19,872 (39) 19,833
---------- ---------- ---------- -------- --------- --------
Total Investment Securities... 478,145 150,761 628,906 195,164 13,361 208,525
---------- ---------- ---------- -------- --------- --------
Federal Funds Sold/Short-Term
Investments........................ 17,459 53,912 71,371 26,711 (10,758) 15,953
---------- ---------- ---------- -------- --------- --------
Total Interest Income......... 1,660,031 1,012,337 2,672,367 754,729 25,619 780,348
---------- ---------- ---------- -------- --------- --------
Interest Expense:
Money Market and NOW Accounts........ 116,817 (59,902) 56,915 35,999 34,884 70,883
Savings Accounts..................... 18,075 (836) 17,239 157 1,145 1,302
Certificates of Deposit.............. 15,957 168,988 184,945 65,537 88,010 153,547
Certificates of Deposit of $100,000
and Over........................... 85,892 57,575 143,467 121,037 24,145 145,182
Federal Funds Purchased/Other
Borrowed Funds..................... 516,150 202,167 718,317 137,932 (12,514) 125,418
---------- ---------- ---------- -------- --------- --------
Total Interest Expense........ 752,891 367,991 1,120,883 360,662 135,670 496,332
---------- ---------- ---------- -------- --------- --------
Net Interest Income.................... $ 907,140 $ 644,346 $1,551,484 $394,067 $(110,051) $284,016
========== ========== ========== ======== ========= ========

Net interest income, the Company's largest and most significant component
of operating income, is the difference between interest and fees earned on loans
and other interest earning assets, and interest paid on deposits and borrowed
funds. Net interest income also depends upon the relative amount of
interest-earning assets, interest-bearing liabilities, and the interest rate
earned or paid on them. Net interest income represented 89.2% of the Company's
net revenues in 2000 and 81.6% of net revenues in 1999.

The Company'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.

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 Company's average loan
portfolio grew by 14.1% and loan yields averaged 9.37% in 2000 or 93 basis
points

15
17

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 Company'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 $5,624,400 for 2000, an increase of $1,120,884 or
24.9% from $4,503,516 a year ago. The increase in interest expense for the
comparable period 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 on 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.

Changes in net interest income and net interest 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.

While the Company seeks to fund asset growth with lower cost savings, money
market, interest bearing checking and non-interest bearing demand deposits, this
is not always achievable, as asset growth rates can exceed the growth rate in
these deposit types. To attract lower cost deposits to fund asset growth,
management has continued to aggressively market certain lower costing products
and management anticipates that, over time, these products should result in
lower cost core deposits providing a higher percentage of new funding than has
recently been experienced. However, the ability of the Company to lower the cost
of interest bearing liabilities is dependent on market conditions.

The Company's net interest income for the first three months of 2001 was
$1,957,879, an increase of $227,582 or 16.5% from net interest income of
$1,680,297 for the first three months of 2000. As indicated in the Rate/Volume
Table, the principal factor contributing to this increase was an increase in the
tax-equivalent interest income of $780,348, resulting from increased loan and
investment securities volumes. Offsetting this increase was a $496,332 increase
in interest expense. This increase in interest expense was primarily due to both
higher average balances of certificates of deposit and other borrowed funds and
higher rates on most liability categories.

The Company's net interest margin (tax-equivalent basis), which is net
interest income divided by average interest earning assets, was 4.49% for the
three month period ended March 31, 2001, a 46 basis point or 9.3% decline
compared to 4.95% for the three month period ended March 31, 2000. The principal
factor causing the decrease in the Company's net interest margin was the sharp
decline in market interest rates during the first quarter of 2001. This resulted
in yields on short-term investments and floating rate loans tied to the prime
rate to decline more quickly than the Company's interest bearing liabilities. As
a result of the interest rate movement, the yield on the Company's total
interest earning assets declined 10 basis points and the cost of interest
bearing liabilities increased 54 basis points compared to the prior year period,
as depositors shifted funds from lower yielding money market and savings
accounts to higher yielding certificates of deposit accounts.

The net interest margin (tax equivalent basis), which is net interest
income divided by average interest-earning assets, was 4.75% in 2000 compared
with 4.29% in 1999. The increase in the net interest margin resulted from those
factors discussed previously.

Average non-interest bearing demand deposits increased 17.2% to $25,596,993
in 2000 from $21,842,138 in 1999. 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.

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18

NON-INTEREST INCOME

Twelve Months Ended December 31, 2000 Compared to December 31, 1999

Non-interest income amounted to $865,878 in 2000 compared to $1,270,868 the
prior year, a decrease of $404,990 or 31.9%.

Service charges on deposit accounts represent the largest single source of
non-interest income. Service charge revenues in 2000 totaled $326,441, a
decrease of 27.8% compared to $451,829 in 1999. This component of non-interest
income represented 37.7% and 35.6% of the total non-interest income in 2000 and
1999, respectively. Service charge income decreased in 2000 principally due to
the decrease in income from overdraft fees. The Company attributes the decrease
to pricing initiatives instituted in 2000. 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 Company 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 Company's
competitive market.

Gains on sales of loans, net, decreased in 2000 to $285,681 from $600,628
in 1999. The rising interest rate environment that existing during 2000
decreased the volume of mortgage loan originations and subsequent secondary
market mortgage loan sales. In 1999, a lower rate environment existed that
resulted in the reported gains on loan sales for those years.

The Company recorded net securities gains of $26,247 and $17,149 in 2000
and 1999, respectively. The gain in 2000 is primarily the result of a modest
portfolio restructuring in the last quarter of 2000. The purpose was to improve
the Company's longer-term interest rate risk position.

Three Months Ended March 31, 2001 Compared to March 31, 2000

Non-interest income was $278,936 for the three months ended March 31, 2001,
an increase of $129,825 or 87.1%, compared to non-interest income of $149,111
for the same period in 2000. The increase was due primarily to gains on sale of
loans held for sale which increased by $91,749 over the same period of 2000.

Gain on sale of loans held for sale for the three months ended March 31,
2001 was $115,016 compared to $23,267 for the three months ended March 31, 2000.
In January 2001, the Company added four full-time mortgage loan originators in
an effort to increase loan origination and secondary market sales volumes.
During 2000, the Company engaged non-employee contractors for this service.
During the first quarter of 2001, the volume of loans sold in the secondary
market amounted to $12,089,741 and resulted in the reported gain of $115,016
compared to total loan sales volume of $4,117,807 and reported gain of $23,267
for the comparable period of 2000.

NON-INTEREST EXPENSE

Twelve Months Ended December 31, 2000 Compared to December 31, 1999

Non-interest expense totaled $5,095,732 in 2000, an increase of $670,519 or
15.2%, compared to $4,425,213 in 1999. The largest increase in non-interest
expense in 2000 compared to 1999 was in salaries and employees benefits. To a
lesser extent, occupancy, and other non-interest expense also reflect increases
for the comparable periods.

Salaries and employee benefits, which represents the largest portion of
non-interest expense, increased $272,216 in 2000, to $2,510,713, or 12.2% over
1999. During 2000, an increase in staffing levels was necessary to support the
Company's strong balance sheet growth and additional branches. Also contributing
to the increase were annual merit salary increases. Staffing costs, not
including benefits, rose 19.1% in 2000 compared to 1999. Salaries and employee
benefits as a percent of average assets were 1.57% in 2000 and 1.60% in 1999.

During 2000, net occupancy expense increased $119,283 to $709,169 from
$589,886 reported in 1999. The increase in occupancy expenses in 2000 compared
to 1999 was due primarily to a full year's operating expenses associated with
the Bank's Hamilton, Mercer County branch office. In October 1999, the Bank

17
19

occupied and began lease payments on this full service branch facility. The
occupancy expense component of total non-interest expense has remained constant
as a percentage of average assets at 0.4% in 2000 and 1999, respectively.

Equipment expenses increased $43,918 or 18.1% to $286,632 in 2000 from
$242,714 in 1999. Equipment expense includes depreciation on furniture and
equipment as well as maintenance on that equipment. Throughout 1999 management
upgraded equipment in preparation for Year 2000 and increased processing
capability to enhance productively. The Company's enhanced technology has
allowed management to further diversify business and consumer product lines.

Marketing expenses increased by $17,487, or 9.2% in 2000 to $208,294,
compared to $190,807 in 1999. In 2000, marketing efforts were concentrated on
advertising to generate deposits to support continuing asset growth in addition
to the Company's emphasis on participation in community activities. The
Company's entry into Hamilton, Mercer County in 1999 resulted in additional
marketing costs to enhance the Company's profile in a new market.

The Company's ratio of non-interest expense to average assets amounted to
3.18% for 2000 compared to 3.16% 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 Company's efficiency ratio decreased in 2000 to 63.4% compared to
64.1% in 1999.

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

NON-INTEREST EXPENSES

2000 1999
---------- ----------

Salaries and employee benefits.............................. $2,510,713 $2,238,497
Occupancy expense........................................... 709,169 589,886
Equipment expense........................................... 286,632 242,714
Marketing................................................... 208,294 190,807
Computer services........................................... 415,627 314,970
Regulatory, professional and other fees..................... 304,263 206,720
Office expense.............................................. 255,387 233,908
All other expenses.......................................... 405,647 407,711
---------- ----------
Total............................................. $5,095,732 $4,425,213
========== ==========

Three Months Ended March 31, 2001 Compared to March 31, 2000

Non-interest expense totaled $1,418,736 for the first three months of 2001,
an increase of $215,204 or 17.9%, compared to $1,203,532 for the same period in
2000. The largest increase in non-interest expense was in salaries and employee
benefits. To a lesser extent, occupancy and other operating expenses also
reflect increases for the first quarter of 2001 compared to 2000.

18
20

The following table presents the major components of non-interest expenses
for the periods indicated.

NON-INTEREST EXPENSES

THREE MONTHS ENDED MARCH
31,
------------------------
2001 2000
---------- ----------

Salaries and employee benefits.............................. $ 750,192 $ 619,505
Occupancy expense........................................... 181,914 171,888
Equipment expense........................................... 70,465 75,150
Marketing................................................... 42,926 53,372
Computer services........................................... 118,067 92,683
Regulatory, professional and other fees..................... 72,620 70,777
Office expense.............................................. 82,409 62,217
All other expenses.......................................... 100,143 57,940
---------- ----------
Total............................................. $1,418,736 $1,203,532
========== ==========

Salaries and employee benefits increased $130,687 or 21.1% to $750,192 for
the three months ended March 31, 2001 compared to $619,505 for the three months
ended March 31, 2000. Salary expense increased $122,545 or 22.3% reflecting the
increase in staffing for the mortgage loan origination function plus normal
annual salary increases. The increase in salaries and employee benefits in the
first quarter of 2001 accounted for 60.7% of the total increase in non-interest
expense when compared to the same period in 2000.

The Company's ratio of non-interest expense to average assets decreased to
3.10% for the first quarter of 2001 compared to 3.33% for the first quarter of
2000. The Company's efficiency ratio decreased to 63.4% for the first three
months of 2001 compared to a ratio of 65.8% for the first three months of 2000.

EARNINGS ANALYSIS

THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000

Summary

The Company realized net income of $531,105 for the three months ended June
30, 2001 as compared to $405,589 reported for the same period in 2000. Net
income per diluted share was $0.39 for the three months ended June 30, 2001
compared to $0.30 per diluted share for the prior year.

Interest Income

Interest income for the quarter ended June 30, 2001 was $3,783,782, an
increase of $795,204 or 26.6% from the $2,988,578 reported in the same period of
2000. This increase is primarily attributable to an increase in earning asset
volume, with the majority of the growth coming in the loan and securities
portfolios. For the three months ended June 30, 2001, average interest earning
assets increased $52,818,548 or 36.4%, compared with the same period in 2000.
The increase in interest income resulting from increases in earning asset volume
was somewhat tempered by a decrease in the average yield earned on these assets.
For the three months ended June 30, 2001, the average yield on earning assets
decreased 59 basis points to 7.71% from 8.30% for the same period last year.

Interest Expense

Interest expense for the quarter ended June 30, 2001 was $1,810,506, an
increase of $503,057 or 38.5% from $1,307,449 reported in the same period last
year. The average cost of interest bearing liabilities decreased 3 basis points
to 4.56% for the current quarter of 2001 from 4.59% for the same period last
year, primarily as a result of a decrease in rates paid on deposits and
short-term borrowed funds. Total average interest bearing liabilities increased
by $44,567,398 for the current quarter of 2001 compared to the same period in
2000.

Net Interest Income

The net effect of the changes in interest income and interest expense for
the three months ended June 30, 2001 compared to the prior year period was an
increase of $292,147 in net interest income. For the three months ended June 30,
2001, the net interest margin and net interest spread, on a fully taxable
equivalent basis, decreased 64 basis points and 56 basis points, respectively,
from the same period last year. The decrease in the net interest margin and
spread were the result of interest bearing assets repricing faster than interest
earning liabilities in the decreasing rate environment that has continued
through the first six months of 2001.

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21

Provision for Loan Losses

For the three months ended June 30, 2001, the provision for loan losses was
$60,000, compared to $45,000 for the same period last year. Contributing to the
increase was an increase in total loan portfolio outstandings. The amount of the
loan loss provisions and the level of the allowance for loan losses are based
upon a number of factors including Management's evaluation of potential losses
in the portfolio after consideration of appraised collateral values, financial
conditions and past credit history of the borrowers as well as prevailing and
anticipated economic conditions.

Non-Interest Income

For the three months ended June 30, 2001, compared to the same period of
2000, total non-interest income increased $32,378 or 10.9%, to $328,852 compared
to $296,474. The increase was due primarily to increases of $12,760 in gains on
sale of loans held for sale and $60,784 in other income. These increases were
partially offset by a decline in service charges on deposit accounts of $41,166.
This decrease in service charges on deposit accounts in 2001 compared to 2000
was due to an unusually high volume of service charges incurred and paid by one
particular commercial entity during 2000 that subsequently terminated its
relationship with the Company by mutual consent.

Non-Interest Expense

For the three months ended June 30, 2001, non-interest expense increased
$119,351, or 9.2%, from the same period last year. Salaries and employee
benefits increased $137,022 compared to the prior year period primarily due to
increased staffing levels to manage the continuing growth of the Company plus
normal salary increases. Occupancy expense increased $72,935 while other
expenses decreased $90,606 as a result of the Company no longer utilizing
independent contractors in its mortgage origination operations.

EARNINGS ANALYSIS

SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000

Summary

The Company realized net income of $1,011,359 for the six months ended June
30, 2001, an increase of 30.7% over the $773,765 for the same period in 2000.
Net income per diluted share was $0.74 for the six months ended June 30, 2001
compared to $0.56 per diluted share for the prior year.

Interest Income

For the first six months of 2001, total interest income was $7,418,845, an
increase of 26.8% compared to total interest income of $5,849,724 for the same
period in 2000. The following table sets forth the Company's consolidated
average balances of assets, liabilities and shareholders' equity as well as
interest income and expense on related items, and the Company's average rate for
the six month periods ended June 30, 2001 and 2000.

20
22

AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES
(yields on a tax-equivalent basis)

Six months ended June 30, 2001 Six months ended June 30, 2000
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ---------- ------- ------------ ---------- -------

ASSETS:
Federal Funds Sold/Short-Term
Investments $ 5,370,316 $ 134,448 5.05% $ 2,159,345 $ 62,839 5.84%
Investment Securities:
U.S. Treasury Bonds 328,475 8,407 5.16% 492,463 12,737 5.19%
Collateralized Mortgage Obligations/
Mortgage Backed Securities 59,393,727 1,910,516 6.43% 44,306,088 1,477,985 6.60%
States and Political Subdivisions 3,259,473 116,699 7.16% 1,578,503 53,452 6.70%
------------ ---------- ----- ------------ ---------- -----
Total 62,981,675 2,035,622 6.46% 46,377,054 1,544,174 6.59%

Loan Portfolio:
Commercial 24,554,610 1,381,932 11.35% 25,519,418 1,325,984 10.42%
Installment 15,214,858 602,268 7.98% 14,514,037 551,571 7.62%
Commercial Mortgages and
Construction Wholesale 52,873,080 2,145,790 8.18% 31,364,966 1,347,287 8.61%
Residential Mortgages and
Construction Retail 19,755,621 765,461 7.81% 15,560,723 579,967 7.47%
All Other Loans 7,361,057 391,174 10.07% 5,506,881 455,238 12.60%
------------ ---------- ----- ------------ ---------- -----
Total 119,759,226 5,286,625 8.90% 92,466,025 4,260,047 9.24%

TOTAL INTEREST-EARNING ASSETS $188,111,217 $7,456,695 8.00% $141,002,424 $5,867,059 8.34%
===== =====

Allowance for Loan Losses (1,199,380) (986,930)
Cash and Due From Bank 6,282,637 5,777,637
Other Assets 3,015,863 3,534,487
------------
TOTAL ASSETS $196,210,337 $149,327,618
============ ============

Interest-Bearing Liabilities:
Money Market and NOW Accounts $ 33,706,829 $ 464,227 2.78% $ 30,026,007 $ 390,461 2.61%
Savings Accounts 10,568,610 134,922 2.57% 10,643,628 141,774 2.67%
Certificates of Deposit 50,784,226 1,517,805 6.03% 43,482,137 1,202,641 5.55%
Certificates of Deposit of $100,000
and Over 23,087,150 633,983 5.54% 7,113,217 195,753 5.52%
Federal Funds Purchased/Other
Borrowed Funds 30,620,840 736,753 4.85% 20,083,999 557,669 5.57%
------------ ---------- ---- ------------ ---------- -----
TOTAL INTEREST-BEARING LIABILITIES $148,767,655 $3,487,690 4.73% $111,348,988 $2,488,298 4.48%
========== ==== ========== ====

NET INTEREST SPREAD 3.27% 3.86%
==== ====
Demand Deposits 29,211,370 23,821,829
Other Liabilities 2,627,963 1,509,189
------------ ------------
Total Liabilities 180,606,988 136,680,006
Shareholders' Equity 15,603,349 12,647,612
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $196,210,337 $149,327,618
------------ ------------

NET INTEREST MARGIN $3,969,005 4.25% $3,378,761 4.81%
========== ==== ========== ====

RATE/VOLUME TABLE

JUNE 30, 2001 VERSUS JUNE 30, 2000
DUE TO CHANGE IN:
(Tax-equivalent basis VOLUME RATE TOTAL
---------- --------- ----------
Interest Income: AMOUNT OF INCREASE/(DECREASE)

Loans:
Commercial ($56,491) $112,440 $55,949
Installment 25,637 25,060 50,697
Commercial Mortgages & Construction-Wholesale 895,931 (97,428) 798,503
Residential Mortgages and Construction-Retail 157,860 27,634 185,494
All Other Loans 91,441 (155,505) (64,064)
-------------------------------------------------------------------------------------------------------
Total Loans 1,114,378 (87,799) 1,026,579
-------------------------------------------------------------------------------------------------------
Investment Securities:
U.S. Treasury Bonds (4,255) (75) (4,330)
Collateralized Mortgage Obligations 484,042 (51,509) 432,533
States and Political Subdivisions 57,963 5,282 63,245
-------------------------------------------------------------------------------------------------------
Total Investment Securities 537,750 (46,302) 491,448
-------------------------------------------------------------------------------------------------------
Federal Funds Sold/Short-Term Investments 86,949 (15,340) 71,609
-------------------------------------------------------------------------------------------------------
Total Interest Income 1,739,077 (149,441) 1,589,636
-------------------------------------------------------------------------------------------------------
Interest Expense:
Money Market and NOW Accounts 48,139 25,627 73,766
Savings Accounts (1,265) (5,587) (6,852)
Certificates of Deposit 206,720 108,444 315,164
Certificates of Deposit of $100,000 and Over 439,200 (970) 438,230
Federal Funds Purchased/Other Borrowed Funds 272,421 (93,337) 179,084
-------------------------------------------------------------------------------------------------------
Total Interest Expense 965,215 34,177 999,392
-------------------------------------------------------------------------------------------------------
Net Interest Income $773,862 ($183,618) $590,244
=======================================================================================================

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23

The current year increase in interest income was primarily due to higher
average balances in the securities and loan portfolios partially offset by
yields earned on these portfolios. Average loans increased $27,293,201, or 29.5%
while the yield on the portfolio decreased 34 basis points to 8.90% from 9.24%.
The lower loan yield reflected the lower interest rate environment during the
first six months of 2001 compared to the same period in 2000.

Average securities increased $16,604,621, or 35.8%, while the yield on the
securities portfolio decreased 13 basis points to 6.46% from 6.59%.

Overall, the yield on the Company's total interest-earning assets decreased
34 basis points to 8.00% for the six months ended June 30, 2001 from the 8.34%
for the same period in 2000.

Interest Expense

Total interest expense for the six months ended June 30, 2001 was
$3,487,690, an increase of 40.2% compared to $2,488,298 for the same period in
2000. The increase in interest expense for the current period resulted primarily
from higher levels of interest-bearing liabilities and higher rates paid on
deposits. The average rate paid on interest bearing liabilities for the six
months ended June 30, 2001 increased 25 basis points to 4.73% from 4.48% for the
same period of 2000.

Net Interest Income

The Company's net interest income for the six month period ended June 30,
2001 was $3,931,155, an increase of 16.9% compared to $3,361,426 for the same
period in 2000. For the first six months of 2001, interest income increased by
$1,569,121 compared to the same period in 2000 while interest expense increased
by $999,392 compared to the same period in 2000. Although the loan and
securities portfolios average balances increased during the first six months of
2001, those assets earned lower rates of return in 2001 than during 2000.

The net interest margin (on a tax-equivalent basis), which is net interest
income divided by average interest-earning assets, was 4.25% for the first six
months of 2001 compared to 4.81% for the same period in 2000. The principal
factor causing the decline in the net interest margin was the lower interest
rate environment during the first six months of 2001 compared to the same period
in 2000.

Provision for Loan Losses

The provision for loan losses for the six months ended June 30, 2001 was
$120,000 compared to $90,000 for the same period of 2000. While the quality of
the loan portfolio remains sound, the increase in the provision for loan losses
was due to loan growth and the inherent risk in the loan portfolio.

Non-Interest Income

Total non-interest income for the six months ended June 30, 2001 was
$607,788, an increase of 8.0% over non-interest income of $562,953 for the same
period in 2000. The increase was due primarily to increased other non-interest
income partially offset by decreases in service charges on deposit accounts and
gains on loans held for sale.

Gain on sale of loans held for sale represents the largest single source on
non-interest income. Gain on sale of loans held for sale for the six months
ended June 30, 2001 was $278,928 compared to $291,787 for the same period in
2000. In January 2001, the Company added four full-time mortgage loan
originators in an effort to increase loan origination and secondary market sales
volumes. During 2000, the Company engaged non-employee contractors for this
service.

Service charges on deposit accounts amounted to $186,560 for the six months
ended June 30, 2001 compared to $219,309 for the same period in 2000. Service
charge income decreased in 2001 principally due to the decrease in income from
overdraft fees.

The Company also generates non-interest income from a variety of fee-based
services. These fees are monitored annually by Management to reflect current
costs amid the Company's competitive market.

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24

Non-Interest Expense

Total non-interest expense for the six months ended June 30, 2001 was
$2,833,601, an increase of 8.3% compared to non-interest expense of $2,616,414
for the same period in 2000. The increase in non-interest expense was primarily
due to the increase in salaries and employee benefits.

The following table presents the major components of non-interest expense for
the six months ended June 30, 2001 and 2000.

NON-INTEREST EXPENSES
Six months ended June 30
2001 2000
---------- ----------

Salaries and employee benefits $1,515,584 $1,247,875
Occupancy expenses 358,277 342,959
Equipment expense 143,916 148,719
Marketing 88,009 108,337
Computer services 237,207 193,649
Regulatory, professional and other fees 151,225 149,570
Office expense 163,756 125,042
All other expenses 175,627 303,263
---------- ----------
$2,833,601 $2,616,414
========== ==========

Salaries and employee benefits increased 21.5% to $1,515,584 for the six months
ended June 30, 2001 compared to $1,247,875 for the six months ended June 30,
2000. This increase reflects the increase in staffing for the mortgage loan
origination function plus normal salary increases. In past years, the Company
engaged independent contractors to originate mortgage loans that were sold in
the secondary market. In January 2001, the Company employed four full-time
mortgage loan originators and ceased using independent contractors for this
function.

The Company's ratio of non-interest expense to average assets decreased to 2.91%
for the six months ended June 30, 2001 compared to 3.52% for the same period in
2000. The Company's efficiency ratio decreased to 62.4% for the first six months
of 2001 compared to a ratio of 66.7% for the first six months of 2000.

FINANCIAL CONDITION

INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES

December 31, 2000 Compared with December 31, 1999

Average interest-earning assets totaled $151,870,334 in 2000, an increase
of $19,804,008, or 15.0%, compared to 1999, reflecting growth in the loan and
investment securities portfolios. Loans increased $12,326,251, or 14.1%, to
average $99,472,064, while investment securities increased $7,145,685, or 17.2%,
to average $48,640,084. The growth in interest-earning assets was funded by
increases in money market and NOW accounts, demand deposits, other borrowed
funds and shareholders' equity.

As a result of interest rates rising in the latter part of 1999 and
continuing to rise through most of the year 2000, the annual average rate earned
on interest-earning assets increased 75 basis points from 7.70% in 1999 to 8.45%
in 2000.

Average interest-bearing liabilities totaled $119,438,746 in 2000, an
increase of $16,040,572, or 15.5%, compared to 1999. The increase resulted
primarily from growth in money market and NOW accounts and Other Borrowed Funds.
The average balance of money market and NOW accounts increased $4,251,373, or
14.7%, to $33,113,533. The average balance of Other Borrowed Funds increased
$9,379,104, or 65.5%, to $23,688,305 in 2000 primarily due to an increase in
Federal Home Loan Bank ("FHLB") borrowings. The average interest rate paid on
interest-bearing liabilities increased 35 basis points to 4.71% in 2000.

March 31, 2001 Compared with December 31, 2000

Total consolidated assets at March 31, 2001 totaled $207,151,954, an
increase of $28,311,579 or 15.8% compared to $178,840,375 at December 31, 2000.
The growth in the Company's asset base during the first three months of 2001 was
primarily due to increases in cash and cash equivalents, securities available
for sale and the loan portfolio. These increases in assets were the result of a
significant increase in total deposits at

23
25

March 31, 2001. Total deposits increased by $23,071,455 or 17.8% to $152,264,496
at March 31, 2001 compared to $129,193,041 at December 31, 2000.

Cash and Cash Equivalents At March 31, 2001, cash and cash equivalents
totaled $20,898,312 compared to $7,539,966 at December 31, 2000. Cash and cash
equivalents at March 31, 2001 consisted of cash and due from banks of
$12,041,030 and Federal funds sold/short term investments of $8,857,282. The
corresponding balances at December 31, 2000 were $6,839,966 and $700,000,
respectively. The higher balances of cash and cash equivalents at March 31, 2001
were primarily due to increased interest bearing deposit balances raised to fund
loan growth and manage the Company's liquidity position.

SECURITIES

December 31, 2000 Compared with December 31, 1999

The Company's investment securities portfolio amounted to $57,041,246, or
31.9% of total assets at December 31, 2000 compared to $45,743,973, or 31.2% of
total assets at December 31, 1999. On an average balance basis, the investment
securities portfolio represented 32.0% of average interest-earning assets for
the year ended December 31, 2000 compared to 31.4% for the year ended December
31, 1999. The average yield earned on the portfolio was 6.74% in 2000, an
increase of 36 basis points from 6.38% earning in 1999.

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, 2000, available-for-sale securities amounted to
$48,537,571, an increase of $11,185,382, or 29.9%, from year-end 1999. The
largest component of the portfolio, U.S. Government and Federal agency
securities, amounted to $45,677,219 at December 31, 2000, compared to
$18,726,883 at year-end 1999.

Sales of securities available for sale generated a gain of $26,247 in 2000,
compared to a gain of $17,149 in 1999. Maturities of securities available for
sale amounted to $1,948,157 in 2000 and $7,283,842 in 1999. At December 31,
2000, the portfolio had a reduced level of net unrealized losses of $254,618,
compared to net unrealized losses of $1,822,471 at the end of the prior year as
a result of increasing interest rates in the latter part of 1999 that continued
into 2000. These unrealized 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 U.S.
Government and Federal agency securities. At December 31, 2000, securities held
to maturity totaled $8,503,675, an increase of $111,891, or 1.3%, from
$8,391,784 the prior year. The market value of the held-to-maturity portfolio at
year-end 2000 was $8,528,995, resulting in a net unrealized gain of $25,320.

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26

March 31, 2001 Compared to December 31, 2000

Information relative to the Company's securities portfolio at March 31,
2001, is as follows:

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
MARCH 31, 2001 COST GAINS LOSSES MARKET VALUE
-------------- ----------- ---------- ---------- ------------

Available for sale --
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies... $36,551,568 $ 44,126 $65,193 $36,530,501
Mortgage backed securities..................... 15,236,782 76,918 861 15,312,839
FHLB stock and other securities................ 1,980,375 -- -- 1,980,375
----------- -------- ------- -----------
$53,768,725 $121,044 $66,054 $53,823,715
=========== ======== ======= ===========
Held to maturity --
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies... $ 4,591,199 $ 67,172 $15,851 $ 4,642,520
Mortgage backed securities..................... 3,694,955 62,819 138 3,757,636
----------- -------- ------- -----------
$ 8,286,154 $129,991 $15,989 $ 8,400,156
=========== ======== ======= ===========

Securities represented 30.0% of total assets at March 31, 2001, and 31.9%
at December 31, 2000. Total securities increased $5,068,623 or 8.9% at March 31,
2001 to $62,109,869 compared to $57,041,246 at year-end 2000.

Securities available for sale totaled $53,823,715 at March 31, 2001, an
increase of $5,286,144 or 10.9% from year-end 2000. During the first quarter of
2001, $7,301,249 of securities available for sale were purchased, (predominantly
mortgage backed securities) and funded by deposit generation and calls and
maturities of securities held to maturity and securities available for sale.

Securities held to maturity totaled $8,286,154 at March 31, 2001, a
decrease of $217,521 or 2.6% from year-end 2000. This decline in held to
maturity securities was a result of calls and maturities and their subsequent
reinvestment in the securities available for sale portfolio.

The net unrealized gain on securities available for sale was $54,990 at
March 31, 2001 compared to a net unrealized loss of $254,618 at December 31,
2000. The net unrealized gain, net of tax effect, was $36,294 as reported in
accumulated other comprehensive income/(loss) in Shareholders' Equity at March
31, 2001, and the net unrealized loss, net of tax effect of $168,048 was
reported at December 31, 2000. The change from net unrealized loss to net
unrealized gain on securities available for sale is primarily due to the changes
in interest rates between December 31, 2000 and March 31, 2001.

The amortized cost, estimated market value and average yield of debt
securities at March 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.

SECURITIES PORTFOLIO

AMORTIZED ESTIMATED AVERAGE
COST MARKET VALUE YIELD
----------- ------------ -------

Maturity Range:
Due in one year or less....................... $ 4,890,146 $ 4,894,526 5.22%
Due after one year through five years......... 7,301,197 7,357,919 6.48%
Due after five years through ten years........ 24,853,269 25,018,943 6.29%
Due after ten years........................... 25,007,383 24,952,483 6.59%
----------- ----------- -----
Total................................. $62,051,995 $62,223,871 6.36%
=========== =========== =====

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27

LOANS

December 31, 2000 Compared with December 31, 1999

The loan portfolio, which represents the Company's largest asset, is a
significant source of both interest and fee income. Elements of the loan
portfolio are subject to differing levels of credit and interest rate risk. The
Company's primary lending focus continues to be commercial loans, owner-occupied
commercial mortgage loans and tenanted commercial real estate loans. Total loans
averaged $99,472,064 during 2000, an increase of $12,326,251, or 12.4%, compared
to an average of $87,145,813 in 1999. Growth in the average loan portfolio
balance was generated by increases of $4,777,416, or 22.6% in commercial loans
and $4,500,964, or 14.8%, in commercial mortgage and construction wholesale
loans. At December 31, 2000, total loans amounted to $110,631,471 compared to
$84,917,615 the prior year, an increase of $25,713,856 or 30.3%. The average
yield earned on the loan portfolio was 9.37% in 2000 compared to 8.44% in 1999,
an increase of 93 basis points. This increase is primarily due to the higher
interest rate environment in 2000.

Commercial loans averaged $25,892,635 for 2000, an increase of 22.6%
compared to 1999. 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
increased 129 basis points to 10.85% in 2000 from 9.56% the prior year. The
increased yield on this portfolio is primarily due to the higher interest rate
environment that existed throughout most of 2000, especially the higher average
prime rate, and competitive pricing.

Commercial mortgages and construction wholesale loans averaged $34,840,215
for 2000, an increase of 14.8% compared to 1999. Generally, these loans
represent owner-occupied or investment properties and complement a broader
commercial relationship with the borrower. These 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 increased 54 basis points to 8.79% from 8.25% the prior
year.

Residential mortgages and construction retail loans averaged $17,690,917
for 2000, an increase of 2.5% compared to 1999. 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 increased 37 basis
points to 7.98% for 2000 from 7.61% the prior year.

March 31, 2001 Compared with December 31, 2000

The following table sets forth the classification of loans by major
category at March 31, 2001 and December 31, 2000.

LOAN PORTFOLIO COMPOSITION

MARCH 31, 2001 DECEMBER 31, 2000
------------------------ ------------------------
% OF % OF
COMPONENT AMOUNT TOTAL AMOUNT TOTAL
--------- ------------ -------- ------------ --------

Construction loans.................... $ 23,026,420 19.7% $ 17,957,852 16.2%
Residential real estate loans......... 14,007,870 12.0% 14,854,583 13.4%
Commercial and industrial loans....... 57,468,855 49.1% 54,974,300 49.7%
Loans to individuals.................. 14,892,365 12.7% 14,767,100 13.3%
Lease financing....................... 7,422,253 6.3% 7,809,845 7.1%
All other loans....................... 300,687 0.2% 267,791 0.3%
------------ ----- ------------ -----
$117,118,450 100.0% $110,631,471 100.0%
============ ===== ============ =====

The loan portfolio increased $6,486,979 or 5.9% at March 31, 2001 to
$117,118,450 from $110,631,471 at December 31, 2000. The Company's lending focus
continues to be on commercial and industrial loans and

26
28

construction loans. The ability of the Company to enter into larger loan
relationships and management's philosophy of relationship banking are key
factors in continued loan growth. Strong competition from both bank and non-bank
competitors could result in comparatively lower yields on new and established
lending relationships. The ultimate collectability of the loan portfolio and the
recovery of the carrying amount of real estate are subject to changes in the
Company's market region's economic environment and real estate market.

The following table provides information concerning the interest rate
sensitivity of the Company's commercial and industrial loans and construction
loans at March 31, 2001.

LOAN INTEREST RATE SENSITIVITY
MARCH 31, 2001

AFTER ONE
WITHIN BUT WITHIN AFTER
MATURITY RANGE ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------------- ----------- ----------- ---------- -----------

Commercial and industrial
loans........................ $29,405,226 $26,987,602 $1,076,027 $57,468,855
Construction loans............. 22,636,405 390,015 0 23,026,420
----------- ----------- ---------- -----------
Total................ $52,041,631 $27,377,617 $1,076,027 $80,495,275
=========== =========== ========== ===========
TYPE
-------------------------------
Fixed rate loans............... $ 7,351,306 $ 6,746,900 $ 0 $14,098,206
Floating rate loans............ 44,690,325 20,630,717 1,076,027 $66,397,069
----------- ----------- ---------- -----------
Total................ $52,041,631 $27,377,617 $1,076,027 $80,495,275
=========== =========== ========== ===========

NON-PERFORMING ASSETS

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

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

Non-performing loans totaled $577,999 at December 31, 2000, a decrease of
$59,355 from the $637,354 reported at December 31, 1999. The table below sets
forth non-performing assets and risk elements in the Company's portfolio by type
for the years and the period 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 decreased $59,355 to $577,999 at December 31, 2000
compared to $637,354 at December 31, 1999. Non-performing assets represented
0.32% of total assets at December 31, 2000 and 0.43% at December 31, 1999.
Non-performing assets as a percentage of total loans were 0.52% at December 31,
2000, compared to 0.75% at December 31, 1999. There is no assurance this
positive trend will continue in the future.

The Company had no restructured loans, other real estate owned or potential
problem loans at March 31, 2001, December 31, 2000 and 1999.

27
29

At December 31, 2000, loans that were 90 days or more past due but still
accruing interest income represented only $471,040, or 0.43% of total loans
compared to $135,598, or 0.16% of total loans at December 31, 1999. Management's
decision to accrue income on these loans was based on the level of collateral
and the status of collection efforts.

NON-PERFORMING ASSETS AND LOANS

MARCH 31 DECEMBER 31 DECEMBER 31
2001 2000 1999
-------- ----------- -----------

Non-Performing loans:
Loans 90 days or more past due and still
accruing....................................... $132,807 $471,040 $135,598
Non-accrual loans................................. 309,857 106,959 501,756
-------- -------- --------
Total non-performing.............................. 442,664 577,999 637,354
Other real estate owned............................. 0 0 0
-------- -------- --------
Total non-performing assets....................... $442,664 $577,999 $637,354
======== ======== ========
Non-performing loans to total loans................. 0.38% 0.52% 0.75%
Non-performing assets to total assets............... 0.21% 0.32% 0.43%

Nonaccrual loans amounted to $309,857 at March 31, 2001, an increase of
$202,898 from $106,959 at year-end 2000. Loans 90 days or more past due and
still accruing decreased $338,233 from $471,040 at December 31, 2000 to $132,807
at March 31, 2001. The Bank held no other real estate owned at March 31, 2001
and at December 31, 2000. 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.

Additional income before taxes amounting to $9,966 would have been
recognized in 2000 if interest on all loans had been recorded based upon
original contract terms. No interest income was recognized on non-accrual loans
in 2000.

ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION

The allowance for loan losses is maintained at a level believed by
management 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 Company'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, 2000, the allowance for loan losses was $1,132,555 compared
to $941,556 at the end of the prior year, an increase of $190,999, or 20.3%. The
allowance for loan losses amount to $1,193,336 at March 31, 2001, an increase of
$60,781 from December 31, 2000. The ratio of the allowance for loan losses to
total loans were 1.02% at both March 31, 2001 and December 31, 2000 and 1.11%,
at December 31, 1999 respectively. The allowance for loan losses as a percentage
of non-performing loans was 195.94% at December 31, 2000, compared to 147.73% at
the end of 1999. This ratio was 269.58% at March 31, 2001. The

28
30

quality of the loan portfolio remains strong and it is management's belief that
the allowance for loan losses is adequate in relation to credit risk exposure
levels.

The provision for loan losses was $215,875 for the year ended December 31,
2000, an increase of $27,000, or 14.3%, from $188,875 recorded in 1999. While
the quality of the loan portfolio remains sound, the increase in the provision
for loan losses was due to loan growth and the inherent risk in the loan
portfolio. Net charge offs in 2000 amounted to $24,876 compared to $22,849
recorded in 1999.

ALLOWANCE FOR LOAN LOSSES

MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
2001 2000 2000 1999
------------ ----------- ------------ ------------

Balance, beginning of period........ $ 1,132,555 $ 941,556 $ 941,556 $ 775,530
Provision charged to operating
expenses.......................... 60,000 45,000 215,875 188,875
Loans charged off................... 0 (6,327) (28,158) (26,662)
Recoveries.......................... 781 0 3,282 3,813
Net (charge offs)/recoveries........ 781 (6,327) (24,876) (22,849)
------------ ----------- ------------ -----------
Balance, end of period.............. $ 1,193,336 $ 980,229 $ 1,132,555 $ 941,556
============ =========== ============ ===========
Loans:
At year end....................... $117,118,450 $88,977,880 $110,631,471 $84,917,615
Average during the year........... 115,555,029 87,902,217 99,472,064 87,145,813
Net charge offs to average loans
outstanding....................... 0.00% (0.01)% (0.03)% (0.03)%
Allowance for loan losses to:
Total loans at year end........... 1.02% 1.10% 1.02% 1.11%
Non-performing loans.............. 269.58% 119.08% 195.94% 147.73%

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

MARCH 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------- -------------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS 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...... $ 620,535 49% $ 577,603 50% $480,194 50%
Real
estate -- construction... 274,467 20% 271,813 16% 225,973 16%
Real
estate -- mortgage.... 131,267 12% 135,907 14% 112,987 13%
Installment loans to
individuals........... 95,467 13% 79,279 13% 65,909 14%
Lease financing.......... 47,733 6% 45,302 7% 37,662 7%
Unallocated................ 23,867 22,651 18,831
---------- --- ---------- --- -------- ---
$1,193,336 100% $1,132,555 100% $941,556 100%
========== === ========== === ======== ===

29
31

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 Company's primary focus being on building and expanding
long-term relationships. Deposits in 2000 averaged $121,347,434, an increase of
$10,416,323, or 9.4% compared to the 1999 average. At December 31, 2000, total
deposits were $129,193,041, an increase of $11,259,469, or 9.5%, from year-end
1999. The average rate paid on the Company's deposit balances in 2000 was 3.49%,
increasing modestly from the 3.45% average rate for 1999.

A significant contributor to the record level of deposit growth in the year
2000 were demand deposits (interest bearing and non-interest bearing) which
increased $14,943,303, or 22.1%, from year-end 1999 to $67,640,717 at December
31, 2000. Average non-interest bearing demand deposits were $25,596,993 for
2000, an increase of $3,754,855, or 17.2%, 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 $4,251,373, or 14.7%, to an average of $33,113,533 in 2000. The
average cost of interest-bearing demand deposits decreased 20 basis points to
2.71% in 2000 compared to 2.91% in 1999. Other time deposits, which consist
primarily of retail certificates of deposit, increased $290,079, or 0.7%, in
2000 to average $43,590,728. The average cost of other time deposits increased
39 basis points to 5.81% in 2000 from 5.42% in 1999.

Certificates of deposit of $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 $8,446,002 during
2000, an increase of $1,476,421or 21.2%, from 1999. The average cost of these
deposits increased 77 basis points during the year to 6.05% compared with 5.28%
in 1999.

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

AVERAGE DEPOSIT BALANCES

2000 1999
-------------------------- --------------------------
AVERAGE PERCENTAGE AVERAGE PERCENTAGE
BALANCE OF TOTAL BALANCE OF TOTAL
------------ ---------- ------------ ----------

Non-interest bearing demand
deposits....................... $ 25,596,993 21.09% $ 21,842,138 19.69%
Interest bearing demand
deposits....................... 33,113,533 27.29% 28,862,160 26.02%
Savings deposits................. 10,600,178 8.74% 9,956,583 8.98%
Certificates of deposit of
$100,000 or more............... 8,446,002 6.96% 6,969,581 6.28%
Other time deposits.............. 43,590,728 35.92% 43,300,649 39.03%
------------ ------ ------------ ------
Total.................. $121,347,434 100.00% $110,931,111 100.00%
============ ====== ============ ======

The following table provides information concerning the Company's total
deposit base at March 31, 2001.

AVERAGE DEPOSIT BALANCES

THREE MONTHS ENDED
MARCH 31, 2001
---------------------
% OF
BALANCE TOTAL
------------ -----

Non-interest bearing demand deposits........................ $ 29,532,862 21.2%
Interest bearing demand deposits............................ 32,987,168 23.7%
Savings deposits............................................ 10,515,075 7.6%
Certificates of deposit of $100,000 or more................. 17,318,100 12.5%
Other time deposits......................................... 48,583,317 35.0%
------------ -----
Total............................................. $138,936,522 100.0%
============ =====

Total deposits increased $23,071,455, or 17.9% to $152,264,496 at March 31,
2001 from $129,193,041 at December 31, 2000. The increase in deposits was
primarily the result of a $15,014,917 increase in certificates of deposit of
$100,000 or more totaling $21,632,428 at March 31, 2001 compared to $6,617,511
at December 31, 2000.

Individual time deposits of $100,000 or greater amounted to $21,632,428 at
March 31, 2001. At March 31, 2001, time deposits mature as follows: $62,802,615
within twelve months; $9,963,029 in over one year through three years, and
$671,011 in over three years.

The following table details amounts and maturities for certificates of
deposit of $100,000 or more at the periods indicated:

CERTIFICATES OF DEPOSIT OF $100,000 OR MORE

MARCH 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
----------- ------------ ------------

Maturity Range:
Within three months....................... $17,794,599 $3,263,452 $ 7,036,191
After three but within six months......... 412,888 352,000 475,855
After six but within twelve months........ 1,651,550 1,408,036 1,856,770
After twelve months....................... 1,773,391 1,594,023 2,070,519
----------- ---------- -----------
$21,632,428 $6,617,511 $11,439,335
=========== ========== ===========

OTHER BORROWED FUNDS

Other borrowed funds are mainly comprised of repurchase agreements, Federal
funds purchased and Federal Home Loan Bank ("FHLB") borrowings. These borrowings
are primarily used to fund asset growth not supported by deposit generation.
During 2000, the average balance of other borrowed funds was $23,688,305, an
increase of $9,379,104, or 65.5% from the average balance of $14,309,201 for
1999.

The balances of other borrowed funds was $15,500,000 at December 31, 2000
and March 31, 2001, an increase of $12,500,000 from the prior year. The average
cost of other borrowed funds increased 116 basis points during the year to 5.88%
compared with 4.72% in 1999.

During 2000, the Company 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 Company's exposure to
rising interest rates.

During 1999, the Company 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. The
Company purchased no advances from the FHLB during the first quarter of 2001.

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

FINANCIAL CONDITION

June 30, 2001 Compared with December 31, 2000

Total consolidated assets at June 30, 2001 totaled $222,429,336, an
increase of $43,588,961 or 24.4% compared to $178,840,375 at December 31, 2000.
The growth in the Company's asset base during the first six months of 2001 was
primarily due to increases in cash and cash equivalents, securities available
for sale and the loan portfolio. These increases in assets were the result of a
significant increase in total deposits at June 30, 2001. Total deposits
increased by $39,329,991 or 30.4% to $168,523,032 at June 30, 2001 compared to
$129,193,041 at December 31, 2000.

Cash and Cash Equivalents

Cash and Cash Equivalents at June 30, 2001 totaled $22,911,114 compared to
$7,539,966 at December 31, 2000. Cash and cash equivalents at June 30, 2001
consisted of cash and due from banks of $6,828,951 and Federal funds sold/short
term investments of $16,082,163. The corresponding balances at December 31, 2000
were $6,839,966 and $700,000, respectively. The higher balances of cash and cash
equivalents at June 30, 2001 were primarily due to increased interest bearing
deposit balances raised to fund loan growth and manage the Company's liquidity
position.

Securities

Securities represented 31.4% of total assets at June 30, 2001 and 31.9% at
December 31, 2000. Total securities increased $12,774,378 or 22.4% at June 30,
2001 to $69,815,624 compared to $57,041,246 at year-end 2000.

Information relative to the company's securities portfolio at June 30,
2001, is as follows:

Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------

JUNE 30, 2001
-------------
Available for sale --
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $36,820,412 $237,039 $ 130,353 $36,927,098
Mortgage backed securities 21,830,830 49,800 92,238 21,788,392
FHLB stock and other securities 1,480,128 0 0 1,480,128
----------- -------- ---------- -----------
$60,131,370 $286,839 $ 222,591 $60,195,618
=========== ======== ========== ===========

Held to maturity --
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 6,268,349 $ 39,665 $ 7,343 $ 6,300,671
Mortgage backed securities 3,351,657 54,496 75 3,406,078
----------- -------- ---------- -----------
$ 9,620,006 $ 94,161 $ 7,418 $ 9,706,749
=========== ======== ========== ===========

Securities available for sale totaled $60,195,618 at June 30, 2001, an
increase of $11,658,047 or 24.0% from year-end 2000. During the first six months
of 2001, $19,543,101 of securities available for sale were purchased
(predominantly mortgage backed securities) and funded by deposit generation,
calls and maturities of securities held to maturity and securities available for
sale.

Securities held to maturity totaled $9,620,006 at June 30, 2001, an
increase of $1,116,331 or 13.1% from year-end 2000.

The net unrealized gain on securities available for sale was $64,248 at
June 30, 2001 compared to a net unrealized loss of $254,618 at December 31,
2000. The net unrealized gain, net of tax effect, was $42,404 as reported in
accumulated other comprehensive income/(loss) in Shareholders' Equity at June
30, 2001 and the net unrealized loss, net of tax effect, of $168,048 was
reported at December 31, 2000. The change from net unrealized loss to net
unrealized gain on securities available for sale is primarily due to the
declining interest rate environment existing between December 31, 2000 and June
30, 2001.

The amortized cost, estimated market value and average yield of debt
securities at June 30, 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.

SECURITIES PORTFOLIO

Estimated
Amortized Market Average
Cost Value Yield
----------- ----------- -------

Maturity Range:
Due in one year or less $ 2,890,128 $ 2,890,926 4.65%
Due after one year through five years 8,880,498 8,943,412 6.22%

Due after five years through ten years 24,992,429 25,103,516 6.17%

Due after ten years 32,988,321 32,964,513 6.57%
----------- ----------- -----
Total $69,751,376 $69,902,367 6.46%
=========== =========== =====

Loans

The following table sets forth the classification of loans by major
category at June 30, 2001 and December 31, 2000.

LOAN PORTFOLIO COMPOSITION June 30, 2001 December 31, 2000
------------------------- ------------------------
% %
Component Amount of total Amount of total
------------ -------- ------------ --------

Construction loans $ 27,098,629 22.3% $ 17,957,852 16.2%
Residential real estate loans 13,317,580 11.0% 14,854,583 13.4%
Commercial and industrial
loans 58,679,068 48.3% 54,974,300 49.7%
Loans to individuals 15,049,887 12.4% 14,767,100 13.3%
Lease financing 6,860,255 5.6% 7,809,845 7.1%
All other loans 508,284 0.4% 267,791 0.3%
------------ ----- ------------ -----
$121,513,703 100.0% $110,631,471 100.0%
============ ===== ============ =====

The loan portfolio increased $10,882,232 or 9.8% at June 30, 2001 to
$121,513,703 from $110,631,471 at December 31, 2000. The ability of the Company
to enter into larger loan relationships and management's philosophy of
relationship banking are key factors in continued loan growth. Strong
competition from both bank and non-bank competitors could result in
comparatively lower yields on new and established lending relationships. The
ultimate collectability of the loan portfolio and the recovery of the carrying
amount of real estate are subject to changes in the Company's market region's
economic environment and real estate market.

Non-Performing Assets

Nonaccrual loans amounted to $202,672 at June 30, 2001, an increase of
$95,713 from $106,959 at year-end 2000. Loans 90 days or more past due and still
accruing increased from $471,040 at December 31, 2000 to $474,299 at June 30,
2001. 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 AND LOANS June 30 December 31
2001 2000
-------- -----------

Non-Performing loans:
Loans 90 days or more past due and still accruing $474,299 $471,040
Non-accrual loans 202,672 106,959
-------- --------
Total non-performing loans 676,971 577,999
Other real estate owned 0 0
-------- --------
Total non-performing assets $676,971 $577,999
======== ========
Non-performing loans to total loans 0.56% 0.52%
Non-performing assets to total assets 0.30% 0.32%

The Company had no restructured loans, other real estate owned or potential
problem loans at June 30, 2001, or December 31, 2000.

Allowance for Loan Losses

The allowance for loan losses amounted to $1,253,646 at June 30, 2001, an
increase of $121,091 from December 31, 2000. The ratio of the allowance for loan
losses to total loans was 1.03% at June 30, 2001 and 1.02% at December 31, 2000,
respectively. The allowance for loan losses as a percentage of non-performing
loans was 185.19% at June 30, 2001, compared to 195.94% at the end of 2000. The
quality of the loan portfolio remains strong and it is management's belief that
the allowance for loan losses is adequate in relation to current credit risk
exposure levels.

The following table presents, for the years indicated, an analysis of the
allowance for loan losses and other related data.

ALLOWANCE FOR LOAN LOSSES
June 30, December 31,
2001 2000
------------- -------------

Balance, beginning of period $ 1,132,555 $ 941,556
Provision charged to operating expenses 120,000 215,875
Loans charged off (392) (28,158)
Recoveries 1,483 3,282
------------- -------------
Net (charge offs)/recoveries 1,091 (24,876)
------------- -------------
Balance, end of period $ 1,253,646 $ 1,132,555
============= =============
Loans:
At period end $ 121,513,703 $ 110,631,471
Average during the year 118,295,205 99,472,064
Net charge offs to average loans outstanding 0.00% (0.03%)
Allowance for loan losses to:
Total loans at period end 1.03% 1.02%
Non-performing loans 185.19% 195.94%

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

June 30, 2001 December 31, 2000
--------------------------- ---------------------------
Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
---------- ------------- ---------- -------------

Balance at end of period applicable to:
Domestic:
Commercial, financial, and agricultural $ 651,896 49% $ 577,603 50%
Real estate - construction 288,339 22% 271,813 16%
Real estate - mortgage 137,901 11% 135,907 14%
Installment loans to individuals 100,292 12% 79,279 13%
Lease financing 50,146 6% 45,302 7%
Foreign 0 0% 0 0%
Unallocated 25,072 22,651
---------- --- ---------- ---
$1,253,646 100% $1,132,555 100%
========== === ========== ===

Deposits

AVERAGE DEPOSIT BALANCE
Six months ended June 30, 2001
------------------------------
Percentage
Balance of Total
------------ ----------

Non-interest bearing demand deposits $ 29,211,370 19.8%
Interest bearing demand deposits 33,706,829 22.9%
Savings deposits 10,568,610 7.2%
Certificates of deposit of $100,000 or more 23,087,150 15.7%
Other time deposits 50,784,226 34.4%
------------ -----
Total $147,358,185 100.0%
============ =====

Total deposits increased $39,329,991 or 30.4% to $168,523,032 at June 30,
2001 from $129,193,041 at December 31, 2000. This increase in deposits was
primarily the result of a $40,567,723 increase in interest bearing deposits to
$138,298,140 at June 30, 2001. The major component of this increase was
certificates of deposit of $100,000 or more which totaled $31,246,350 at June
30, 2001 compared to $6,617,511 at December 31, 2000.

The following table details amounts and maturities for certificates of
deposit of $100,000 or more at June 30, 2001:

Certificates of Deposit of $100,000 or More
June 30, 2001
-------------

Maturity Range:
Within three months $18,140,645
After three but within six months 7,525,526
After six but within twelve months 3,706,603
After twelve months 1,873,576
-----------
$31,246,350

Other Borrowings

Other Borrowings are comprised of Federal Home Loan Bank ("FHLB")
borrowings. These borrowings are primarily used to fund asset growth not
supported by deposit generation.

The balances of other borrowed funds was $15,500,000 at June 30, 2001 and
December 31, 2000.

37
SHAREHOLDERS' EQUITY AND DIVIDENDS

Shareholders' equity at December 31, 2000 was $15,220,830, an increase of
$2,741,332, or 22.0%, compared to the prior year. Book value per common share
rose to $11.39 compared to $9.32 at December 31, 1999. The increase in
shareholders' equity and book value per share at December 31, 2000 resulted from
net income of $1,729,778, less the effect of the stock buyback discussed below
and net unrealized holding losses on securities.

Shareholders' equity at March 31, 2001 totaled $15,878,609, an increase of
$657,779, or 4.3%, compared to December 31, 2000. Book value per common share
rose to $11.87 at March 31, 2001. The increase in shareholders' equity and book
value per share at March 31, 2001 resulted from net income of $480,254 for the
first quarter of 2001 plus the net unrealized gain on securities available for
sale was $36,294 at March 31, 2001 compared to a net unrealized loss of $168,048
at December 31, 2000. This shift from a net unrealized loss to a net unrealized
gain resulted in a $204,342 increase in shareholders' equity. These increases
were partially offset by the $24,511 increase in Treasury Stock to $44,715 at
March 31, 2001 as a result of continuation of the Company's stock buyback
program.

Shareholders' equity at June 30, 2001 totaled $16,381,264, an increase of
$1,160,434, or 7.6%, compared to December 31, 2000. Book value per common share
rose to $12.30 at June 30, 2001 compared to $11.39 at December 31, 2000. The
increase in shareholders' equity and book value per share at June 30, 2001
resulted from net income of $1,011,359 for the first six months of 2001 plus the
net unrealized gain on securities available for sale was $42,404 at June 30,
2001 compared to a net unrealized loss of $168,048 at December 31, 2000. This
shift from a net unrealized loss to a net unrealized gain resulted in a $210,452
increase in shareholders' equity. These increases were partially offset by the
$59,058 increase in Treasury Stock to $79,262 at June 30, 2001 as a result of
continuation of the Company's stock buyback program.

In 2000, the Board of Directors authorized a stock buyback program that
allows for the repurchase of a limited number of the Company's shares at
management's discretion on the open market. The Company undertook this
repurchase program in order to increase shareholder value. During the three
months ended March 31, 2001, 2,800 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 $44,715 at March 31, 2001 compared to
$20,204 at December 31, 2000. During the six months ended June 30, 2001, 4,300
shares of common stock were purchased under this program and treasury stock
totaled $79,262 at June 30, 2001.

During the period 1996 - 2000, the Company has achieved a four year
compounded growth rate for shareholders' equity of 27.9% per annum. In addition,
the Company's book value per share has increased over this period at a
compounded growth rate of 14.7% per annum. In lieu of cash dividends, the
Company and, prior to its acquisition by the Company, the Bank, have 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 2000 and 1999.

The Company's stock is not listed for trading on any securities exchange,
but quotations appear on the OTC Bulletin Board under the symbol "FCCY".

LIQUIDITY

Liquidity measures the ability to satisfy current and future cash flow
needs as they become due. Liquidity management refers to the Company's ability
to support asset growth while satisfying the borrowing needs and deposit
withdrawal requirements of customers. In addition to maintaining liquid assets,
factors such as capital position, profitability, asset quality and availability
of funding affect a 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 Company 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, 2000, the cash
balance was $7,539,966.

Net cash provided by operating activities totaled $2,202,761 in 2000
compared to $6,725,018 in 1999. 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 $35,620,727 in 2000 compared
to $19,992,719 in 1999. The increase in usage resulted from an increase in
loans.

Net cash provided by financing activities amounted to $28,541,065 in 2000
compared to $17,207,675 in 1999. The increase in 2000 resulted primarily from an
increase in other borrowed funds and deposits.

Net cash used in operating activities totaled $3,686,953 for the first six
months in 2001 compared to $3,930,157 for the same period 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 $23,451,460 for the first six
months in 2001 compared to $13,685,899 for the same period in 2000. The increase
in usage resulted from the purchase of securities and an increase in loans.

Net cash provided by financing activities amounted to $42,509,561 for the
first six months in 2001 compared to $15,330,058 for the same period in 2000.
The increase in 2001 resulted primarily from the increase in deposits.

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 $3,201,266. Contractual and
anticipated principal payments from the securities portfolios are expected to be
approximately $4,274,643 in 2001. Another source of liquidity is the loan
portfolio, which provides a steady flow of payments and maturities.

INTEREST RATE SENSITIVITY ANALYSIS

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

One measure of interest rate risk is the gap ratio, which is defined as the
difference between the dollar volume of interest-earning assets and
interest-bearing liabilities maturing or repricing within a specified period of
time as a percentage of total assets. A positive gap results when the volume of
interest rate-sensitive assets exceeds that of interest rate-sensitive
liabilities within comparable time periods. A negative gap results when the
volume of interest rate-sensitive liabilities exceeds that of interest
rate-sensitive assets within comparable time periods. As indicated in the table
below, the one year gap position at December 31, 2000, March 31, 2001 and June
30,2001 was a negative 5.2%, 5.7% and 4.1%, respectively. Generally, a financial
institution with a negative gap position will most likely experience decreases
in net interest income during periods of rising rates and increases in net
interest income during periods of falling interest rates.

The negative gap realized by the Company in 2000 was due largely to
customer preferences for short-term and floating rate deposit products which
caused interest-rate sensitive liabilities to exceed interest-rate sensitive
assets during the earlier time periods presented. While gap analysis represents
a useful asset/liability management tool, it does not necessarily indicate the
effect of general interest rate movements on the Company's net interest income,
due to discretionary repricing of assets and liabilities, and other competitive
pressures.

Included in the analysis of the gap position are certain savings deposit
and demand accounts which are less sensitive to fluctuations in interest rates
than other interest-bearing sources of funds. In determining the sensitivity of
such deposits, management reviews the movement of its deposit rates for the past
four years relative to market rates. Using regression analysis, management has
estimated that these deposits are approximately 25-30% sensitive to interest
rate changes (i.e., if short term rates were to increase 100 basis points, the
interest rate on such deposits would increase 25-30 basis points).

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

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.

The Company reports its callable agency investments ($25.3 million at
December 31, 2000) at their Option Adjusted Spread ("OAS") modified duration
date, as opposed to the call or maturity date. In management's opinion, using
modified duration dates on callable agency securities provides a better estimate
of the option exercise date under any interest rate environment. The OAS
methodology is an approach whereby the likelihood of option exercise takes into
account the coupon on the security, the distance to the call date, the maturity
date and current interest rate volatility. In addition, expected prepayment
assumptions have been applied to mortgage-related securities, which are included
in investments.

INTEREST RATE SENSITIVITY AT DECEMBER 31, 2000
($ IN THOUSANDS)

NON-INTEREST
INTEREST SENSITIVITY PERIOD TOTAL ONE YEAR SENSITIVE AND
------------------------------------- WITHIN TO OVER TWO
30 DAY 90 DAY 180 DAY 365 DAY ONE YEAR TWO YEARS YEARS TOTAL
------- ------- ------- ------- -------- --------- ------------- --------

Earning Assets:
Total Investment Securities.... $ 3,972 $ 3,583 $ 4,528 $ 4,995 $17,078 $ 6,201 $33,762 $ 57,041
Loans.......................... 45,856 2,075 2,753 5,091 55,775 9,351 45,505 110,631
Other Interest-earning
assets....................... 2,938 2,938 8,230 11,168
------- ------- ------- ------- ------- ------- ------- --------
$52,766 $ 5,658 $ 7,281 $10,086 $75,791 $15,552 $87,497 $178,840
------- ------- ------- ------- ------- ------- ------- --------
Source of Funds:
Savings and time deposits...... 5,467 10,222 11,925 17,774 45,388 7,576 6,824 59,788
Other interest-bearing
liabilities.................. 34,058 275 412 824 35,569 1,647 33,063 70,279
Non-interest-bearing sources... 4,203 4,203 44,570 48,773
------- ------- ------- ------- ------- ------- ------- --------
43,728 10,497 12,337 18,598 85,160 9,223 84,457 178,840
------- ------- ------- ------- ------- ------- ------- --------
Asset (Liability) Sensitivity
Gap:
Period Gap..................... $ 9,038 $(4,839) $(5,056) $(8,512) $(9,369) $ 6,329 $ 3,040 $ 0
Cumulative Gap................. $ 9,038 $ 4,199 $ (857) $(9,369) $(9,369) $(3,040)
Cumulative Gap to Total
Assets....................... 5.1% 2.3% (0.5%) (5.2%) (5.2%) (1.7%)

INTEREST RATE SENSITIVITY AT MARCH 31, 2001
($ IN THOUSANDS)

NON-INTEREST
INTEREST SENSITIVITY PERIOD TOTAL ONE YEAR SENSITIVE AND
--------------------------------------- WITHIN TO OVER TWO
30 DAY 90 DAY 180 DAY 365 DAY ONE YEAR TWO YEARS YEARS TOTAL
------- -------- ------- -------- -------- --------- ------------- --------

Earning Assets:
Total Investment
Securities................. $ 6,092 $ 4,989 $ 2,662 $ 6,436 $ 20,179 $13,680 $28,250 $ 62,109
Loans........................ 51,659 2,219 3,702 5,944 63,524 10,791 42,805 117,120
Other Interest-earning
assets..................... 13,779 13,779 14,144 27,923
------- -------- ------- -------- -------- ------- ------- --------
71,530 7,208 6,364 12,380 97,482 24,471 85,199 207,152
------- -------- ------- -------- -------- ------- ------- --------
Sources of Funds:
Savings and time deposits.... 9,849 20,097 12,848 23,335 66,129 9,959 6,292 82,380
Other interest-bearing
liabilities................ 38,219 250 375 751 39,595 1,502 32,010 73,107
Non-interest bearing
sources.................... 3,561 3,561 48,104 51,665
------- -------- ------- -------- -------- ------- ------- --------
51,629 20,347 13,223 24,086 109,285 11,461 86,406 207,152
------- -------- ------- -------- -------- ------- ------- --------
Asset (Liability) Sensitivity
Gap:
Period Gap................... $19,901 $(13,139) $(6,859) $(11,706) $(11,803) $13,010 $(1,207) $ 0
Cumulative Gap............... $19,901 $ 6,762 $ (97) $(11,803) $(11,803) $ 1,207
Cumulative Gap to Total
Assets..................... 9.6% 3.3% 0.0% (5.7%) (5.7%) 0.6%

INTEREST RATE SENSITIVITY AT JUNE 30, 2001
($ in thousand)

Non-interest
One Year Sensitive and
Interest Sensitivity Period Total To Over
------------------------------------------- Within Two Two
30 Day 90 Day 180 Day 365 Day One Year Years Years Total
-------- -------- --------- --------- --------- -------- ------------- --------

Earning Assets:
Total Investment Securities $ 9,847 $ 3,512 $ 2,427 $ 4,676 $ 20,462 $ 8,615 $ 40,739 $ 69,816
Loans 54,883 2,682 3,476 5,461 66,502 10,381 44,630 121,513
Other Interest-earning assets 22,203 22,203 8,897 31,100
------- -------- -------- --------- --------- -------- -------- --------
86,933 6,194 5,903 10,137 109,167 18,996 94,266 222,429
------- -------- -------- --------- --------- -------- -------- --------

Source of Funds:
Savings and time deposits 17,045 22,852 17,538 22,719 80,154 14,128 6,856 101,138
Other interest-bearing
liabilities 30,864 613 920 1,840 34,237 3,681 34,757 72,675
Non-interest-bearing sources 3,869 3,869 44,747 48,616
------- -------- -------- --------- --------- -------- -------- --------
51,778 23,465 18,458 24,559 118,260 17,809 86,360 222,429
------- -------- -------- --------- --------- -------- -------- --------

Asset (Liability Sensitivity Gap:
Period Gap $35,155 $(17,271) $(12,555) $ (14,422) $ (9,093) $ 1,187 $ 7,906 $ 0
Cumulative Gap $35,155 $ 17,884 $ 5,329 $ (9,093) $ (9,093) $ (7,906)
Cumulative Gap to Total
Assets 15.8% 8.0% 2.4% (4.1%) (4.1%) (3.6%)

MARKET RISK ANALYSIS

To measure the impacts of longer-term asset and liability mismatches beyond
two years, the Company utilizes Modified Duration of Equity and Economic Value
of Portfolio Equity ("EVPE") models. The modified duration of equity measures
the potential price risk of equity to changes in interest rates. A longer
modified duration of equity indicates a greater degree of risk to rising
interest rates. Because of balance sheet optionality, an EVPE analysis is also
used to dynamically model the present value of asset and liability cash flows,
with rates ranging up or down 200 basis points. The economic value of equity is
likely to be different as interest rates change. Results falling outside
prescribed ranges require action by management. At June 30, 2001, March 31,
2001, December 31, 2000 and 1999, the Company's variance in the economic value
equity as a percentage of assets with an instantaneous and sustained parallel
shift of 200 basis points is within the negative 3% guideline, as shown in the
tables below.

41
The market capitalization of the Company should not be equated to the EVPE,
which only deals with the valuation of balance sheet cash flows using
conservative assumptions. Calculated core deposit premiums may be less than what
is available in an outright sale. The model does not consider potential premiums
on floating rate loan sales, the impact of overhead expense, non-interest
income, taxes, industry market price multiples and other factors reflected in
the market capitalization of a company.

The following tables set forth certain information relating to the
Company's financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity or repricing and the instruments fair value at
June 30, 2001, March 31, 2001 and December 31, 2000 and 1999.

MARKET RISKS ANALYSIS
($ IN THOUSANDS)

June 30, 2001
----------------------------------------------
CHANGE IN RATES Flat -200bp +200bp
------------ ---------- ----------

Economic Value
of Portfolio
Equity $ 23,030,000 $20,008,00 $19,489,000
Change (3,021,000) (3,540,000)
Change as a %
of assets (1.36%) (1.59%)

MARCH 31, 2001
---------------------------------------
CHANGE IN RATES FLAT -200BP +200BP
--------------- ----------- ----------- -----------

Economic Value of
Portfolio Equity.... $22,534,000 $18,560,000 $20,321,000
Change............... (3,974,000) (2,212,000)
Change as a % of
assets.............. (1.92)% (1.07)%

DECEMBER 31, 2000
---------------------------------------
CHANGE IN RATES FLAT -200BP +200BP
--------------- ----------- ----------- -----------

Economic Value of
Portfolio Equity.... $22,759,000 $19,559,000 $19,727,000
Change............... (3,200,000) (3,032,000)
Change as a % of
assets.............. (1.79)% (1.70)%

DECEMBER 31, 1999
---------------------------------------
CHANGE IN RATES FLAT -200BP +200BP
--------------- ----------- ----------- -----------

Economic Value of
Portfolio Equity.... $16,798,000 $18,515,600 $12,467,000
Change............... $ 1,717,600 (4,330,600)
Change as a % of
assets.............. 1.17% (2.95)%

ITEM 3. DESCRIPTION OF PROPERTY

GENERAL

The Company's and the Bank's principal office in Cranbury, New Jersey (the
"Principal Office") 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 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, 2001. The Bank has renewed the lease for a
three (3) year period through September 2004 for an increased monthly rental.

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 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 any bona fide offer.
Notwithstanding receipt of a bona fide offer, the Bank also has the option to
purchase this branch 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.

ENVIRONMENTAL MATTERS

To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future. In
the ordinary course of its business, the Company from time to time forecloses on
properties securing loans. There is a risk that the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and could be held liable to a
governmental entity or to third parties for property damage, personal injury,
and investigation and cleanup costs incurred by such parties in connection with
the contamination. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or remediate such property, may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not the
facility is owned or operated by such person. In addition, the owner or former
owners of a contaminated site may be subject to common law claims by third
parties based on damage and costs resulting from environmental contamination
emanating from such property.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information concerning the beneficial
ownership of the Company's Common Stock as of June 4, 2001 by each Director, by
all Directors and Executive Officers as a group, and by any individual or group
owning 5% or more of the Company's Common Stock. Except as set forth in the
table, the Company knows of no person or group that beneficially owns 5% or more
of the Company's Common Stock. Beneficial ownership includes shares, if any,
held in the name of the spouse, minor children or other relatives of the holder
living in such persons home, as well as shares, if any, held in the name of
another person under an arrangement whereby the holder can vest title in himself
at once or at some future time. Unless otherwise specified, all persons listed
below have sole voting and investment power with respect to their shares of
Company Common Stock. Percentage ownership is based on 1,331,905 shares of
Common Stock (net of treasury stock) on June 4, 2001.

NUMBER
OF SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER(A) OWNED OF STOCK
--------------------------- ------------ --------

Charles S. Crow, III........................................ 5,372(b) *
Edward D. Knapp............................................. 25,705(c) 1.93%
Robert F. Mangano........................................... 72,102(d) 5.14%
William M. Rue, C.P.C.U..................................... 43,246(e) 3.24%
Frank E. Walsh, III......................................... 62,586(f) 4.69%
All Directors and Executives Officers of the Company as a
Group
(5 Persons)............................................... 206,775(g) 14.62%

---------------

(a) The address for all persons listed is c/o 1st Constitution Bancorp, 2650
Route 130 North, Cranbury, New Jersey 08512.

(b) Includes options to purchase 2,205 shares of Company Common Stock, 1,157
shares of Company Common Stock held by Crow & Tartanella Profit Sharing
Plan and 1,157 shares of Company Common Stock held by Crow Family
Associates, LLC.

(c) (i) Includes 5,090 shares of Company Common Stock held by Mr. Knapp's wife,
(ii) options to purchase 5,513 shares of Company Common Stock have been
granted, of which 3,307 are currently exercisable and included in the
table; and (iii) excludes a grant of 1,050 shares of Restricted Stock,
which will vest 25% a year commencing December 2001 based on continued
service.

(d) Options to purchase 76,389 shares of Company Common Stock have been
granted, of which 71,979 are currently exercisable and included in the
table.

(e) Includes (i) 5,737 shares of Company Common Stock held by or on behalf of
Mr. Rue's children and (ii) options to purchase 2,205 shares of Company
Common Stock.

(f) Includes (i) 59,204 shares of Company Common Stock owned by Waterville
Partners, L.P., over which Mr. Walsh may be deemed to have beneficial
ownership and (ii) options to purchase 2,205 shares of Company Common
Stock.

(g) Includes options to purchase 81,901 shares of Company Common Stock.

* less than 1%

ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS

The following table lists the executive officers and directors of the
Company and the positions they hold with the Company. Directors of the Company
hold office for a term of one year or until their successors are duly elected
and have qualified. Executive officers of the Company are elected by the
Company's Board of Directors at the Company's annual meeting and hold office
until the next annual meeting of the Company's Board of Directors or until the
respective successors are duly elected and have qualified.

NAME AND POSITION WITH THE COMPANY DIRECTOR
(OTHER THAN DIRECTOR) AGE SINCE PRINCIPAL OCCUPATION
---------------------------------- --- -------- --------------------

Charles S. Crow, III,................ 51 1999 Attorney, Crow & Associates, Princeton, NJ
Secretary
Edward D. Knapp,..................... 66 1999 Chairman of the Board and Loan Review Officer,
Chairman of the Board 1st Constitution Bank
Robert F. Mangano,................... 55 1999 President and Chief Executive Officer, 1st
President and Chief Executive Constitution Bank
Officer
William M. Rue,...................... 53 1999 President, Rue Insurance, Trenton, NJ
C.P.C.U.
Frank E. Walsh, III.................. 34 1999 V.P., Jupiter Capital Management, Morristown, NJ
Joseph M. Reardon,................... 48 N.A. Vice President and Treasurer, 1st Constitution
Vice President and Treasurer Bank

DIRECTORS

Set forth below is the name of certain biographical information regarding
the directors of the Company.

Charles S. Crow, III has been a partner in the law firm of Crow &
Associates in Princeton, New Jersey since December 1, 1998 and prior to that was
a partner in the law firm of Crow & Tartanella in Somerset, New Jersey from
January 1, 1992 to November 30, 1998.

Edward D. Knapp is the Chairman of the Board and has been Chairman of the
Bank since 1995. He is the Loan Review Officer of the Bank. He is the retired
President and Chief Executive Officer of First Fidelity Bank, N.A., New Jersey.
He began his career at First Fidelity in 1956, was elected its president in
1978, and retired in 1990.

Robert F. Mangano is the President and Chief Executive Officer of the
Company and of the Bank. Prior to joining the Bank in 1996, Mr. Mangano was
President and Chief Executive Officer of Urban National Bank, a community bank
in the northern part of New Jersey for a period of three years and a Senior Vice
President of another bank for one year. Prior to that he held a senior position
with the Midlantic Corporation for 21 years. He is a Director of the Englewood
Hospital Medical Center and serves as Vice Chairman of the Board. Mr. Mangano is
on the Executive Board of the George Washington Council of the Boy Scouts of
America and has served as Treasurer of the John Harms Theater.

William M. Rue, C.P.C.U. is President of Rue Insurance in Trenton, New
Jersey. He is also a director of Selective Insurance Group. He has been a
Chartered Property Casualty Underwriter since 1972 and an Associate in Risk
Management since 1994. Mr. Rue also serves as a trustee of Rider University and
a director of the Robert Wood Johnson University Hospital at Hamilton. He is a
member of the Cranbury Township Zoning Board of Adjustment.

Frank E. Walsh, III has been a Vice President of Jupiter Capital Management
based in Morristown, New Jersey, since 1991. Jupiter, and its affiliated
entities, make investments across numerous asset classes for their clients.
Prior to joining Jupiter, Mr. Walsh was an analyst for Kidder Peabody, Inc., in
New York City. In addition to the Company's Board, Mr. Walsh serves as a
director for several other charitable and for-profit boards.

clients. Prior to joining Jupiter, Mr. Walsh was an analyst for Kidder Peabody,
Inc., in New York City. In addition to the Company's Board, Mr. Walsh serves as
a director for several other charitable and for-profit boards.

No Director of the Company is also a director of any company registered
pursuant to Section 12 of the Securities Exchange Act of 1934 or any company
registered as an investment company under the Investment Company Act of 1940.

All of the above directors of the Company also serve as directors of the
Bank.

EXECUTIVE OFFICER

Set forth below is the name of, and certain biographical information
regarding, the additional principal officer of the Company who does not also
serve as a Director of the Company.

Joseph M. Reardon is the Vice President and Treasurer of the Company and
the Bank. Prior to joining the Bank in May 2000, Mr. Reardon held financial
executive positions with a number of firms including most recently 13 years with
B.M.J. Financial Corp., a bank holding company ending in April 1997. Mr. Reardon
came out of retirement after one year to act as chief financial officer of the
New Jersey State Aquarium at Camden, a position he held from April 1998 to April
2000.

ITEM 6. EXECUTIVE COMPENSATION

The following table is a summary of certain information concerning
compensation during the last three fiscal years paid to the Company's President
and Chief Executive Officer (the only executive officer of the Company whose
total cash compensation exceeded $100,000).

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------- -------------------------------------
SALARY AND OTHER ANNUAL SECURITIES UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR BONUS COMPENSATION STOCK OPTION GRANTS COMPENSATION
--------------------------- ---- ---------- ------------ --------------------- ------------

Robert F. Mangano............ 2000 $ 274,000(1) $11,032(3) --
President and Chief 1999 $ 270,000(2) $10,552(3) 11,025(5) --
Executive Officer 1998 $ 232,500(4) $11,152(3) --

---------------
(1) Includes bonus accrued for services performed in 2000 and paid in 2001.

(2) Includes bonus accrued for services performed in 1999 and paid in 2000.

(3) Includes the value of life insurance in excess of $50,000 and an annuity
contract.

(4) Includes bonus accrued for services performed in 1998 and paid 1999.

(5) As adjusted for a 5% stock dividend declared on December 21, 2000.

During 2000, no stock options were granted or exercised by, and no
restricted stock was awarded to, the person named in the table.

EMPLOYMENT AGREEMENT

The Company entered into a 3 year employment agreement with Mr. Mangano,
its President and Chief Executive Officer, dated as of April 22, 1999 (the
"Employment Agreement"), which by its terms is automatically extended for one
year on each anniversary date until terminated. The Employment Agreement
provides for a base salary of $180,000 per annum or such higher rate as the
Board may thereafter establish. The Employment Agreement also provides for: (i)
participation by Mr. Mangano in the Company's stock option plans, (ii) the
creation of a bonus plan for Mr. Mangano, and (iii) participation in the
Company's employee benefit plans. The Employment Agreement may be terminated in
the event of the death or Disability (as defined in the Employment Agreement) of
Mr. Mangano or for Just Cause (as defined in the Employment Agreement). The
Employment Agreement further provides for the payment of certain amounts

to Mr. Mangano upon a change of control of the Company, as more fully described
in such agreement. Mr. Mangano is subject to a covenant not to compete for one
year following the termination or discontinuation of his employment with the
Company.

DIRECTOR COMPENSATION

Non-employee directors of the Company do not receive a cash fee for Board
and/or committee meetings attended; however, such non-employee directors who are
also directors of the Board of the Bank were compensated for services rendered
in that capacity in 2000 at the rate of $250 per Bank Board meeting and $250 per
Bank committee meeting attended. The Bank paid a total of $12,000 to its
non-employee directors for 2000. During 2000, the Company granted 1,000 shares
of Restricted Stock to Edward D. Knapp, Chairman of the Board, under the 2000
Employee Stock Option and Restricted Stock Plan discussed below and subject to
vesting based on continued service, in exchange for services rendered to the
Company.

STOCK OPTION PLANS

Key Employee Plan and 1996 Stock Option Plan

The Bank's 1990 Employee Stock Option Plan for Key Employees, as amended
(the "Key Employee Plan"), was adopted by the Board of the Bank and approved by
the shareholders of the Bank in March 1990. The Bank's 1996 Employee Stock
Option Plan (the "Stock Option Plan") was adopted by the Board and approved by
the shareholders in March 1997. In connection with the consummation of the
holding company structure, the Key Employee Plan and the Stock Option Plan
(collectively, the "Option Plans") was each amended so that no further grants
may be made under the Option Plans. In addition, each Option Plan was amended to
provide that each option to purchase one share of Bank Common Stock was
converted into an option to purchase one share of Company Common Stock and that
such plans will be administered by a committee of the Board of Directors of the
Company rather than a committee of the Board of Directors of the Bank.

As of March 31, 2001, options for 41,525 shares (as adjusted for all stock
dividends) were outstanding under the Key Employee Plan, and options for 48,268
shares (as adjusted for all stock dividends) were outstanding under the Stock
Option Plan.

Employee Stock Option Plan

The 2000 Employee Stock Option and Restricted Stock Plan (the "Plan") was
adopted by the Board of the Company and approved by the shareholders in April
2000. Under the Plan, the Company may issue stock options ("Options") for up to
210,000 shares of its Common Stock (as adjusted for all stock dividends) to
eligible employees, independent contractors, agents and consultants of the
Company and its subsidiaries, but excluding non-employee directors of the
Company, to aid in attracting and retaining employees, independent contractors,
agents and consultants, and to closely align their interests with those of
shareholders. The Company may also issue shares of Company Common Stock under
the Plan (the "Restricted Stock") as a bonus to any employee for such
consideration as determined by the committee in accordance with applicable laws.

The Plan is administered by a committee of the Board of the Company, which
consists of all members of the Board who are not eligible to receive options
under the Plan and who are outside directors. The committee determines the terms
of each grant under the Plan. Under the Plan, the option price must equal the
fair market value of the Company Common Stock at the time of grant, and the term
of any option cannot exceed 10 years from the date of the grant. The number of
shares of Company Common Stock covered by the Plan, and the amount and option
price for each outstanding option shall be proportionally adjusted for any
increase or decrease in the number of issued shares of Company Common Stock
resulting from the subdivision or consolidation of shares or the payment of a
stock dividend or any other increase or decrease in the number of shares
effected without receipt of consideration by the Company.

As of March 31, 2001, options for 2,700 shares (as adjusted for all stock
dividends) were outstanding under the Plan and 2,400 shares of Restricted Stock
(as adjusted for all stock dividends), subject to vesting based on continued
service, have been granted under the Plan.

Directors Plan

The Board has adopted a Directors Stock Option and Restricted Stock Plan
for nonemployee directors (the "Directors Plan"). The Directors Plan provides
for options to purchase a total of not more than 55,125 shares (as adjusted for
all stock dividends) of Company Common Stock by nonemployee directors of the
Company and its subsidiaries, including the Bank. The Company may also issue
shares of Company Common Stock under the Directors Plan as a bonus to any
employee for such consideration as determined by the committee in accordance
with applicable laws. As of March 31, 2001, options for 19,184 shares (as
adjusted for all stock dividends) were outstanding under the Directors Plan.

The Directors Plan is administered by a committee of the Board of the
Company, comprised of two (2) members of the Board who are outside directors,
which determines the terms of each grant under such Directors Plan. Under the
Directors Plan, the option price must equal the fair market value of the Company
Common Stock at the time of grant, and the term of any option cannot exceed 10
years from the date of the grant. The number of shares of Company Common Stock
covered by the Directors Plan, and the amount and option price for each
outstanding option shall be proportionally adjusted for any increase or decrease
in the number of issued shares of Company Common Stock resulting from the
subdivision or consolidation of shares or the payment of a stock dividend or any
other increase or decrease in the number of shares effected without receipt of
consideration by the Company.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company, through its Bank subsidiary, has had, and expects in the
future to have, banking transactions in the ordinary course of business with its
directors and executive officers (and their associates) on substantially the
same terms as those prevailing for comparable transactions with others. All
loans by the Bank to such persons (i) were made in the ordinary course of
business; (ii) were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons; and (iii) did not involve more than the normal
risk of collectibility or present other unfavorable features. As of March 31,
2001, the Bank had total loans and loan commitments outstanding to directors and
executive officers and their affiliates of approximately $3.2 million, or
approximately 20.1% of total shareholder's equity at that date.

The Company and the Bank lease their respective Principal Offices for an
aggregate monthly rental of $17,428 plus real estate taxes and certain common
space charges allocated by the landlord. Prior to December 2000, the building
was owned by Constitution Center, LLC, a limited liability company. Charles S.
Crow, III and William M. Rue, each a director of the Company and the Bank, and
shareholders of the Company, as well certain directors of the Bank, are the
owners of a small interest in Constitution Center, LLC. Constitution Center,
LLC, sold the building to an unrelated third party in December 2000. The new
owner assumed the obligations under the existing lease and terms.

William M. Rue, a director of the Company and the Bank, and a shareholder
of the Company is the President of Rue Insurance which provides property,
liability, workers compensation and health insurance for the Bank.

ITEM 8. DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of 10,000,000 shares
of common stock, without par value.

DIVIDENDS

The holders of the Company's Common Stock are entitled to dividends, when,
as, and if declared by the Company's Board of Directors. Generally, New Jersey
law prohibits corporations from paying dividends, if after giving effect to the
distribution, the corporation would be unable to pay its debts as they become
due in the usual course of its business or the corporation's total assets would
be less than its total liabilities.

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 Banking Act and 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 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.

LIQUIDATION RIGHTS

In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to receive, on a pro rata per share basis,
any assets distributable to shareholders, after the payment of debts and
liabilities and after the distribution to holders of any outstanding shares
hereafter issued that have prior rights upon liquidation.

VOTING RIGHTS

Each holder of the Common Stock is entitled to one vote for each share held
on all matters voted upon by the shareholders, including the election of
directors. There is no cumulative voting in the election of directors.

PREEMPTIVE RIGHTS

Holders of shares of the Common Stock are not entitled to preemptive rights
with respect to any shares of the Common Stock that may be issued.

TRANSFER AGENT

The Company's transfer agent for the Common Stock is Registrar and Transfer
Company, with offices at 10 Commerce Drive, Cranford, New Jersey 07016.

PART II

ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS

MARKET FOR COMMON STOCK

The Company's Common Stock is traded in the over-the-counter market.
Information concerning the asked and bid prices of the Common Stock is available
from the OTC Bulletin Board under the symbol "FCCY." The Company is
contemplating applying for listing on either Nasdaq Small Cap Market or the
National Market System of the Nasdaq and there is no assurance that the Company
will be accepted for listing and, if accepted for listing, an active market will
develop in the future.

The following table sets forth high and low bid prices per share for the
Company's Common Stock for each quarter of 1999 and 2000 and the first two
quarters of 2001, based upon 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.

HIGH BID LOW BID
-------- -------

1999
First Quarter.......................................... $14.90 $12.31
Second Quarter......................................... $15.12 $12.09
Third Quarter.......................................... $16.84 $14.04
Fourth Quarter......................................... $15.98 $15.12
2000
First Quarter.......................................... $17.38 $15.00
Second Quarter......................................... $15.95 $10.71
Third Quarter.......................................... $11.90 $ 9.52
Fourth Quarter......................................... $11.31 $ 9.76
2001
First Quarter.......................................... $16.38 $10.00
Second Quarter......................................... $14.25 $12.94

As of March 31, 2001, 1,334,305 shares of Common Stock were outstanding
held of record by approximately 416 persons, and there were outstanding options
which were exercisable on that date (or within 90 days thereof) for 95,582
shares of Common Stock.

Since its formation, the Company has not paid any cash dividends to its
shareholders. The future dividend policy of the Company is subject to the
discretion of the Board of Directors and will depend upon a number of factors,
including future earnings, financial conditions, cash needs, general business
conditions and applicable dividend limitations. At the present time, the Board
of Directors does not intend to pay cash dividends to its shareholders at any
time during the foreseeable future.

In lieu of cash dividends, the Company has declared a stock dividend in
each of the two years since its formation in 1999 and anticipates the
consideration of stock dividends in the future. The stock dividends were
declared and paid at the following times in the indicated amounts:

DECLARATION DATE PAYMENT DATE DIVIDEND
---------------- ------------ --------

December, 1999 January 31, 2000 5%
December, 2000 January 31, 2001 5%

The holders of the Company's Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. The Company's ability to pay dividends is subject to
restrictions imposed by New Jersey law. Generally, New Jersey law prohibits
corporations from paying dividends if after giving effect thereto, the
corporation would be unable to pay its debts as they become due in the usual
course of its business or the corporation's total assets would be less than its
total liabilities.

ITEM 2. LEGAL PROCEEDINGS

The Company and 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 Bank's 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.

ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

NONE

ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES

The Company has not sold any securities over the past three years. Issuance
of the Common Stock in connection with the acquisition of the Bank as a wholly
owned subsidiary was exempt from registration pursuant to Section 3(a)(12) of
the Securities Act of 1933, as amended.

ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Certificate of Incorporation of the Company provides that the Company
will indemnify to the full extent from time to time permitted by law, any person
made, or threatened to be made, a party to, or a witness or other participant
in, any threatened, pending or completed action, suit or proceeding, whether
civil or criminal, administrative, arbitrative, legislative, investigative or of
any other kind, by reason of the fact that such person is or was a director,
officer, employee or other agent of the Company or any subsidiary of the Company
or serves or served any other enterprise at the request of the Company against
expenses, judgments, fines, penalties and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit or
proceeding and any appeal therein. The Federal Deposit Insurance Act generally
prohibits indemnification of a holding company's directors and officers for any
penalty or judgment resulting from any administrative or civil action instituted
by a federal banking agency.

The Certificate of Incorporation of the Company contains provisions that
may limit the liability of any director or officer of the Company to the Company
or its shareholders for damages for an alleged breach of any duty owed to the
Company or its shareholders. This limitation will not relieve an officer or
director from liability based on any act or omission (i) that was in breach of
such person's duty of loyalty to the Company or its shareholders; (ii) that was
not in good faith or involved a knowing violation of law; or (iii) that resulted
in receipt by such officer or director of an improper personal benefit. These
provisions are explicitly permitted by New Jersey law.

The New Jersey Business Corporation Act empowers a corporation to indemnify
a corporate agent against his expenses and liabilities incurred in connection
with any proceeding (other than a derivative

49
51

lawsuit) involving the corporate agent by reason of his being or having been a
corporate agent if (a) the agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and (b) with respect to any criminal proceeding, the corporate
agent had not reasonable cause to believe his conduct was unlawful. For purposes
of the Act, the term "corporate agent" includes any present or former director,
officer, employee or agent of the corporation, and a person serving as a
"corporate agent" for any other enterprise at the request of the corporation.

With respect to any derivative action, the corporation is empowered to
indemnify a corporate agent against his expenses (but not his liabilities)
incurred in connection with any proceeding involving the corporate agent by
reason of his being or having been a corporate agent if the agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. However, only the court in which the proceeding
was brought can empower a corporation to indemnify a corporate agent against
expenses with respect to any claim, issue or matter as to which the agent was
adjudged liable for negligence or misconduct.

The corporation may indemnify a corporate agent in a specific case if a
determination is made by any of the following that the applicable standard of
conduct was met: (i) the Board of Directors, or a committee thereof, acting by a
majority vote of a quorum consisting of disinterested directors; (ii) by
independent legal counsel if there is not a quorum of disinterested directors or
if the disinterested quorum empowers counsel to make the determination; or (iii)
by the stockholders.

A corporate agent is entitled to mandatory indemnification to the extent
that the agent is successful on the merits or otherwise in any proceeding, or in
defense of any claim, issue or matter in the proceeding. If a corporation fails
or refuses to indemnify a corporate agent, whether the indemnification is
permissive or mandatory, the agent may apply to a court to grant him the
requested indemnification. In advance of the final disposition of a proceeding,
the corporation may pay an agent's expenses if the agent agrees to repay the
expenses if it is ultimately determined that he is not entitled to
indemnification.

50
52

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

INDEPENDENT AUDITORS' REPORT................................ 52
FINANCIAL STATEMENTS
Consolidated Statements of Condition, December 31, 2000
and 1999, respectively................................. 53
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998, respectively......... 54
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998,
respectively........................................... 55
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998, respectively......... 56
Notes to Consolidated Financial Statements, December 31,
2000, 1999 and 1998.................................... 57
Consolidated Statements of Condition, March 31, 2001 and
December 31, 2000. Unaudited........................... 70
Consolidated Statements of Income for the three months
ended March 31, 2001 and 2000. Unaudited............... 71
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000. Unaudited............... 72
Notes to Consolidated Financial Statements, March 31,
2001. Unaudited........................................ 73
Consolidated Statements of Condition, June 30, 2001 and
December 31, 2000 (Unaudited).......................... 75
Consolidated Statements of Income for the three and six
months ended June 30, 2001 and 2000 (Unaudited)........ 76
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000 (Unaudited)............... 77
Notes to Consolidated Financial Statements,
June 30, 2001.......................................... 78

51
53

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated statements of condition of
1st Constitution Bancorp and subsidiary as of December 31, 2000 and 1999, 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,
2000. 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 1st
Constitution Bancorp and subsidiary as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG

Short Hills, New Jersey
January 18, 2001

52
54

CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 2000 AND 1999

2000 1999
------------ ------------

ASSETS
CASH AND DUE FROM BANKS..................................... $ 6,839,966 $ 5,616,867
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS
TO RESELL................................................. 700,000 6,800,000
------------ ------------
Total cash and cash equivalents................... 7,539,966 12,416,867
------------ ------------
SECURITIES (Notes 2 and 8):
Available for sale, at market value....................... 48,537,571 37,352,189
Held to maturity (market value of $8,528,995 and
$8,196,386 in 2000 and 1999, respectively)............. 8,503,675 8,391,784
------------ ------------
Total securities.................................. 57,041,246 45,743,973
------------ ------------
LOANS HELD FOR SALE (Note 3)................................ 1,306,806 914,157
------------ ------------
LOANS (Notes 3, 4, 5 and 8)................................. 110,631,471 84,917,615
Less Allowance for loan losses........................... (1,132,555) (941,556)
------------ ------------
Net loans............................................ 109,498,916 83,976,059
------------ ------------
PREMISES AND EQUIPMENT, net (Note 6)........................ 939,838 974,483
------------ ------------
ACCRUED INTEREST RECEIVABLE................................. 1,287,741 852,546
------------ ------------
OTHER ASSETS (Note 9)....................................... 1,225,862 1,924,396
------------ ------------
Total assets................................................ $178,840,375 $146,802,481
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 7)
Non-interest bearing................................... $ 31,462,624 $ 24,957,079
Interest bearing....................................... 97,730,417 92,976,493
------------ ------------
Total deposits.................................... 129,193,041 117,933,572
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note 8)..... 16,835,430 12,053,834
OTHER BORROWINGS (Note 8)................................... 15,500,000 3,000,000
ACCRUED INTEREST PAYABLE.................................... 1,541,439 928,776
ACCRUED EXPENSES AND OTHER LIABILITIES...................... 549,635 406,801
------------ ------------
Total liabilities................................. 163,619,545 134,322,983
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY (Notes 9, 10 and 13):
Common stock, no par value; 10,000,000 shares authorized;
1,337,995 and 1,274,473 shares issued and 1,336,105 and
1,274,473 outstanding as of December 31, 2000 and 1999,
respectively........................................... 13,912,814 13,187,006
Retained earnings........................................... 1,496,268 495,323
Treasury Stock, 1,890 shares at cost........................ (20,204) 0
Accumulated other comprehensive loss........................ (168,048) (1,202,831)
------------ ------------
Total shareholders' equity........................ 15,220,830 12,479,498
------------ ------------
Total liabilities and shareholders' equity.................. $178,840,375 $146,802,481
============ ============

See accompanying Notes to Consolidated Financial Statements.

53
55

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

2000 1999 1998
----------- ----------- -----------

INTEREST INCOME:
Interest on loans................................. $ 9,323,088 $ 7,350,998 $ 6,281,548
Interest on securities
Taxable........................................ 3,129,830 2,540,109 1,744,912
Tax-exempt..................................... 99,264 72,787 63,081
Interest on Federal funds sold and securities
purchased under agreements to resell........... 240,055 168,684 240,854
----------- ----------- -----------
Total interest income..................... $12,792,237 $10,132,578 $ 8,330,395
=========== =========== ===========
INTEREST EXPENSE:
Interest on deposits.............................. 4,230,438 3,827,871 3,138,296
Interest on Federal funds purchased and securities
sold under agreements to repurchase............ 1,089,396 506,681 492,801
Interest on other borrowings...................... 304,566 168,964 87,561
----------- ----------- -----------
Total interest expense.................... 5,624,400 4,503,516 3,718,658
----------- ----------- -----------
Net interest income....................... 7,167,837 5,629,062 4,611,737
PROVISION FOR LOAN LOSSES (Note 4).................. 215,875 188,875 178,000
----------- ----------- -----------
Net interest income after provision for
loan losses............................. 6,951,962 5,440,187 4,433,737
----------- ----------- -----------
NON-INTEREST INCOME:
Service charges on deposit accounts............... 326,441 451,829 306,028
Gain on sale of loans held for sale............... 285,681 600,628 560,637
Gain on sale of securities available for sale..... 26,247 17,149 --
Other income...................................... 227,509 201,262 138,305
----------- ----------- -----------
Total other income........................ 865,878 1,270,868 1,004,970
----------- ----------- -----------
NON-INTEREST EXPENSES:
Salaries and employee benefits.................... 2,510,713 2,238,497 1,970,901
Occupancy expense (Note 11)....................... 709,169 589,886 476,172
Other operating expenses (Note 12)................ 1,875,850 1,596,830 1,412,437
----------- ----------- -----------
Total other expenses...................... 5,095,732 4,425,213 3,859,510
----------- ----------- -----------
Income before income taxes................ 2,722,108 2,285,842 1,579,197
INCOME TAXES (Note 9)............................... 992,330 839,000 579,100
----------- ----------- -----------
Net income................................ $ 1,729,778 $ 1,446,842 $ 1,000,097
=========== =========== ===========
NET INCOME PER SHARE
Basic............................................. $ 1.29 $ 1.08 $ .91
Diluted........................................... $ 1.27 $ 1.05 $ .89
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic............................................. 1,337,929 1,337,986 1,104,706
Diluted........................................... 1,359,937 1,380,556 1,124,718
=========== =========== ===========

See accompanying Notes to Consolidated Financial Statements.

54
56

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

ACCUMULATED
OTHER TOTAL
RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
COMMON STOCK EARNINGS STOCK (LOSS) INCOME EQUITY
------------ ----------- -------- ------------- -------------

BALANCE, December 31, 1997............... $ 6,352,962 -- $ 19,578 $ 6,372,540
Issuance of common stock, Net of $75,000
in expenses (400,000 shares)........... 4,825,000 -- -- 4,825,000
Exercise of stock options (2,000
shares)................................ 16,122 -- -- 16,122
5% stock dividend declared in December,
1998 (57,567 shares)................... 866,653 (866,653) -- --
Comprehensive Income:
Net income -- 1998..................... -- 1,000,097 -- 1,000,097
Other comprehensive income Unrealized
gain on Securities available for
Sale, net of tax of $24,452.......... -- -- 47,464 47,464
-----------
Comprehensive Income..................... -- -- -- 1,047,561
----------- ----------- -------- ----------- -----------
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
$533,070............................. 1,034,783 1,034,783
----------- ----------- -------- ----------- -----------
Comprehensive Income
BALANCE, December 31, 2000............... $13,912,814 $ 1,496,268 $(20,204) $ (168,048) $15,220,830
=========== =========== ======== =========== ===========

See accompanying Notes to Consolidated Financial Statements.

55
57

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

2000 1999 1998
------------ ------------ ------------

OPERATING ACTIVITIES:
Net income......................................... $ 1,729,778 $ 1,446,842 $ 1,000,097
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Provision for loan losses....................... 215,875 188,875 178,000
Depreciation and amortization................... 218,268 209,233 122,471
Net amortization (accretion) on securities...... (4,351) 33,065 43,750
Gain on sale of loans held for sale............. (285,681) (600,628) (560,637)
Gain on sale of securities available for sale... (26,247) (17,149) --
Originations of loans held for sale............. (40,834,113) (59,458,042) (39,041,500)
Proceeds from sales of loans held for sale...... 40,727,145 65,793,682 33,715,968
Decrease (increase) in accrued interest
receivable.................................... (435,195) 9,359 (176,118)
Decrease (increase) in other assets............. 141,785 (489,545) (242,376)
Increase in accrued interest payable............ 612,663 101,500 130,368
(Decrease) increase in accrued expenses and
other liabilities............................. 142,834 (492,174) 158,580
------------ ------------ ------------
Net cash provided by (used in) operating
activities................................. 2,202,761 6,725,018 (4,671,397)
INVESTING ACTIVITIES:
Purchases of securities --
Available for sale................................. (15,039,088) (24,969,454) (20,839,946)
Held to maturity................................... (1,365,000) (654,469) (1,543,221)
Proceeds from maturities and prepayments of
securities --
Available for sale................................. 1,948,157 7,283,842 13,436,857
Held to maturity................................... 1,253,109 385,442 2,653,258
Proceeds from sales of securities available for
sale............................................ 3,504,450 6,138,600 --
Net increase in loans.............................. (25,738,732) (7,668,319) (13,810,527)
Capital expenditures............................... (183,623) (508,361) (325,893)
------------ ------------ ------------
Net cash used in investing activities......... (35,620,727) (19,992,719) (20,429,472)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of common stock, net...................... -- 41,306 4,841,122
Net increase in demand, savings and time
deposits........................................ 11,259,469 13,516,113 18,857,536
Net increase in securities sold under agreements to
repurchase...................................... 4,781,596 2,650,256 1,051,773
Net increase in other borrowings................... 12,500,000 1,000,000 2,000,000
------------ ------------ ------------
Net cash provided by financing activities..... 28,541,065 17,207,675 26,750,431
------------ ------------ ------------
(Decrease) increase in cash and cash
equivalents................................ (4,876,901) 3,939,974 1,649,562
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 12,416,867 8,476,893 6,827,331
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 7,539,966 $ 12,416,867 $ 8,476,893
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest........................................ $ 5,011,737 $ 4,402,016 $ 3,588,290
Income taxes.................................... 866,397 1,040,498 802,373
============ ============ ============

See accompanying Notes to Consolidated Financial Statements.

56
58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

1ST 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 and its wholly-owned subsidiary 1ST Constitution Bank
and its wholly-owned subsidiaries, 1ST Constitution Investment Company and FCB
Assets Holdings, Inc., collectively "The Bank" or "The Company". All significant
intercompany amounts have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles 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 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 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

57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 cost 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, 2000 and 1999.

58
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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 securities purchased
under agreements to resell. Generally, Federal funds are sold for a one or
two-day period.

Reclassifications

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

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 22,008, 42,570,
and 20,012 for 2000, 1999, and 1998, 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 21, 2000.

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.

59
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SECURITIES

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

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
=========== ======== ======== ===========

GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1999 COST GAINS LOSSES VALUE
---- ----------- ---------- ---------- -----------

Available for sale --
U. S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $20,065,627 $6,769 $1,345,513 $18,726,883
Mortgage backed securities................... 16,856,118 186 482,382 16,373,922
FHLB stock and other securities.............. 2,252,915 -- 1,531 2,251,384
----------- ------ ---------- -----------
$39,174,660 $6,955 $1,829,426 $37,352,189
=========== ====== ========== ===========
Held to maturity --
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies.................................. $ 3,079,746 $1,147 $ 122,327 $ 2,958,566
Mortgage backed securities................... 5,312,038 343 74,561 5,237,820
----------- ------ ---------- -----------
$ 8,391,784 $1,490 $ 196,888 $ 8,196,386
=========== ====== ========== ===========

The amortized cost and estimated market value of debt securities at
December 31, 2000, 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.

60
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------

Available for sale --
Due in one year or less................................... $ 2,909,643 $ 2,906,573
Due after one year through five years..................... 7,913,998 7,925,786
Due after five years through ten years.................... 20,104,086 19,926,990
Due after ten years....................................... 17,864,462 17,778,222
----------- -----------
Total available for sale.......................... $48,792,189 $48,537,571
=========== ===========
Held to maturity --
Due in one year or less................................... $ 1,365,000 $ 1,365,000
Due after one year through five years..................... 1,697,965 1,704,281
Due after five years through ten years.................... 3,479,065 3,466,191
Due after ten years....................................... 1,961,645 1,993,523
----------- -----------
Total held to maturity............................ $ 8,503,675 $ 8,528,995
=========== ===========

Gross gains on securities sales were $26,247 in 2000, and $17,149 in 1999.
There were no sales of securities during 1998.

As of December 31, 2000 and 1999, securities having a book value of
$29,920,801 and $17,725,562, respectively, were pledged to secure public
deposits, repurchase agreements, other borrowings, and for other purposes as
required by law.

(3) LOANS AND LOANS HELD FOR SALE

Loans outstanding by classification at December 31, 2000 and 1999 are as
follows:

2000 1999
------------ -----------

Construction loans............................... $ 17,957,852 $ 7,130,325
Residential real estate loans.................... 14,854,583 12,288,205
Commercial and industrial loans.................. 54,974,300 46,566,697
Loans to individuals............................. 14,767,100 13,220,968
Lease financing.................................. 7,809,845 5,500,055
All other loans.................................. 267,791 211,365
------------ -----------
$110,631,471 $84,917,615
============ ===========

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 $1,306,806 at
December 31, 2000 and $914,157 at December 31, 1999. The Bank currently sells
loans, servicing released.

61
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) ALLOWANCE FOR LOAN LOSSES

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

2000 1999 1998
---------- -------- --------

Balance, beginning of year........................ $ 941,556 $775,530 $627,722
Provision charged to expense...................... 215,875 188,875 178,000
Loans charged off................................. (28,158) (26,662) (32,971)
Recoveries........................................ 3,282 3,813 2,779
---------- -------- --------
Balance, end of year.............................. $1,132,555 $941,556 $775,530
========== ======== ========

The amount of loans which were not accruing interest amounted to $106,959
and $501,756 at December 31, 2000 and 1999, respectively. Impaired loans totaled
$35,927 and $56,801 at December 31, 2000 and 1999, respectively. There was no
valuation allowance on impaired loans in 2000 or 1999. Loans 90 days or more
past due and still accruing totaled $471,070 and $135,598 in 2000 and 1999,
respectively.

The average recorded investment in impaired loans for the years ended
December 31, 2000, 1999 and 1998, was approximately $46,000, $66,000, and
$100,000, respectively.

(5) LOANS TO RELATED PARTIES

Activity related to loans to directors, executive officers and their
affiliated interests during 2000 is as follows:

Balance, beginning of year.................................. $ 4,377,487
Loans granted............................................... 250,000
Repayments of loans......................................... (1,465,090)
-----------
Balance, end of year........................................ $ 3,162,397
===========

All such loans were made under customary terms and conditions and were
current as to principal and interest payments as of December 31, 2000 and 1999.

(6) PREMISES AND EQUIPMENT

Premises and equipment consist of the following as of December 31, 2000 and
1999

2000 1999
---------- ----------

Leasehold improvements.............................. $ 550,912 $ 443,653
Furniture and equipment............................. 1,292,695 1,233,138
---------- ----------
1,843,607 1,676,791
Less -- Accumulated depreciation.................... (903,769) (702,308)
---------- ----------
$ 939,838 $ 974,483
========== ==========

62
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) DEPOSITS

Deposits at December 31, 2000 and 1999 consist of the following:

2000 1999
------------ ------------

Demand
Non-interest bearing.......................... $ 31,462,624 $ 24,957,079
Interest bearing.............................. 36,178,093 27,740,335
Savings......................................... 10,244,003 10,010,496
Time............................................ 51,308,321 55,225,662
------------ ------------
$129,193,041 $117,933,572
============ ============

Individual time deposits $100,000 or greater, amounted to $6,617,511 and
$11,439,335 at December 31, 2000 and 1999, respectively. As of December 31,
2000, time deposits mature as follows: $42,256,480 in 2001; $6,590,781 in 2002;
$1,909,883 in 2003; $227,454 in 2004; and $323,723 in 2005.

(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS

Securities sold under agreements to repurchase are summarized as follows.

2000 1999 1998
----------- ----------- ----------

Balance outstanding at year end.............. $16,835,430 $12,053,834 $9,403,578
Weighted average interest rate at year end... 4.75% 4.46% 4.33%
Average daily balance outstanding during
year....................................... 19,071,365 10,865,091 9,045,613
Weighted average interest rate during year... 5.38% 4.52% 5.17%
Highest month-end outstanding balance........ 34,643,386 12,053,834 10,466,294

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.

63
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) INCOME TAXES

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

2000 1999 1998
-------- -------- --------

Federal --
Current.......................................... $952,240 $789,716 $549,768
Deferred......................................... (89,920) (61,216) (49,268)
-------- -------- --------
863,320 728,500 500,500
-------- -------- --------
State --
Current.......................................... 144,641 121,196 90,658
Deferred......................................... (15,631) (10,696) (12,056)
-------- -------- --------
129,010 110,500 78,600
-------- -------- --------
$992,330 $839,000 $579,100
======== ======== ========

A comparison of income tax expense at the Federal statutory rate in 2000,
1999 and 1998 to the Company's provision for income taxes is as follows:

2000 1999 1998
-------- -------- --------

Federal income tax at 34%.......................... $925,517 $777,186 $536,927
Add (deduct) effect of:
State income taxes net of federal income tax
effect........................................ 85,147 72,930 51,876
Tax-exempt interest income....................... (33,750) (24,748) (21,448)
Other items, net................................. 15,416 13,632 11,745
-------- -------- --------
Provision for income taxes......................... $992,330 $839,000 $579,100
======== ======== ========

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

2000 1999
-------- --------

Deferred tax assets --
Allowance for loan losses............................ $452,342 $376,057
Unrealized loss on securities available for sale..... 86,570 619,640
Other................................................ 20,379 --
-------- --------
Total deferred tax assets.............................. 559,291 995,697
-------- --------
Deferred tax liabilities --
Other.................................................. -- 8,437
Total Deferred Tax Liabilities......................... -- 8,437
-------- --------
Net Deferred Tax Asset................................. $559,291 $987,260
======== ========

Based upon the current facts, management has determined that it is more
likely than not that there will be sufficient taxable income in future years to
realize the deferred tax assets. However, there can be no assurances about the
level of future earnings.

(10) SHAREHOLDERS' EQUITY

The Bank's shareholders have approved a stock option plan for employees and
directors, and entered into an employment agreement with additional options
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

64
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 2000, 1999 and 1998 would have been reduced
to the following pro forma amounts.

2000 1999 1998
---------- ---------- ----------

Net income --
As reported.................................. $1,729,778 $1,446,842 $1,000,097
Pro forma.................................... $1,719,778 $1,385,159 $ 975,862
Net income per share --
As reported --
Basic..................................... $ 1.29 $ 1.08 $ .91
Diluted................................... $ 1.27 $ 1.05 $ .89
Pro forma --
Basic..................................... $ 1.29 $ 1.04 $ .89
Diluted................................... $ 1.27 $ 1.00 $ .87

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 1999 and 1998: dividend yield of 0%; expected
volatility of 25% and 25%, respectively; risk-free interest rates of 5.75% and
5.50%, respectively; and expected lives of 5 years.

A summary of the status of the Bank's stock options at December 31, 2000,
1999 and 1998 and changes during the years then ended is presented below.

2000 1999 1998
-------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVG. PRICE SHARES AVG. PRICE SHARES AVG. PRICE
------- ---------- ------- ---------- ------ ----------

Outstanding, at beginning of year...... 119,751 $10.55 82,811 $ 8.59 75,866 $ 8.10
Granted................................ -- -- 42,236 $14.06 9,261 $12.23
Exercised.............................. -- -- (5,296) $ 7.80 (2,316) $ 6.96
Forfeited.............................. (6,278) 12.09 -- -- -- --
------- ------- ------- ------- ----- -------
Outstanding, at end of year............ 113,473 $ 10.50 119,751 $10.55 82,811 $ 8.59
------- ------- ------- ------- ----- -------
(Range of Exercise Prices --
$7.31-$14.76)
Exercisable, at end of year............ 96,891 9.61 99,024 $ 9.91 82,811 $ 8.59
------- ------- ------- ------- ----- -------
(2000 Range of Exercise Prices --
$7.52-$14.06)
Weighted average remaining
contractual life.................. 6.8 years 7.8 years 8.0 years
Weighted average fair value of
options granted during the year... $ -- $ 4.26 $ 4.10

In December 2000, 1999 and 1998, the Bank declared a 5%, stock dividend to
shareholders. All amounts in the table above and elsewhere in this note have
been adjusted to reflect such stock dividends.

(11) COMMITMENTS AND CONTINGENCIES COMMITMENTS

The Bank's main office is leased from a partnership which includes certain
Bank directors at a monthly rental of $13,919 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.

65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2000, future minimum rental payments under
noncancellable operating leases are as follows:

2001........................................................ $ 386,755
2002........................................................ $ 365,459
2003........................................................ $ 298,592
2004........................................................ $ 294,180
2005........................................................ $ 304,145
Thereafter.................................................. $2,217,192

Rent expense aggregated $512,805, $426,883 and $284,198 for the years ended
December 31, 2000, 1999 and 1998, 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 $28,190,000 to its borrowers as
of December 31, 2000. At December 31, 2000, the Bank was contingently liable for
outstanding letters of credit to customers in the amount of $758,487.

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.

66
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) OTHER OPERATING EXPENSES

The components of other operating expenses for the years ended December 31,
2000, 1999 and 1998 are as follows:

2000 1999 1998
---------- ---------- ----------

Equipment expense.............................. $ 286,632 $ 242,714 $ 155,446
Marketing...................................... 208,294 190,807 178,143
Computer services.............................. 415,627 314,970 299,690
Regulatory, professional and other fees........ 304,263 206,720 226,085
Office expense................................. 255,387 233,908 195,130
All other expenses............................. 405,647 407,711 357,943
---------- ---------- ----------
$1,875,850 $1,596,830 $1,412,437
========== ========== ==========

(13) REGULATORY CAPITAL 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, 2000, that the Bank meets all capital adequacy requirements to
which it is subject.

As of December 31, 2000, the most recent notification from the Bank's
primary regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. 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. 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.

67
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Holding Company and Bank's actual capital amounts and ratios as of
December 31, 2000 and 1999 are as follows:

TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- -------------------------- ----------------------------
AS OF DECEMBER 31, 2000 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------- ----------- ----- ---------- ------------- ----------- --------------

Total capital (to Risk Weighted Assets)...... $16,505,078 13.46% $9,811,360 Greater than, $12,264,200 Greater than,
Equal to 8% Equal to 10%
Tier I Capital (to Risk Weighted Assets)..... 15,372,523 12.53% 4,905,680 Greater than, 7,358,520 Greater than,
Equal to 4% Equal to 6%
Tier I Capital (to Average Assets)........... 15,372,523 8.61% 7,140,120 Greater than, 8,925,150 Greater than,
Equal to 4% Equal to 5%
As of December 31, 1999
Total capital (to Risk Weighted Assets)...... 14,590,256 15.14% 7,707,760 Greater than, 9,634,700 Greater than,
Equal to 8% Equal to 10%
Tier I Capital (to Risk Weighted Assets)..... 13,648,700 14.17% 3,853,880 Greater than, 5,780,820 Greater than,
Equal to 4% Equal to 6%
Tier I Capital (to Average Assets)........... 13,648,700 9.44% 5,785,560 Greater than, 7,231,950 Greater than,
Equal to 4% Equal to 5%

(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 disclosure. 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.

68
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------

Cash and cash equivalents......... $ 7,539,966 $ 7,539,966 $ 12,416,867 $ 12,416,867
Securities available for sale..... 48,537,571 48,537,571 37,352,189 37,352,189
Securities held to maturity....... 8,503,675 8,528,995 8,391,784 8,196,386
Loans held for sale............... 1,306,806 1,307,000 914,157 915,000
Gross loans....................... 110,631,471 111,692,000 84,917,615 84,332,000
Deposits.......................... 129,193,041 129,467,000 117,933,572 117,866,000
Securities sold under agreements
to repurchase................... 16,835,430 16,835,430 12,053,834 12,053,834
Other borrowings.................. 15,500,000 15,694,000 3,000,000 2,996,000

Standby letters of credit as of December 31, 2000 and 1999 are based on
fees charged for similar agreements; accordingly, the estimated fair value of
standby letters of credit is nominal.

69
71

CONSOLIDATED STATEMENTS OF CONDITION
MARCH 31, 2001 AND DECEMBER 31, 2000

MARCH 31, DECEMBER 31,
2001 2000
------------ ------------

ASSETS
CASH AND DUE FROM BANKS..................................... $ 12,041,030 $ 6,839,966
FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS............... 8,857,282 700,000
------------ ------------
Total cash and cash equivalents................... 20,898,312 7,539,966
------------ ------------
SECURITIES:
Available for sale, at market value....................... 53,823,715 48,537,571
Held to maturity (market value of $8,400,156 and
$8,528,995 in 2001 and 2000, respectively)............. 8,286,154 8,503,675
------------ ------------
Total securities............................................ 62,109,869 57,041,246
------------ ------------
LOANS HELD FOR SALE......................................... 4,922,341 1,306,806
------------ ------------
LOANS....................................................... 117,118,450 110,631,471
Less -- Allowance for loan losses......................... (1,193,336) (1,132,555)
------------ ------------
Net loans............................................ 115,925,114 109,498,916
------------ ------------
PREMISES AND EQUIPMENT, net................................. 938,577 939,838
------------ ------------
ACCRUED INTEREST RECEIVABLE................................. 1,227,142 1,287,741
------------ ------------
OTHER ASSETS................................................ 1,130,599 1,225,862
------------ ------------
Total assets................................................ $207,151,954 $178,840,375
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing................................... $ 33,442,857 $ 31,462,624
Interest bearing....................................... 118,821,639 97,730,417
------------ ------------
Total deposits.................................... 152,264,496 129,193,041
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE.............. 21,165,620 16,835,430
OTHER BORROWINGS............................................ 15,500,000 15,500,000
ACCRUED INTEREST PAYABLE.................................... 1,645,386 1,541,439
ACCRUED EXPENSES AND OTHER LIABILITIES...................... 697,843 549,635
------------ ------------
Total liabilities................................. 191,273,345 163,619,545
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value; 10,000,000 shares authorized;
1,337,995 shares issued and 1,334,305 and 1,336,105
outstanding as of March 31, 2001 and December 31, 2000,
respectively........................................... 13,912,814 13,912,814
Retained earnings........................................... 1,974,216 1,496,268
Treasury Stock, shares at cost (3,690 shares and 1,890
shares at March 31, 2001 and December 31, 2000,
respectively)............................................. (44,715) (20,204)
Accumulated other comprehensive income/(loss)............... 36,294 (168,048)
------------ ------------
Total shareholders' equity........................ 15,878,609 15,220,830
------------ ------------
Total liabilities and shareholders' equity.................. $207,151,954 $178,840,375
============ ============

See accompanying Notes to Consolidated Financial Statements.

70
72

CONSOLIDATED STATEMENTS OF INCOME
MARCH 31, 2001 AND 2000

THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
---------- ----------

INTEREST INCOME:
Interest on loans......................................... $2,620,503 $2,064,632
Interest on securities:
Taxable................................................ 923,868 735,176
Tax-exempt............................................. 31,553 18,152
Interest on Federal funds sold and short-term
investments............................................ 59,139 43,186
---------- ----------
Total interest income............................. 3,635,063 2,861,146
---------- ----------
INTEREST EXPENSE:
Interest on deposits...................................... 1,305,685 934,768
Interest on Federal funds purchased and securities sold
under agreements to repurchase......................... 163,512 201,984
Interest on other borrowings.............................. 207,987 44,097
---------- ----------
Total interest expense............................ 1,677,184 1,180,849
Net interest income............................... 1,957,879 1,680,297
PROVISION FOR LOAN LOSSES................................... 60,000 45,000
---------- ----------
Net interest income after provision for loan
losses.......................................... 1,897,879 1,635,297
---------- ----------
NON-INTEREST INCOME:
Service charges on deposit accounts....................... 86,475 78,058
Gain on sale of loans held for sale....................... 115,016 23,267
Other income.............................................. 77,445 47,786
---------- ----------
Total other income................................ 278,936 149,111
---------- ----------
NON-INTEREST EXPENSES:
Salaries and employee benefits............................ 750,192 619,505
Occupancy expense......................................... 181,914 171,888
Other operating expenses.................................. 486,630 412,139
---------- ----------
Total other expenses.............................. 1,418,736 1,203,532
---------- ----------
Income before income taxes........................ 758,079 580,876
INCOME TAXES................................................ 277,825 212,700
---------- ----------
Net income........................................ $ 480,254 $ 368,176
---------- ----------
NET INCOME PER SHARE
Basic..................................................... $ 0.36 $ 0.28
Diluted................................................... $ 0.35 $ 0.27
---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................... 1,335,386 1,338,197
Diluted................................................... 1,364,467 1,376,689
---------- ----------

See accompanying Notes to Consolidated Financial Statements.

71
73

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
------------- ------------

OPERATING ACTIVITIES:
Net income................................................ $ 480,254 $ 368,176
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Provision for loan losses.............................. 60,000 45,000
Depreciation and amortization.......................... 53,008 57,072
Net amortization (accretion) on securities............. (6,547) 1,293
Gain on sale of loans held for sale.................... (115,016) (23,267)
Originations of loans held for sale.................... (15,705,276) (6,233,407)
Proceeds from sales of loans held for sale............. 12,204,757 4,141,074
Decrease (increase) in accrued interest receivable..... 60,599 (1,418)
Increase (decrease) in other assets.................... (30,273) 453,900
Increase in accrued interest payable................... 103,947 85,727
(Decrease) increase in accrued expenses and other
liabilities.......................................... 148,208 (154,911)
------------ -----------
Net cash used in operating activities................ (2,746,339) (1,260,761)
------------ -----------
INVESTING ACTIVITIES:
Purchases of securities --
Available for sale..................................... (7,301,249) (1,477,695)
Proceeds from maturities and prepayments of securities --
Available for sale..................................... 2,324,713 210,564
Held to maturity....................................... 217,521 335,166
Net increase in loans..................................... (6,486,198) (4,066,592)
Capital expenditures...................................... (51,747) (33,498)
------------ -----------
Net cash used in investing activities................ (11,296,960) (5,032,055)
------------ -----------
FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings and time
deposits............................................... 23,071,455 (2,531,116)
Net increase in securities sold under agreements to
repurchase............................................. 4,330,190 7,306,777
------------ -----------
Net cash provided by financing activities............ 27,401,645 4,775,661
------------ -----------
Increase (decrease) in cash and cash equivalents..... 13,358,346 (1,517,155)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 7,539,966 12,416,867
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 20,898,312 $10,899,712
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest............................................... $ 1,573,237 $ 1,095,122
Income taxes........................................... 265,000 253,472
------------ -----------

See accompanying Notes to Consolidated Financial Statements.

72
74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 (UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying unaudited Consolidated Financial Statements included
herein have been prepared by 1st Constitution Bancorp (the "Company"), in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to such rules and regulations. These
Consolidated Financial Statements should be read in conjunction with the audited
financial statements and the notes thereto.

In the opinion of the Company, all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair presentation of the operating
results for the interim periods have been included. The results of operations
for periods of less than a year are not necessarily indicative of results for
the full year.

Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 2001.

(2) NET INCOME PER COMMON SHARE

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

Diluted net income per common share is computed by dividing net income by
the weighted average number of shares outstanding, as adjusted for the assumed
exercise of potential common stock options, using the treasury stock method.
Potential shares of common stock resulting from stock option agreements totaled
29,081 and 38,492 for the three months ended March 31, 2001 and March 31, 2000,
respectively.

(3) RECENT ACCOUNTING PRONOUNCEMENT

On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities" as amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133", and in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", (collectively SFAS No. 133). The
adoption of the above statements did not have a material impact on the financial
statements of the Company.

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement 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. Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
142. Statement 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 reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.

Statement 142 requires that goodwill and any intangible asset 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-Statement 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 Statement 142.

73
75

The Company is required to adopt the provisions of Statement 141
immediately. The initial adoption of Statement 141 had no impact on the
Company's consolidated financial statements. The Company is required to adopt
Statement 142 effective January 1, 2002. The Company currently has no recorded
goodwill or intangible assets and does not anticipate that the initial adoption
of Statement 142 will have a significant impact the Company's consolidated
financial statements.

1ST CONSTITUTION BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION

June 30, 2001 December 31, 2000
------------- ------------------

ASSETS
CASH AND DUE FROM BANKS $ 6,828,951 $ 6,839,966

FEDERAL FUNDS SOLD/SHORT-TERM INVESTMENTS 16,082,163 700,000
------------- -------------
Total cash and cash equivalents 22,911,114 7,539,966
------------- -------------
SECURITIES:
Available for sale, at market value 60,195,618 48,537,571
Held to maturity (market value of $9,683,918 and $8,528,995 in 2001 and 2000,
respectively) 9,620,006 8,503,675
------------- -------------
Total securities 69,815,624 57,041,246
------------- -------------

LOANS HELD FOR SALE 6,120,572 1,306,806
------------- -------------
LOANS 121,513,703 110,631,471
Less- Allowance for loan losses (1,253,646) (1,132,555)
------------- -------------
Net loans 120,260,057 109,498,916
------------- -------------
PREMISES AND EQUIPMENT, net 937,187 939,838
ACCRUED INTEREST RECEIVABLE 1,326,401 1,287,741
OTHER ASSETS 1,058,381 1,225,862
------------- -------------
Total assets $ 222,429,336 $ 178,840,375
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
Deposits
Non-interest bearing $ 30,224,892 $ 31,462,624
Interest bearing 138,298,140 97,730,417
------------- -------------
Total deposits 168,523,032 129,193,041

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 20,015,000 16,835,430
OTHER BORROWINGS 15,500,000 15,500,000
ACCRUED INTEREST PAYABLE 1,562,770 1,541,439
ACCRUED EXPENSES AND OTHER LIABILITIES 447,270 549,635
------------- -------------
Total liabilities 206,048,072 163,619,545
------------- -------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Common stock, no par value; 10,000,000 shares authorized; 1,337,995 shares issued
and 1,331,805 and 1,336,105 outstanding as of June 30, 2001 and December 31,
2000, respectively 13,912,814 13,912,814
Retained earnings 2,505,308 1,496,268
Treasury Stock, shares at cost (6,190 shares and 1,890 shares at June 30, 2001 and
December 31, 2000, respectively) (79,262) (20,204)
Accumulated other comprehensive income/(loss) 42,404 (168,048)
------------- -------------
Total shareholders' equity 16,381,264 15,220,830
------------- -------------
Total liabilities and shareholders' equity $ 222,429,336 $ 178,840,375
============= =============

See accompanying notes to consolidated financial statements

75
77

1ST CONSTITUTION BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME

Three months ended June 30, Six months ended June 30,
-------------------------- --------------------------
INTEREST INCOME 2001 2000 2001 2000
---------- ---------- ---------- ----------

Interest on loans $2,666,122 $2,195,415 $5,286,625 $4,260,047
Interest on securities
Taxable 995,055 755,547 1,918,923 1,490,722
Tax-exempt 47,296 17,963 78,849 36,116
Interest on Federal funds sold and
short-term investments 75,309 19,653 134,448 62,839
---------- ---------- ---------- ----------
Total interest income 3,783,782 2,988,578 7,418,845 5,849,724
---------- ---------- ---------- ----------

INTEREST EXPENSE
Interest on deposits 1,445,252 995,861 2,750,937 1,930,629
Interest on securities sold under agreement
to repurchase and other borrowed funds 365,254 311,588 736,753 557,669
---------- ---------- ---------- ----------
Total interest expense 1,810,506 1,307,449 3,487,690 2,488,298
---------- ---------- ---------- ----------
Net interest income 1,973,276 1,681,129 3,931,155 3,361,426
Provision for loan losses 60,000 45,000 120,000 90,000
Net interest income after provision for loan losses 1,913,276 1,636,129 3,811,155 3,271,426
---------- ---------- ---------- ----------

NON-INTEREST INCOME
Service charges on deposit accounts 100,085 141,251 186,560 219,309
Gain on sale of loans held for sale 163,912 151,152 278,928 291,787
Other income 64,855 4,071 142,300 51,857
---------- ---------- ---------- ----------
Total non-interest income 328,852 296,474 607,788 562,953
---------- ---------- ---------- ----------

NON-INTEREST EXPENSE
Salaries and employee benefits 765,392 628,370 1,515,584 1,247,875
Occupancy Expense 320,280 247,345 358,277 342,959
Other operating expenses 329,193 419,799 959,740 1,025,580
---------- ---------- ---------- ----------
Total non-interest expense 1,414,865 1,295,514 2,833,601 2,616,414
---------- ---------- ---------- ----------
Income before income taxes 827,263 637,089 1,585,342 1,217,965
Income taxes 296,158 231,500 573,983 444,200
---------- ---------- ---------- ----------
Net income $ 531,105 $ 405,589 $1,011,359 $ 773,765
---------- ---------- ---------- ----------

NET INCOME PER SHARE
Basic $ 0.40 $ 0.30 $ 0.76 $ 0.58
Diluted $ 0.39 $ 0.30 $ 0.74 $ 0.56
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,332,723 1,338,197 1,333,947 1,338,197
Diluted 1,361,373 1,365,083 1,362,597 1,365,083

See accompanying notes to consolidated financial statements

76
78

1ST CONSTITUTION BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30,
-------------------------------
2001 2000
------------ ------------

OPERATING ACTIVITIES:
Net income $ 1,011,359 $ 773,765
Adjustments to reconcile net income
to net cash provided by (used in) operating activities-

Provision for loan losses 120,000 90,000
Depreciation and amortization 108,785 116,048
Net amortization on securities 8,673 414
Gain on sale of loans held for sale (278,928) (291,787)
Gain on sale of securities available for sale --- (6,247)
Originations of loans held for sale (31,056,555) (18,513,322)
Proceeds from sales of loans held for sale 26,621,717 13,266,189
Increase in accrued interest receivable (38,660) (201,803)
Decrease (increase) in other assets (2,310) 620,289
Increase in accrued interest payable 21,331 283,262
(Decrease) increase in accrued expenses and other liabilities (102,365) (66,965)
------------ ------------

Net cash used in operating activities (3,686,953) (3,930,157)
------------ ------------
INVESTING ACTIVITIES:

Purchases of securities -
Available for sale (19,543,101) (4,474,497)
Held to maturity (2,829,268) ---
Proceeds from maturities and prepayments of securities -
Available for sale 8,195,247 1,548,522
Held to maturity 1,712,937 651,295
Proceeds from sales of securities available for sale --- 994,742
Net increase in loans (10,881,141) (12,324,558)
Capital expenditures (106,134) (81,403)
------------ ------------

Net cash used in investing activities (23,451,460) (13,685,899)
------------ ------------
FINANCING ACTIVITIES:

Net increase (decrease) in demand, savings and time deposits 39,329,991 10,063,878
Net increase in securities sold under agreements to repurchase 3,179,570 5,266,180
------------ ------------

Net cash provided by financing activities 42,509,561 15,330,058
------------ ------------

Increase (decrease) in cash and cash equivalents 15,371,148 (2,285,998)

CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 7,539,966 12,416,867
------------ ------------

CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 22,911,114 $ 10,130,869
============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:

Cash paid during the period for -
Interest $ 3,466,359 $ 2,205,036
Income taxes $ 889,600 $ 546,397
============ ============

See accompanying notes to consolidated financial statements.

77
79

1ST CONSTITUTION BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 (UNAUDITED)

(1) BASIS OF PRESENTATION

The accompanying unaudited Consolidated Financial Statements herein have been
prepared by 1st Constitution Bancorp (the "Company), in accordance with
generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to such rules and regulations. These consolidated
Financial Statements should be read in conjunction with the audited financial
statements and the notes thereto.

Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 2001.

(2) NET INCOME PER COMMON SHARE

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

Diluted net income per common share is computed by dividing net income by the
weighted average number of shares outstanding, as adjusted for the assumed
exercise of potential common stock options, using the treasury stock method.
Potential shares of common stock resulting from stock option agreements totaled
28,650 and 26,886 for the three-month and six-month periods ended June 30, 2001
and 2000, respectively

(3) RECENT ACCOUNTING PRONOUNCEMENT

On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities" as amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", and in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", (collectively SFAS No. 133). The
adoption of the above statements did not have a material impact on the financial
statements of the Company.

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lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 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
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.

Statement 142 requires that goodwill and any intangible asset 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-Statement 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to amortized prior to
the adoption of Statement 142.

The Company is required to adopt the provisions of Statement 141 immediately.
The initial adoption of Statement 141 had no impact on the Company's
consolidated financial statements. The Company is required to adopt Statement
142 effective January 1, 2002. The Company currently has no recorded goodwill or
intangible assets and does not anticipate that the initial adoption of Statement
142 will have a significant impact on the Company's consolidated financial
statements.

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PART III

ITEM 1 INDEX TO EXHIBITS

(a) The following exhibits are filed as part of this Registration Statement:

EXHIBIT
NUMBER DESCRIPTION
------- -----------

2.1* Certificate of Incorporation of the Company.
2.2* Bylaws of the Company.
6.1* Amended and Restated 1990 Employee Stock Option Plan, as
amended.
6.2* 1996 Employee Stock Option Plan, as amended.
6.3* 2000 Employee Stock Option Plan.
6.4* Stock Option Plan for Non-Employee Directors.
6.5* Employment Agreement between the Company and Robert F.
Mangano dated April 22, 1999.

---------------
*Previously filed.

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SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 2 to registration statement to be
signed on its behalf by the undersigned thereunto duly authorized.

1st CONSTITUTION BANCORP

By: /s/ ROBERT F. MANGANO
------------------------------------
Robert F. Mangano,
President and Chief Executive
Officer

Dated: September 6, 2001