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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



FORM 10-K



(Mark One)

|x | ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------



For the transition period from  to



Commission file Number: 000-32891



1ST CONSTITUTION BANCORP

(Exact Name of Registrant as Specified in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New Jersey                                                     |  | 22-3665653                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (IRS Employer Identification Number)



2650 Route 130, P.O.
Box 634, Cranbury 08512

(Address of Principal Executive Offices, including Zip Code)



(609) 655-4500

(Registrants telephone number, including area code)



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



None



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



Common Stock, No Par Value

(Title of
Class)



Indicate by check mark whether the registrant: (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ̈No x



The aggregate market value of the registrants common stock held by non-affiliates of the registrant, computed by reference to the price at which the
common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the registrants most recently completed second quarter, is $37,020,485.



As of March 1, 2004, 1,564,663 shares of the registrants common stock
were outstanding.



Portions of the registrants 2003
Annual Report to Shareholders are incorporated by reference into Part II of this report, and portions of the registrants definitive Proxy Statement for its 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this
report.



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FORM 10-K



INDEX



|           |  |                                                                                                |  |   
|---------- |  | ---------------------------------------------------------------------------------------------- |  | --
|PART I    
|Item 1.    |  | Business                                                                                       |  | 1 
|Item 2.    |  | Properties                                                                                     |  | 11
|Item 3.    |  | Legal Proceedings                                                                              |  | 12
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                            |  | 12
|          
|PART II   
|           |  |                                                                                               
|Item 5.    |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 12
|Item 6.    |  | Selected Financial Data                                                                        |  | 13
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operation           |  | 14
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 30
|Item 8.    |  | Financial Statements and Supplementary Data                                                    |  | 31
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 31
|Item 9A.   |  | Controls and Procedures                                                                        |  | 31
|          
|PART III  
|           |  |                                                                                               
|Item 10.   |  | Directors and Officers of the Registrant                                                       |  | 31
|Item 11.   |  | Executive Compensation                                                                         |  | 31
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 32
|Item 13.   |  | Certain Relationships and Related Transactions                                                 |  | 33
|Item 14.   |  | Principal Accountant Fees and Services                                                         |  | 33
|          
|PART IV   
|           |  |                                                                                               
|Item 15.   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 33
|           | 
|SIGNATURES |  | 37                                                                                            





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PART I



|Item 1. | Business.
|------- | ---------



1st Constitution Bancorp



1st Constitution Bancorp (the Company) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of New Jersey in February 1999 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, 2003, the Company, on a consolidated basis, had total assets of approximately $293.5 million, total
deposits of approximately $245.4 million, total loans of approximately $164.0 million and total shareholders equity of approximately $23.6 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 six branch offices in downtown Cranbury,
Hamilton Square, Plainsboro, Princeton, Montgomery Township, and Perth Amboy, New Jersey. The Banks deposits are insured up to applicable legal limits by the Federal Deposit Insurance Corporation (FDIC).



Management efforts focus on positioning the Bank to meet the financial needs
of the communities in Middlesex, Mercer and Somerset Counties and to provide financial services to individuals, families, institutions and small businesses. To achieve this goal, the Bank is focusing its efforts on:



| |  | personal service;
| | - | -----------------



| |  | expansion of its branch network;
| | - | --------------------------------



| |  | innovative product offerings; and
| | - | ---------------------------------



| |  | technological advances and e-commerce
| | - | -------------------------------------



Personal Service



The Bank provides a wide range of commercial and consumer banking services to individuals, families, institutions and small businesses in central New
Jersey. The Banks focus is to understand the needs of the community and the customers and tailor products, services and 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.



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Expansion of Branch Banking.



The Bank continually evaluates opportunities for branch bank expansion, either mini branches or full service banks, to
continue to grow and meet the needs of the community. During the second quarter of 2003, the Bank opened a sixth branch banking office at an interim location located in Perth Amboy, New Jersey. Negotiations are also underway to open an eighth office
in Jamesburg, Middlesex County, which, if successful, is projected to open in the second quarter of 2004. The Company can provide no assurance that negotiations will be successful or, if successful, that the new branch will open on the anticipated
schedule.



Significant bank merger activity has occurred in
recent years. During 2001, the largest bank headquartered in New Jersey, Summit Bancorp, merged with Fleet Bancorp, a northeast super regional bank with locations in New Jersey. This merger resulted in the closing of several Fleet and Summit branch
locations throughout the Banks market area.



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 its e-commerce capabilities. At www.1stconstitution.com, customers have easy access to online banking, including account access, and to the
Banks bill payment system. Consumers can apply online for loans 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 financial institutions, regulated small loan companies and local
credit unions, regional and national issuers of money market funds and corporate and government borrowers. Within the direct market area of the Bank, there are a significant number of offices of competing financial institutions. In New Jersey
generally, and in the Banks local market specifically, large commercial banks, as well as savings banks and savings and loan associations, hold a dominant market share and there has been significant merger activity in the last few years,
creating even larger competitors. Locally, the Banks most direct competitors include Fleet Bank (which has entered into an agreement to be acquired by Bank of America), PNC Bank and Sovereign Bank. The Bank is at a competitive disadvantage
compared with these larger regional commercial and savings banks. By virtue of their larger capital, asset size or reserves, many of such institutions have substantially greater lending limits (ceilings on the amount of credit a bank may provide to
a single customer that are linked to the institutions capital) and other resources than the Bank. Many such institutions are empowered to offer a wider range of services, including trust services, than the Bank and, in some cases, have lower
funding costs (the price a bank must pay for deposits and other borrowed monies used to make loans to customers) than the Bank.



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



In recent years, non-bank financial institutions have begun to offer services that compete for deposits with the Bank, such as brokerage firms and
insurance companies offering such instruments as short-term money market



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funds, corporate and government securities funds, mutual funds and annuities. It is expected that competition in these areas will continue to increase. Some
of these competitors are not subject to the same degree of regulation and supervision as the Company and the Bank and therefore may be able to offer customers more attractive products than the Bank.



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



Lending Activities



The
Bank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 Banks loan officers,
existing depositors and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Bank has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and
nature of the loan.



Commercial Lending



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



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



Residential Consumer Lending



A portion of the Banks lending activities consists of the origination of fixed and adjustable rate residential first 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. The Bank also 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 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



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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 borrowers to obtain and maintain title, fire, and extended casualty insurance, and where required by applicable regulations, flood insurance. 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, which gives the Bank the right to declare a loan
immediately due and payable in certain circumstances, including, without limitation, upon the sale or other disposition by the borrower of the real property subject to a mortgage. In general, the Bank enforces due on sale 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, and boats, and 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 are charged on other types of loans.
Non-residential consumer loans, however, do pose additional risk of collectability when compared to traditional types of loans, such as residential mortgage loans granted by commercial banks.



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 a myriad of 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
shareholders. 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.



State and Federal 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. 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 has not applied to become a financial holding company but 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 (the Modernization Act). At present, the Company does not engage in any significant activity other than owning the Bank.



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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.



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 Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), required each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional
activities. In addition, pursuant to FDICIA, each federal banking agency has promulgated regulations, specifying the levels at which a bank would be considered well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, or critically undercapitalized, and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution.



The regulations implementing these provisions of FDICIA provide that a bank
will be classified as well capitalized if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0
percent, and (iv) meets certain other requirements. A bank will be classified as adequately capitalized if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0
percent, (iii) has a Tier 1 leverage ratio of (a) at least 4.0 percent, or (b) at least 3.0 percent if the institution was rated 1 in its most recent examination, and (iv) does not meet the definition of well capitalized. A bank will be
classified as undercapitalized if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0
percent, or (b) less than 3.0 percent if the institution was rated 1 in its most recent examination. A bank will be classified as significantly undercapitalized if it (i) has a total risk-based capital ratio of less than 6.0 percent,
(ii) has a Tier 1 risk-based capital ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination.



As of December 31, 2003, the Banks capital ratios exceed the
requirements to be considered a well capitalized institution under the FDIC regulations, which is its principal federal bank regulator.



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, 2003, the Company maintained a Tier 1 capital
ratio of 14.06% and total qualifying capital ratio of 14.94%.



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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, 2003 was
9.74%.



FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46) was issued in January 2003 and was recently reissued as FASB Interpretation No. 46 (revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R is applicable to all special-purpose
entities (SPEs) in which the entity holds a variable interest no later than the end of the first reporting period ending after December 15, 2003, and immediately to all entities created after January 31, 2003. The effective dates of FIN
46R vary depending on the type of reporting enterprise and the type of entity that the enterprise is involved with. FIN 46 and FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 and FIN 46R provide guidance on the identification of entities controlled through means
other than voting rights. FIN 46 and FIN 46R specify how a business enterprise should evaluate its interest in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary
beneficiary if the entity does not effectively disperse risks among the parties involved.



Under the above accounting literature, the Company was required to de-consolidate its investment in 1st Constitution Capital Trust I (the Trust) at December 31, 2003. The de-consolidation of subsidiary
trusts of bank holding companies formed in connection with the issuance of trust preferred securities like the Trust resulted in the $5.0 million of trust preferred securities being classified and characterized as subordinated debentures that were
issued from the holding company to the Trust. In July 2003, the Board of Governors of the Federal Reserve System instructed bank holding companies to continue to include the redeemable subordinated debentures in their Tier 1 capital for regulatory
capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to include redeemable subordinated debentures in Tier 1 capital for regulatory capital purposes. As of
December 31, 2003, assuming the Company was not allowed to include the $5.0 million in redeemable subordinated debentures issued by the Trust in Tier 1 capital, the Company would have Tier 1 capital of 11.58% and a leverage ratio of 8.03%, each on a
pro forma basis.



Restrictions on Dividends



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



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



The Company has never paid a cash dividend and the Companys Board of Directors has no plans to pay a cash dividend in the foreseeable future. The
Bank paid a stock dividend every year from 1993 to 1999, when it was acquired by the Company. The Company has paid a 5% stock dividend every year since its formation in 1999.



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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. 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 shareholders (the Company) or any shareholder 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.



Financial
Institution Legislation



The Gramm-Leach-Bliley Financial
Modernization Act of 1999 became effective in early 2000. The Modernization Act:



| |  | allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than is
permissible, for a bank holding company, including insurance underwriting and making merchant banking investments in commercial and financial companies; if a bank holding company elects to become a financial holding company, it files a
certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | allows banks to establish subsidiaries to engage in certain activities which a financial holding company could engage in, if the bank meets certain management, capital and Community
Reinvestment Act standards;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | allows insurers and other financial services companies to acquire banks and removes various restrictions that currently apply to bank holding company ownership of securities firms
and mutual fund advisory companies; and establishes the overall regulatory structure applicable to financial holding companies that also engage in insurance and securities operations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Modernization Act modified other laws applicable to financial
institutions, including laws related to financial privacy and community reinvestment.



Additional proposals to change the laws and regulations governing the banking and financial services industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any such changes and the impact such changes might have on the Company cannot be determined at this time.



The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which became law on July 30, 2002, added new legal requirements for public companies
affecting corporate governance, accounting and corporate reporting.



The
Sarbanes-Oxley Act provides for, among other things:



| |  | a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Section 22(h) of the Federal
Reserve Act);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | independence requirements for audit committee members;
| | - | ------------------------------------------------------



| |  | independence requirements for outside auditors;
| | - | -----------------------------------------------



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| |  | certification of financial statements and reports on Forms 10-K, 10-KSB, 10-Q, and 10-QSB by the chief executive officer and the chief financial officer;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuers securities by directors and senior officers in the twelve month period
following initial publication of any financial statements that later require restatement due to corporate misconduct;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | disclosure of off-balance sheet transactions;
| | - | ---------------------------------------------



| |  | two-business day filing requirements for insiders filing Forms 4;
| | - | -----------------------------------------------------------------



| |  | disclosure of a code of ethics for financial officers and filing a Form 8-K for a change or waiver of such code;
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | real time filing of periodic reports;
| | - | ---------------------------------------



| |  | posting of certain SEC filings and other information on the company website;
| | - | ----------------------------------------------------------------------------



| |  | the reporting of securities violations up the ladder by both in-house and outside attorneys;
| | - | ----------------------------------------------------------------------------------------------



| |  | restrictions on the use of non-GAAP financial measures;
| | - | -------------------------------------------------------



| |  | the formation of a public accounting oversight board; and
| | - | ---------------------------------------------------------



| |  | various increased criminal penalties for violations of securities laws.
| | - | -----------------------------------------------------------------------



The Nasdaq Stock Market, where the Companys securities are quoted, has implemented new corporate governance rules, including rules strengthening
director independence requirements for boards, and the adoption of charters for the audit committee. The rule changes are intended to, among other things, allow shareholders to more easily and efficiently monitor the performance of companies and
directors. The Company expects these increased burdens will increase its legal and accounting fees and the amount of time that the Board of Directors and management will have to devote to corporate governance issues.



Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley,
the Companys chief executive officer and chief financial officer were each required to certify that the Companys Quarterly and Annual Reports do not contain any untrue statement of a material fact. The rules have several requirements,
including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Companys internal controls; they have made certain disclosures to the Companys auditors
and the audit committee of the Board of Directors about the Companys internal controls; and they have included information in the Companys Quarterly and Annual Reports about their evaluation and whether there have been significant
changes in the Companys internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.



At the March 18, 2004 Board of Directors meeting, the Board of Directors of the Company approved a series of actions to strengthen and improve its
corporate governance practices. Included in those actions was the adoption of a new Code of Ethics, corporate governance guidelines, and new charters for the Audit, Compensation, and Nominating Committees.



As part of the USA Patriot Act, signed into law on October 26, 2001, Congress
adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the Act). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special
measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program;
(ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and



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report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their
representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the
Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.



The Department of Treasury has issued regulations implementing
the due diligence requirements. These regulations require minimum standards to verify customer identity and maintain accurate records, encourages cooperation among financial institutions, federal banking agencies, and law enforcement authorities
regarding possible money laundering or terrorist activities, prohibits the anonymous use of concentration accounts, and requires all covered financial institutions to have in place an anti-money laundering compliance program.



The Bank, a New Jersey-chartered commercial bank, is subject to
supervision and examination by the New Jersey Department of Banking and Insurance. The Bank is also subject to regulation by the FDIC, which is its principal federal Bank regulator.



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



Community Reinvestment Act



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



Insurance of Deposits



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



9



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##### Table of Contents

Employees



The Company has two paid employees. Banking operations are conducted by the Bank, and as of December 31, 2003, the Bank had 64 full-time employees and 15
part-time employees. Neither the Banks nor the Companys employees are represented by any collective bargaining group. The Bank and the Company each considers its relations with such employees to be good.



Risk Factors



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



The Company faces significant
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, 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 with these entities compete in the future. See BUSINESS  Competition.



Economic Conditions and Related Uncertainties



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



Federal and
State Government Regulation



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



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



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.



10



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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, will likely result, could, anticipates, believes,
continues, expects, plans, will continue, is anticipated, estimated, project or outlook or similar expressions (including confirmations by an authorized
executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify forward-looking statements. The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or
projected. Factors that my cause actual results to differ from those results expressed or implied, include, but are not limited to, those listed above under Risk Factors, the overall economy and the interest rate environment; the ability
of customers to repay their obligations; the adequacy of the allowance for loan losses; competition; significant changes in accounting, tax or regulatory practices and requirements; and technological changes. Although management has taken certain
steps to mitigate any negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on profitability. Such risks and other aspects of the Companys business
and operations are described in Business and Managements Discussion and Analysis of Financial Condition and Results of Operations. The Company has no obligation to publicly release the result of any revisions which may
be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.



|Item 2. | Properties.
|------- | -----------



General



The
Companys and the Banks principal office in Cranbury, New Jersey (the Principal Office) is leased. The current lease provides for an aggregate monthly rental of $15,667 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 two additional five year renewal periods. The Bank also has the right of first refusal to purchase the premises of which the Principal Office is a
part on the same terms and conditions as contained in any bona fide offer. In July 2003, the Bank entered into a five year lease for an additional 1,900 square feet of office space in this building for an aggregate monthly rental of $1,979 per
month, subject to annual rental increases. The Bank has two additional five year renewal periods.



The Bank leases approximately 2,400 square feet for its branch office in Montgomery Township, New Jersey for an aggregate monthly rental of $5,050. This
lease expires on September 30, 2004.



The Bank also leases
approximately 3,780 square feet for its branch office in downtown Cranbury, New Jersey for an aggregate monthly rental of $3,671 per month. The Bank has renewed the lease for the first of two five-year periods through July 2007 at aggregate monthly
rental rates adjusted based on the consumer price index. The Bank has the right of first refusal to purchase this branch office on the same terms and conditions as contained in any bona fide offer. Notwithstanding receipt of a bona fide offer, the
Bank also has the option to purchase this branch 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 July 2003, the Bank amended the lease for its branch located in
Plainsboro, New Jersey. This lease provides for the rental of approximately 2,000 square feet. The Bank has extended the lease for an additional term of five years and has the right to early termination after the thirtieth month of occupancy by
giving 180 days prior written notice of termination. The aggregate monthly payment for this lease is $3,000, 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



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##### Table of Contents

renewal options for this space. The aggregate monthly rental payment for this lease is $8,924, with annual escalations.



In January 2004, the Bank entered into a two year lease for a new Loan
Production Office in Fort Lee, New Jersey. The lease provides for the rental of 1,567 square feet with an aggregate monthly rental of $2,873 in the first year and $2,938 in the second year.



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



|Item 3. | Legal Proceedings.
|------- | ------------------



None.



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



No matters were submitted to a vote of the Companys shareholders during the fourth quarter of the fiscal year ended December 31, 2003.



PART II



|Item 5. | Market for Registrants Common Equity And Related Stockholder Matters.
|------- | ----------------------------------------------------------------------



The common stock of the Company commenced trading on the Nasdaq National Market System under the trading symbol
FCCY on December 28, 2001. The following are the high and low sales prices per share for 2003 and 2002, based on information obtained from the Nasdaq National Market System. All such bid prices reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent actual transactions.



|               |  |      |       |     |      |       |      |  |     |       |  |   |       |    
|-------------- |  | ---- | ----- | --- | ---- | ----- | ---- |  | --- | ----- |  | - | ----- | ---
|               |  | 2003 |       |     | 2002 |      
|               |  | High |       | Low |      |       | High |  | Low |      
|First Quarter  |  | $    | 27.36 |     | $    | 24.73 | (1)  |  | $   | 19.05 |  | $ | 16.63 | (1)
|Second Quarter |  |      | 26.21 |     |      | 24.04 | (1)  |  |     | 20.30 |  |   | 17.70 | (1)
|Third Quarter  |  |      | 25.02 |     |      | 23.81 | (1)  |  |     | 19.01 |  |   | 16.42 | (1)
|Fourth Quarter |  |      | 29.49 |     |      | 24.16 | (1)  |  |     | 26.25 |  |   | 19.00 | (1)



|(1) | All prices have been retroactively adjusted for the 5% stock dividend declared December 18,
2003 and paid January 31, 2004 to shareholders of record on January 15, 2004, and prices in 2002 have also been adjusted for a 5% stock dividend declared December 19, 2002 and paid January 31, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of March 5, 2004 there were approximately 371 holders of the
Companys common stock.



The Company paid a 5% stock
dividend on January 31, 2004, January 31, 2003, and January 31, 2002. The Company has never paid a cash dividend and there are no plans to pay a cash dividend at this time. The Company plans to retain its earnings in order to provide capital for
growth of the Bank.



12



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##### Table of Contents

|Item 6. | Selected Financial Data.
|------- | ------------------------



The following selected financial data should be read in conjunction with the Companys Consolidated Financial Statements and the accompanying notes
presented elsewhere herein.



|                                       |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |                                              |   |             |   |  |      |  
|-------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | - |  | ---- | ----------- | - | -------------------------------------------- | - | ----------- | - |  | ---- | -
|For years ended December 31            |  | 2003 |             |   | 2002 |   |             | 2001 |  |   | 2000        |   |  | 1999 |             |   | Five Year Compounded Growth Rate 1999 - 2003 |  
|                                       |  |      |             |   |      |  
|Highlights                             |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |                                              |   |             |   |  |      |  
|Net income                             |  | $    | 3,228,500   |   |      | $ | 2,687,322   |      |  | $ | 2,152,001   |   |  | $    | 1,729,778   |   |                                              | $ | 1,446,842   |   |  | 34.0 | %
|Return on average assets               |  |      | 1.18        | % |      |   | 1.06        | %    |  |   | 1.03        | % |  |      | 1.08        | % |                                              |   | 1.03        | % |  |      |  
|Return on average equity               |  |      | 14.85       | % |      |   | 14.09       | %    |  |   | 13.17       | % |  |      | 13.09       | % |                                              |   | 11.74       | % |  |      |  
|Net interest margin                    |  |      | 3.94        | % |      |   | 3.87        | %    |  |   | 4.04        | % |  |      | 4.75        | % |                                              |   | 4.29        | % |  |      |  
|                                       |  |      |             |   |      |  
|Income Statement Data                  |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |                                              |   |             |   |  |      |  
|Net interest income                    |  | $    | 10,012,780  |   |      | $ | 9,209,044   |      |  | $ | 8,054,847   |   |  | $    | 7,167,837   |   |                                              | $ | 5,629,062   |   |  | 21.4 | %
|Provision for loan losses              |  |      | 240,000     |   |      |   | 240,000     |      |  |   | 300,000     |   |  |      | 215,875     |   |                                              |   | 188,875     |   |  |      |  
|Non-interest income                    |  |      | 2,401,349   |   |      |   | 1,525,526   |      |  |   | 1,186,582   |   |  |      | 865,878     |   |                                              |   | 1,270,868   |   |  |      |  
|Non-interest expenses                  |  |      | 7,168,722   |   |      |   | 6,287,881   |      |  |   | 5,552,291   |   |  |      | 5,095,732   |   |                                              |   | 4,425,213   |   |  |      |  
|                                       |  |      |             |   |      |  
|Balance Sheet Data at December 31      |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |                                              |   |             |   |  |      |  
|Total Assets                           |  | $    | 293,483,174 |   |      | $ | 273,862,343 |      |  | $ | 232,800,734 |   |  | $    | 181,183,775 |   |                                              | $ | 157,757,153 |   |  | 22.6 | %
|Total Deposits                         |  |      | 245,353,724 |   |      |   | 224,149,464 |      |  |   | 193,882,067 |   |  |      | 137,635,827 |   |                                              |   | 134,338,026 |   |  | 22.6 | %
|Total Loans                            |  |      | 163,950,306 |   |      |   | 151,049,736 |      |  |   | 124,937,483 |   |  |      | 110,356,471 |   |                                              |   | 84,917,615  |   |  | 20.7 | %
|Shareholders Equity                   |  |      | 23,585,256  |   |      |   | 20,994,842  |      |  |   | 17,432,944  |   |  |      | 15,220,830  |   |                                              |   | 12,479,498  |   |  | 17.8 | %
|Intangible Assets                      |  |      | 0           |   |      |   | 0           |      |  |   | 0           |   |  |      | 16,355      |   |                                              |   | 33,629      |   |  |      |  
|Allowance for Loan Losses              |  |      | 1,786,632   |   |      |   | 1,669,882   |      |  |   | 1,414,495   |   |  |      | 1,132,555   |   |                                              |   | 941,556     |   |  | 23.2 | %
|                                       |  |      |             |   |      |  
|Share Information (1)                  |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |                                              |   |             |   |  |      |  
|Earnings per share  Basic             |  | $    | 2.07        |   |      | $ | 1.74        |      |  | $ | 1.39        |   |  | $    | 1.11        |   |                                              | $ | 0.93        |   |  | 27.2 | %
|Earnings per share  Diluted           |  | $    | 1.97        |   |      | $ | 1.65        |      |  | $ | 1.34        |   |  | $    | 1.10        |   |                                              | $ | 0.90        |   |  | 26.5 | %
|Book value per share                   |  | $    | 15.07       |   |      | $ | 13.58       |      |  | $ | 11.31       |   |  | $    | 9.82        |   |                                              | $ | 8.06        |   |  | 18.8 | %
|Average diluted shares outstanding     |  |      | 1,636,798   |   |      |   | 1,629,361   |      |  |   | 1,601,157   |   |  |      | 1,427,934   |   |                                              |   | 1,449,583   |   |  | 8.5  | %
|                                       |  |      |             |   |      |  
|Capital Ratios                         |  |      |             |   |      |   |             |      |  |   |             |   |  |      |             |   |                                              |   |             |   |  |      |  
|Total capital to risk-weighted assets  |  |      | 14.94       | % |      |   | 14.75       | %    |  |   | 12.82       | % |  |      | 13.46       | % |                                              |   | 15.14       | % |  |      |  
|Tier 1 capital to risk-weighted assets |  |      | 14.06       | % |      |   | 13.84       | %    |  |   | 11.86       | % |  |      | 12.53       | % |                                              |   | 14.17       | % |  |      |  
|Tier 1 capital to average assets       |  |      | 9.74        | % |      |   | 9.64        | %    |  |   | 7.57        | % |  |      | 8.61        | % |                                              |   | 9.44        | % |  |      |  



|(1) | All share information has been restated for the effect of a 5% stock dividend declared in December 2003.
|--- | --------------------------------------------------------------------------------------------------------



13



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##### Table of Contents

|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operation.
|------- | -------------------------------------------------------------------------------------



This discussion should be read in conjunction with the consolidated financial statements, notes and tables included
elsewhere in this report. Throughout the following sections, the Company refers to 1STConstitution
Bancorp and its wholly owned subsidiaries, 1STConstitution Bank and 1STConstitution Capital Trust I, the Bank refers to 1STConstitution Bank, and the Trust refers to 1STConstitution Capital Trust I. The purpose of this discussion and analysis is to assist in the understanding and evaluation of the Companys financial condition, changes in financial condition and results of operations.



2003 Overview



The Company reported net income for the twelve months ended December 31, 2003 of $3,228,500, an increase of 20.1% from the
$2,687,322 earned in the twelve months ended December 31, 2002. Diluted net income per share was $1.97 in 2003 compared to $1.65 reported in 2002. Basic net income per share in 2002 was $2.07 as compared to the $1.74 reported in 2002. The Company
has achieved a five-year compounded growth rate for net income of 34.0% over the 1999-2003 period. All share information has been restated for the effect of a 5% stock dividend declared in December 2003.



Key performance ratios continued to improve for 2003. Return on average
assets (ROA) and return on average equity (ROE) were 1.18% and 14.85%, respectively in 2003, compared to 1.06% and 14.09%, respectively, in 2002.



The Companys record earnings for 2003 reflect continuing momentum across a broad range of products and services
offerings. Increased lending activity, coupled with increases in deposits and secondary market loan sales volume, fueled both the record earnings and balance sheet growth.



The Companys net interest income for 2003 was $10,012,780, an increase of 8.7% from the $9,209,044 reported for 2002.
The net interest margin for 2003 was 3.94% compared to 3.87% reported for 2002. The Company has been confronted with continuing net interest margin pressures due to the ultra low interest rate environment as well as elevated levels of loan
prepayments and accelerated amortization of premiums on mortgage-backed investment securities. Net amortization on the Companys securities amounted to $1,190,853 for 2003, an increase of $670,507, or 128.9%, over the $520,346 reported for
2002. The Company was able to offset the 36 basis points reduction in the yield on total interest-earning assets by reducing the cost of total interest-bearing liabilities by 54 basis points for 2003. During 2003, management exercised a tight
discipline in pricing on both loans and deposits.



The Federal
Reserve Banks Open Market Committee (FOMC) met two times during the fourth quarter of 2003. At both meetings, the FOMC kept the Federal Funds target rate stable at 1.00%. Management expects a level Federal Funds target rate over
the next several months and management does not expect an increase in this rate and, consequently, in market interest rates, until mid to late 2004. Management revises its interest rate outlook from time to time based upon market conditions and
other factors.



The Companys non-interest income
represented 14.3% of total revenues for 2003 compared to 9.6% for 2002. The Banks non-interest income for 2003 was $2,401,349, an increase of 57.4% from the $1,525,526 reported for 2002. The primary force driving this increase was gain on sale
of loans held for sale which amounted to $1,284,913 for 2003 compared to $676,208 for 2002. While the low interest rate environment pressured the Banks net interest margin through lower yields and increased premium amortization, it also fueled
strong mortgage loan and refinance demand that resulted in the record level of gains on loan sales in the secondary market. During 2003, the Bank originated $91,972,465 of loans that were sold in the secondary market compared to $63,511,458 in
origination volume for 2002. Management expects this volume level to remain steady as long as, among other things, market interest rates remain at the current levels and the economic outlook continues to be positive.



14



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##### Table of Contents

Driven by commercial loan growth, the Banks loan portfolio increased 8.5% in 2003 compared to 2002.
At December 31, 2003, total loans outstanding reached $163,950,306 compared to $151,049,736 at December 31, 2002. Asset quality remained strong in 2003, as illustrated by the ratio of nonperforming loans to total loans of 0.20% in 2003 and 0.10% in
2002. The allowance for loan losses totaled $1,786,632 or 1.09% of total loans, covering over five times the balance of total nonperforming loans. The Banks deposit base increased 9.5% to total $245,353,724 at December 31, 2003. Management
priced deposit products to be competitive with other financial institutions with branch locations in its market.



Management believes that the Company has positioned itself for continued success with the combination of a strong capital base, a commitment to provide
exceptional customer service, and a commitment to maintain the technology necessary to provide its customers with easy access to the financial products and services offered by the Bank.



Critical Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results of Operation is based upon the Companys consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Companys Consolidated Financial Statements for the year ended December 31, 2003 contains a summary of the Companys significant accounting policies.
Management believes the Companys policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which
often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application is periodically reviewed with the
Audit Committee and the Board of Directors. The provision for loan losses is based upon managements evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the
size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any
underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to
significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to make additional
provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Companys loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a
substantial portion of the carrying value of the Companys loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the Central New Jersey area experience an adverse
economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Companys control.



Results of Operations



The Company reported record earnings of $3,228,500 or $1.97 per share (diluted) for the year ended December 31, 2003 compared to $2,687,322 or $1.65 per
share (diluted) in 2002. Net income and diluted earnings per share grew 20.1% and 19.6%, respectively, in 2003. The Company posted net income of $2,152,001 or $1.34 per share (diluted) in 2001.



Net Interest Income



Net interest income, the Companys largest and most significant component of operating income, is the difference
between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 80.7% of the Companys net revenues in 2003. Net interest income



15



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##### Table of Contents

also depends upon the relative amount of interest earning assets, interest-bearing liabilities, and the interest rate earned or paid on them.



The following tables set forth the Companys consolidated average
balances of assets and liabilities and shareholders equity as well as interest income and expense on related items, and the Companys average yield or rate for the years ended December 31, 2003, 2002, 2001, 2000 and 1999. The average
rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.



Average Balance Sheets with Resultant Interest and Rates



|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|----------------------------------------------- |  | --------------- | ----------- | - | -------- | - | ------------ | ---- | ----- | --------------- |  | - | ----------- | - | ------------ | - | ---------- | --------------- | ----- | - | -------- | - | ------------ | - |  | - | ---------- |  | ----- | -
|(yields on a tax-equivalent basis)              |  | 2003            |             |   | 2002     |   |              | 2001 |      
|                                                |  | Average Balance |             |   | Interest |   | Average Rate |      |       | Average Balance |  |   | Interest    |   | Average Rate |   |            | Average Balance |       |   | Interest |   | Average Rate |  
|Assets:                                         |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Federal Funds Sold/Short-Term Investments       |  | $               | 3,044,985   |   |          | $ | 29,458       |      | 0.97  | %               |  | $ | 11,743,276  |   |              | $ | 198,659    |                 | 1.69  | % |          | $ | 12,982,838   |   |  | $ | 412,274    |  | 3.18  | %
|Investment Securities:                          |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|U.S. Treasury Bonds                             |  |                 |            |   |          |   |             |      |       |                 |  |   |            |   |              |   |           |                 |       |   |          |   | 164,096      |   |  |   | 8,407      |  | 5.12  | %
|Collateralized Mortgage Obligations             |  |                 | 76,837,624  |   |          |   | 2,619,813    |      | 3.41  | %               |  |   | 79,604,274  |   |              |   | 3,598,437  |                 | 4.52  | % |          |   | 61,040,382   |   |  |   | 3,663,462  |  | 6.00  | %
|States and Political Subdivisions               |  |                 | 8,058,436   |   |          |   | 461,411      |      | 5.73  | %               |  |   | 3,722,838   |   |              |   | 243,341    |                 | 6.54  | % |          |   | 3,312,135    |   |  |   | 232,075    |  | 7.01  | %
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Total                                           |  |                 | 84,896,060  |   |          |   | 3,081,224    |      | 3.63  | %               |  |   | 83,327,112  |   |              |   | 3,841,778  |                 | 4.61  | % |          |   | 64,516,613   |   |  |   | 3,903,943  |  | 6.05  | %
|Loan Portfolio:                                 |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Commercial                                      |  |                 | 38,410,951  |   |          |   | 2,768,004    |      | 7.21  | %               |  |   | 30,758,677  |   |              |   | 2,275,368  |                 | 7.40  | % |          |   | 23,804,565   |   |  |   | 2,532,392  |  | 10.64 | %
|Installment                                     |  |                 | 8,947,398   |   |          |   | 675,344      |      | 7.55  | %               |  |   | 14,435,272  |   |              |   | 1,095,210  |                 | 7.59  | % |          |   | 14,755,091   |   |  |   | 1,182,582  |  | 8.01  | %
|Commercial Mortgages and Construction Wholesale |  |                 | 90,701,292  |   |          |   | 5,567,060    |      | 6.14  | %               |  |   | 71,547,571  |   |              |   | 4,640,234  |                 | 6.49  | % |          |   | 58,004,941   |   |  |   | 4,472,315  |  | 7.71  | %
|Residential Mortgages and Construction Retail   |  |                 | 23,133,308  |   |          |   | 1,276,368    |      | 5.52  | %               |  |   | 19,892,071  |   |              |   | 1,268,682  |                 | 6.38  | % |          |   | 19,842,072   |   |  |   | 1,545,547  |  | 7.79  | %
|All Other Loans                                 |  |                 | 8,998,670   |   |          |   | 1,138,986    |      | 12.66 | %               |  |   | 8,525,695   |   |              |   | 1,067,307  |                 | 12.52 | % |          |   | 7,537,883    |   |  |   | 822,201    |  | 10.91 | %
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Total (1)                                       |  |                 | 170,191,619 |   |          |   | 11,425,762   |      | 6.71  | %               |  |   | 145,159,286 |   |              |   | 10,346,801 |                 | 7.13  | % |          |   | 123,944,552  |   |  |   | 10,555,037 |  | 8.52  | %
|Total Interest-Earning Assets                   |  |                 | 258,132,664 |   |          |   | 14,536,444   |      | 5.63  | %               |  |   | 240,229,674 |   |              |   | 14,387,238 |                 | 5.99  | % |          |   | 201,444,003  |   |  |   | 14,871,254 |  | 7.38  | %
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Allowance for Loan Losses                       |  |                 | (1,769,585  | ) |          |   |              |      |       |                 |  |   | (1,554,474  | ) |              |   |            |                 |       |   |          |   | (1,271,319   | ) |  |   |            |  |       |  
|Cash and Due From Banks                         |  |                 | 8,678,793   |   |          |   |              |      |       |                 |  |   | 9,134,645   |   |              |   |            |                 |       |   |          |   | 6,476,212    |   |  |   |            |  |       |  
|Other Assets                                    |  |                 | 8,906,063   |   |          |   |              |      |       |                 |  |   | 5,118,255   |   |              |   |            |                 |       |   |          |   | 2,833,836    |   |  |   |            |  |       |  
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Total Assets                                    |  | $               | 273,947,935 |   |          |   |              |      |       |                 |  | $ | 252,928,100 |   |              |   |            |                 |       |   |          | $ | 209,482,732  |   |  |   |            |  |       |  
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Liabilities and Shareholders Equity:           |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Interest-Bearing Liabilities:                   |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Money Market and NOW Accounts                   |  | $               | 76,435,477  |   |          | $ | 752,547      |      | 0.98  | %               |  | $ | 76,698,669  |   |              | $ | 980,605    |                 | 1.28  | % |          | $ | 50,474,834   |   |  | $ | 1,264,832  |  | 2.51  | %
|Savings Accounts                                |  |                 | 21,684,139  |   |          |   | 155,221      |      | 0.72  | %               |  |   | 15,548,553  |   |              |   | 184,759    |                 | 1.19  | % |          |   | 10,738,835   |   |  |   | 252,584    |  | 2.35  | %
|Certificates of Deposit                         |  |                 | 63,182,395  |   |          |   | 1,751,582    |      | 2.77  | %               |  |   | 59,131,266  |   |              |   | 2,166,251  |                 | 3.66  | % |          |   | 52,943,869   |   |  |   | 2,952,410  |  | 5.58  | %
|Certificates of Deposit of $100,000 and Over    |  |                 | 18,287,421  |   |          |   | 503,905      |      | 2.76  | %               |  |   | 18,619,750  |   |              |   | 629,594    |                 | 3.38  | % |          |   | 26,149,741   |   |  |   | 1,232,808  |  | 4.71  | %
|Federal Funds Purchased/Other Borrowed Funds    |  |                 | 23,985,934  |   |          |   | 952,910      |      | 3.97  | %               |  |   | 19,769,886  |   |              |   | 921,982    |                 | 4.66  | % |          |   | 19,924,483   |   |  |   | 1,038,504  |  | 5.21  | %
|Trust Preferred Securities                      |  |                 | 5,000,000   |   |          |   | 257,852      |      | 5.16  | %               |  |   | 3,621,299   |   |              |   | 216,081    |                 | 5.89  | % |          |   |             |   |  |   |           |  |      |  
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Total Interest-Bearing Liabilities              |  |                 | 208,575,366 |   |          |   | 4,374,017    |      | 2.10  | %               |  |   | 193,389,423 |   |              |   | 5,099,272  |                 | 2.64  | % |          |   | 160,231,762  |   |  |   | 6,741,138  |  | 4.21  | %
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Net Interest Spread (2)                         |  |                 |             |   |          |   |              |      | 3.53  | %               |  |   |             |   |              |   |            |                 | 3.35  | % |          |   |              |   |  |   |            |  | 3.17  | %
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Demand Deposits                                 |  |                 | 41,318,131  |   |          |   |              |      |       |                 |  |   | 39,021,155  |   |              |   |            |                 |       |   |          |   | 30,209,573   |   |  |   |            |  |       |  
|Other Liabilities                               |  |                 | 2,310,536   |   |          |   |              |      |       |                 |  |   | 1,447,781   |   |              |   |            |                 |       |   |          |   | 2,704,081    |   |  |   |            |  |       |  
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Total Liabilities                               |  |                 | 252,204,033 |   |          |   |              |      |       |                 |  |   | 233,858,359 |   |              |   |            |                 |       |   |          |   | 193,145,416  |   |  |   |            |  |       |  
|Shareholders Equity                            |  |                 | 21,743,902  |   |          |   |              |      |       |                 |  |   | 19,069,741  |   |              |   |            |                 |       |   |          |   | 16,337,316   |   |  |   |            |  |       |  
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Total Liabilities and Shareholders Equity      |  | $               | 273,947,935 |   |          |   |              |      |       |                 |  | $ | 252,928,100 |   |              |   |            |                 |       |   |          | $ | 209,482,732  |   |  |   |            |  |       |  
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  
|Net Interest Margin (3)                         |  |                 |             |   |          | $ | 10,162,427   |      | 3.94  | %               |  |   |             |   |              | $ | 9,287,966  |                 | 3.87  | % |          |   |              |   |  | $ | 8,130,116  |  | 4.04  | %
|                                                |  |                 |             |   |          |   |              |      |       |                 |  |   |             |   |              |   |            |                 |       |   |          |   |              |   |  |   |            |  |       |  



16



---

##### Table of Contents

Average Balance Sheets with Resultant Interest and Rates



|                                                |  |                 |             |   |          |   |              |  |       |                 |  |   |             |   |              |   |            |  |       |  
|----------------------------------------------- |  | --------------- | ----------- | - | -------- | - | ------------ |  | ----- | --------------- |  | - | ----------- | - | ------------ | - | ---------- |  | ----- | -
|(yields on a tax-equivalent basis)              |  | 2000            |             |   | 1999     |  
|                                                |  | Average Balance |             |   | Interest |   | Average Rate |  |       | Average Balance |  |   | Interest    |   | Average 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 (1)                                       |  |                 | 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 Banks                         |  |                 | 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                   |  | $               | 42,898,014  |   |          | $ | 1,396,912    |  | 3.26  | %               |  | $ | 33,681,758  |   |              | $ | 1,137,997  |  | 3.38  | %
|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  |   |              |   | 2,348,077  |  | 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    |  |                 | 13,903,824  |   |          |   | 894,552      |  | 6.43  | %               |  |   | 9,489,603   |   |              |   | 378,234    |  | 3.99  | %
|Trust Preferred Securities                      |  |                 |             |   |          |   |              |  |       |                 |  |   |             |   |              |   |            |  |       |  
|Total Interest-Bearing Liabilities              |  |                 | 119,438,746 |   |          |   | 5,624,400    |  | 4.71  | %               |  |   | 103,398,174 |   |              |   | 4,503,516  |  | 4.36  | %
|                                                |  |                 |             |   |          |   |              |  |       |                 |  |   |             |   |              |   |            |  |       |  
|Net Interest Spread(2)                          |  |                 |             |   |          |   |              |  | 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 |   |          |   |              |  |       |                 |  | $ | 139,793,808 |   |              |   |            |  |       |  
|                                                |  |                 |             |   |          |   |              |  |       |                 |  |   |             |   |              |   |            |  |       |  
|Net Interest Margin (3)                         |  |                 |             |   |          | $ | 7,215,484    |  | 4.75  | %               |  |   |             |   |              | $ | 5,664,000  |  | 4.29  | %
|                                                |  |                 |             |   |          |   |              |  |       |                 |  |   |             |   |              |   |            |  |       |  



|(1) | Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual loans
with no related interest income.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The net interest margin is equal to net interest income divided by average interest earning assets.
|--- | ---------------------------------------------------------------------------------------------------



17



---

##### Table of Contents

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



The
Companys net interest income totaled $10,012,780 in 2003, an increase of 8.7% from the $9,209,044 reported in 2002. As indicated in the Rate/Volume Table, the principal factor contributing to the 2003 increase in net interest income was an
increase in the interest income of $1,552,729, resulting from increased balances in the loan portfolio components. This was partially offset by decreases in both loan and investment securities yields due to the lower interest rate environment and
the impact of accelerated premium amortization on mortgage-backed securities during 2003.



The Companys net interest income totaled $9,209,044 in 2002, an increase of 14.3% from the $8,054,847 reported in 2001. As indicated in the Rate/Volume Table, the principal factor contributing to the 2002
increase in net interest income was a decrease in the interest expense of $1,641,866 resulting from decreased deposit and interest-bearing liability market rates of interest. This was partially offset by decreases in both loan and investment
securities yields due to the lower interest rate environment in 2002



Rate/Volume Table



|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|----------------------------------------------------- |  | ---------------------------------------------------------- | --------- | - | ---------------------------------------------------------- | ---------- | - | ----- | - | --------- | ------ |  | - | --------- | - |  | ---------- | - |  | - | ---------- | -
|                                                      |  | Amount of Increase (Decrease)                              |          
|                                                      |  | Year Ended December 31, 2003 versus 2002 Due to Change in: |           |   | Year Ended December 31, 2002 versus 2001 Due to Change in: |           
|(Tax-equivalent basis)                                |  | Volume                                                     |           |   | Rate                                                       |            |   | Total |   |           | Volume |  |   | Rate      |   |  | Total      |  
|Interest Income:                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Loans:                                                |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Commercial                                            |  | $                                                          | 566,268   |   |                                                            | ($58,441   | ) |       | $ | 507,827   |        |  | $ | 739,918   |   |  | (996,942   | ) |  |   | ($257,024  | )
|Installment                                           |  |                                                            | (416,530  | ) |                                                            | (5,774     | ) |       |   | (422,304  | )      |  |   | (25,400   | ) |  | (61,972    | ) |  |   | (87,372    | )
|Commercial Mortgages and Construction-Wholesale       |  |                                                            | 1,136,982 |   |                                                            | (250,416   | ) |       |   | 886,566   |        |  |   | 875,579   |   |  | (707,660   | ) |  |   | 167,919    |  
|Residential Mortgages and Construction-Retail         |  |                                                            | 206,791   |   |                                                            | (171,072   | ) |       |   | 35,719    |        |  |   | 3,895     |   |  | (280,760   | ) |  |   | (276,865   | )
|All Other Loans                                       |  |                                                            | 59,216    |   |                                                            | 11,936     |   |       |   | 71,152    |        |  |   | 115,758   |   |  | 129,348    |   |  |   | 245,106    |  
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Total loans                                           |  |                                                            | 1,552,729 |   |                                                            | (473,767   | ) |       |   | 1,078,961 |        |  |   | 1,709,750 |   |  | (1,917,986 | ) |  |   | (208,236   | )
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Investment Securities:                                |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|U.S. Treasury Bonds                                   |  |                                                            | 0         |   |                                                            | 0          |   |       |   | 0         |        |  |   | (8,407    | ) |  | 0          |   |  |   | (8,407     | )
|Collat. Mortg. Obligations / Mortg. Backed Securities |  |                                                            | (125,053  | ) |                                                            | (853,571   | ) |       |   | (978,624  | )      |  |   | 1,113,834 |   |  | (1,178,859 | ) |  |   | (65,024    | )
|States and political subdivisions                     |  |                                                            | 248,225   |   |                                                            | (30,155    | ) |       |   | 218,070   |        |  |   | 28,790    |   |  | (17,525    | ) |  |   | 11,265     |  
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Total Investment Securities                           |  |                                                            | 123,172   |   |                                                            | (883,726   | ) |       |   | (760,554  | )      |  |   | 1,134,217 |   |  | (1,196,384 | ) |  |   | (62,165    | )
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Federal Funds Sold / Short-Term Investments           |  |                                                            | (115,825  | ) |                                                            | (53,376    | ) |       |   | (169,201  | )      |  |   | (39,418   | ) |  | (174,197   | ) |  |   | (213,615   | )
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Total Interest Income                                 |  |                                                            | 1,560,076 |   |                                                            | (1,410,869 | ) |       |   | 149,206   |        |  |   | 2,804,549 |   |  | (3,288,567 | ) |  |   | (484,016   | )
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Interest Expense:                                     |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Money Market and NOW Accounts                         |  |                                                            | (3,369    | ) |                                                            | (289,848   | ) |       |   | (293,217  | )      |  |   | 658,218   |   |  | (942,444   | ) |  |   | (284,226   | )
|Savings Accounts                                      |  |                                                            | 73,013    |   |                                                            | (73,078    | ) |       |   | (65       | )      |  |   | 113,028   |   |  | (180,853   | ) |  |   | (67,825    | )
|Certificates of Deposit                               |  |                                                            | 148,271   |   |                                                            | (526,268   | ) |       |   | (377,997  | )      |  |   | 345,257   |   |  | (1,131,416 | ) |  |   | (786,159   | )
|Certificates of Deposit of $100,000 And Over          |  |                                                            | (11,233   | ) |                                                            | (115,442   | ) |       |   | (126,675  | )      |  |   | (305,042  | ) |  | (298,172   | ) |  |   | (603,214   | )
|Federal Funds Purchased / Other Borrowed Funds        |  |                                                            | 167,340   |   |                                                            | (136,412   | ) |       |   | 30,928    |        |  |   | (8,054    | ) |  | (108,469   | ) |  |   | (116,523   | )
|Trust Preferred Securities                            |  |                                                            | 68,206    |   |                                                            | (26,435    | ) |       |   | 41,771    |        |  |   | 216,081   |   |  | 0          |   |  |   | 216,081    |  
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Total interest expense                                |  |                                                            | 442,229   |   |                                                            | (1,167,485 | ) |       |   | (725,255  | )      |  |   | 1,019,488 |   |  | (2,661,354 | ) |  |   | (1,641,866 | )
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  
|Net Interest Income                                   |  | $                                                          | 1,117,847 |   |                                                            | ($243,384  | ) |       | $ | 874,461   |        |  | $ | 1,785,061 |   |  | ($627,212  | ) |  | $ | 1,157,850  |  
|                                                      |  |                                                            |           |   |                                                            |            |   |       |   |           |        |  |   |           |   |  |            |   |  |   |            |  



Average interest
earning assets increased by $17,902,990 or 7.5%, to $258,132,664 in 2003 from $240,229,674 in 2002, with increases in 2003 of $25,032,333 in loans and $1,568,948 in investment securities compared to 2002. Led by commercial mortgages and construction
loans, the Banks average loan portfolio grew by 17.2% and loan yields averaged 6.71% in 2003, 42 basis points lower than 2002. This decrease was primarily the result of 2003 loan growth at lower yields amid a decreasing interest rate
environment for the entire year. The Banks average investment securities portfolio grew 1.9%, and the yield on that portfolio decreased 98 basis points when comparing 2003 to 2002 primarily as a result of the accelerated premium amortization
on mortgage-backed securities. Net premium amortization for 2003 amounted to $1,190,853 compared to $520,346 for 2002. Overall, the yield on interest earning assets decreased 36 basis points to 5.63% in 2003 from 5.99% in 2002.



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Average interest earning assets increased by $38,785,671, or 19.3%, to $240,229,674 in 2002 from
$201,444,003 in 2001, with increases in 2002 of $21,214,734 in loans and $18,810,499 in investment securities compared to 2001. Led by commercial mortgages and construction loans, the Banks average loan portfolio grew by 17.1% and loan yields
averaged 7.13% in 2002, 139 basis points lower than 2001. This decrease was primarily the result of 2002 loan growth at lower yields amid a decreasing interest rate environment for the majority of the year. The Banks average investment
securities portfolio grew 29.2%, and the yield on that portfolio decreased 144 basis points when comparing 2002 to 2001. Overall, the yield on interest earning assets decreased 139 basis points to 5.99% in 2002 from 7.38% in 2001.



Interest expense was $4,374,017 for 2003, a decrease of $725,255 or 14.2%
from $5,099,272 for 2002. This decrease in interest expense is principally attributable to higher levels of interest-bearing liabilities priced at a significantly lower market interest rate level. Savings accounts increased on average by $6,135,586
in 2003, as compared to 2002, to contribute to the funding of loan portfolio growth. The cost on these deposits decreased 47 basis points in 2003 from 2002. Average interest bearing liabilities rose 7.9% in 2003 from 2002. The cost of total interest
bearing liabilities decreased 54 basis points to 2.10% in 2003 from 2.64% in 2002.



Average non-interest bearing demand deposits increased 5.9% to $41,318,131 in 2003 from $39,021,155 in 2002. 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.



Interest expense was $5,099,272 for 2002, a decrease of $1,641,866 or 24.4% from $6,741,138 for 2001. This decrease in interest expense is principally
attributable to higher levels of interest-bearing liabilities priced at a significantly lower market rate of interest. Money market and NOW accounts increased on average by $26,223,835 in 2002, as compared to 2001, to contribute to the funding of
loan growth. The cost on these deposits decreased 123 basis points in 2002 from 2001. Average interest-bearing liabilities rose 20.7% in 2002 from 2001. The cost of total interest-bearing liabilities decreased 157 basis points to 2.64% in 2002 from
4.21% in 2001.



Non-Interest Income



Non-interest income increased by $875,823, or 57.4%, to $2,401,349 in 2003
from $1,525,526 in 2002. Non-interest income in 2002 increased by $338,944, or 28.6%, from a posted total of $1,186,582 for 2001.



Service charges on deposit accounts represent a significant source of non-interest income. Service charge revenues increased by $42,283, or 8.2%, to
$559,698 in 2003 from $517,415 in 2002. Service charge revenue totaled $402,312 in 2001. This component of non-interest income represented 23.3%, 33.9%, and 33.9% of the total non-interest income in 2003, 2002, and 2001, respectively. Service charge
income increased in 2003 and 2002 as a result of the Banks increasing deposit base and growing number of new accounts subject to service charges. Management continues to utilize a strategy of requiring compensating balances from its commercial
customers. Those who meet balance requirements are not assessed service charges.



Gain on sale of loans held for sale was $1,284,913 for 2003, an increase of $608,705, or 90.0%, compared to $676,208 for 2002. Gain on sale of loans held for sale totaled $402,923 in 2001. Market interest rates on
30-year fixed rate mortgages fell consistently over the first half of 2003, reaching a low of 5.06% in July, a level not seen since the 1950s. Consumers rushed to refinance their home loans, which, along with a strong housing market, led to the Bank
achieving record levels in mortgage origination volume ($91,972,465) and mortgage loan sale gains ($1,284,913), as newly-originated loans were sold at higher than normal spreads due to the consistently lower level of market interest rates. In 2001,
a higher interest rate environment existed that resulted in less reported gain on loan sales for that year.



Non-interest income also includes income from bank-owned life insurance (BOLI) which amounted to $261,301 for 2003 compared to $69,705 for
2002. During the fourth quarter of 2002, the Bank purchased $6.0 million in tax-free BOLI assets which partially offset the cost of employee benefit plans and reduced the overall effective tax rate. The Bank also generates non-interest income from a
variety of fee-based services. These include



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safe deposit rentals, wire transfer service fees and Automated Teller Machine fees for non-customers. Deposit and service fee charges are reviewed and
adjusted as needed from time to time by management to reflect current costs incurred by the Bank to offer the products or services and prices charged by competitor financial institutions amid the Banks competitive market.



The Company recorded net securities gains of $131,436 in 2001. These gains
were primarily the result of modest portfolio restructurings. Their purpose was to improve the Companys longer-term interest rate risk position.



Non-Interest Expense



Non-interest expense increased by $880,841, or 14.0%, to $7,168,722 in 2003, from $6,287,881 in 2002. Non-interest expense in 2002 increased 13.2% to
$6,287,881 from $5,552,291 in 2001. The largest increase in non-interest expense in 2003 compared to 2002 was in salaries and employees benefits. To a lesser extent, occupancy, and other non-interest expense also reflect increases for the comparable
periods. The largest increase in non-interest expense in 2002 compared to 2001 was in salaries and employee benefits and, to a lesser extent, other non-interest expenses, as described in the table below. The following table presents the major
components of non-interest expense for the years indicated.



Non-interest
Expenses



|                                        |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|--------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                        |  | 2003 |           | 2002 |   | 2001      |  | 2000 |           | 1999
|Salaries and employee benefits          |  | $    | 3,979,655 |      | $ | 3,229,793 |  | $    | 2,714,070 |      | $ | 2,510,713 |  | $ | 2,238,497
|Occupancy expense                       |  |      | 818,545   |      |   | 740,088   |  |      | 724,088   |      |   | 709,169   |  |   | 589,886  
|Equipment expense                       |  |      | 434,933   |      |   | 451,054   |  |      | 310,702   |      |   | 286,632   |  |   | 242,714  
|Marketing                               |  |      | 225,860   |      |   | 237,268   |  |      | 190,233   |      |   | 208,294   |  |   | 190,807  
|Computer services                       |  |      | 498,081   |      |   | 432,875   |  |      | 494,686   |      |   | 415,627   |  |   | 314,970  
|Regulatory, professional and other fees |  |      | 548,440   |      |   | 436,701   |  |      | 384,720   |      |   | 304,263   |  |   | 206,720  
|Office expense                          |  |      | 312,055   |      |   | 311,346   |  |      | 330,358   |      |   | 255,387   |  |   | 233,908  
|All other expenses                      |  |      | 351,153   |      |   | 448,756   |  |      | 403,434   |      |   | 405,647   |  |   | 407,711  
|                                        |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total                                   |  | $    | 7,168,722 |      | $ | 6,287,881 |  | $    | 5,552,291 |      | $ | 5,095,732 |  | $ | 4,425,213
|                                        |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          



Salaries and employee
benefits, which represent the largest portion of non-interest expense, increased by $749,862, or 23.2%, to $3,979,655 in 2003 compared to $3,229,793 in 2002. These expenses increased in 2002 by $515,723 or 19.0% over the $2,714,070 reported for
2001. The 2003 increase reflects the increase in staffing levels required to support the mortgage loan origination function plus normal employee salary increases. The increase in the level of salaries and employee benefits for 2002 versus 2001 was
due to an increase in staffing levels to support the Companys strong balance sheet growth. Salaries and employee benefits as a percent of average assets were 1.45% in 2003, 1.28% in 2002 and 1.30% in 2001.



During 2003, net occupancy expense increased by $78,457, or 10.6% to $818,545
from $740,088 in 2002. The increase in occupancy expenses in 2003 compared to 2002, and in 2002 compared to 2001, was due primarily to contractual rent increases at most of the Banks branch offices.



The occupancy expense component of total non-interest expense as a percentage
of average assets was 0.30% in 2003, 0.29% in 2002 and 0.35% in 2001, respectively.



Regulatory, professional and other fees increased by $111,739 or 25.6% to $548,440 in 2003 from $436,701 in 2002. These expenses increased in 2002 by $51,981 or 13.5% over 2001. During 2003, the Company incurred an
increased level of professional fees in successfully preventing a takeover attempt launched by another financial institution which submitted to the Board of Directors an offer deemed by the Board of Directors not to be in the best interests of
shareholders.



Equipment expense decreased by $16,121, or 3.6%,
to $434,933 for 2003 from $451,054 for 2002. Equipment expense includes depreciation on furniture and equipment as well as maintenance expenses on that equipment. Equipment expenses increased by $140,352 or 45.2% to $451,054 in 2002 from $310,702 in
2001. During the fourth quarter of 2002, the Bank completed a major conversion of its EDP software and hardware used



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throughout the Bank to process all loan and deposit transactions as well as maintain its financial records. This resulted in additional expenses for employee
training, supplies and materials and EDP processing service agreements. Management continues to upgrade equipment thereby increasing processing capability to enhance productivity. The Banks enhanced technology has allowed management to further
diversify business and consumer product lines.



The Banks
ratio of non-interest expense to average assets was 2.62% for 2003 compared to 2.49% for 2002 and 2.65% for 2001.



An important industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources. The
Banks efficiency ratio decreased in 2003 to 57.7% compared to 58.6% in 2002, and 60.1% in 2001.



Financial Condition



Interest-Earning Assets and Interest-Bearing Liabilities



Average interest-earning assets increased by $17,902,990, or 7.5%, to $258,132,664 in 2003 from $240,229,674 in 2002, reflecting growth in the loan and investment securities portfolios. Loans increased by $25,032,333,
or 17.2%, to average $170,191,619 in 2003, while investment securities increased by $1,568,948, or 1.9%, to average $84,896,060 in 2003. The growth in interest-earning assets was funded by increases in savings accounts, demand deposits, other
borrowed funds and shareholders equity.



As a result of
the continuous decrease in market interest rates throughout 2003, the annual average rate earned on interest-earning assets decreased 36 basis points to 5.63% in 2003 from 5.99% in 2002.



Average interest-bearing liabilities increased by $15,185,943, or 7.9%, to $208,575,366 in 2003 from $193,389,423 in 2002.
The increase resulted primarily from growth in savings accounts as well as in certificates of deposit under $100,000. The average balance of savings accounts increased by $6,135,586, or 39.5%, to $21,684,139 in 2003 from $15,548,553 in 2002. The
average balance of certificates of deposit under $100,000 increased by $4,051,129, or 6.9%, to $63,182,395 in 2003 from $59,131,266 in 2002 which management believes was primarily due to customers seeking a secure investment for their funds during a
period of economic distress and falling interest rates. The average interest rate paid on interest-bearing liabilities decreased 54 basis points to 2.10% in 2003 from 2.64% in 2002.



Cash and Cash Equivalents



At December 31, 2003, cash and cash equivalents totaled $14,702,886 compared to $9,594,374 at December 31, 2002. Cash and cash equivalents at December 31,
2003 consisted of cash and due from banks of $6,987,850 and Federal funds sold/short-term investments of $7,715,036. The corresponding balances at December 31, 2002 were $9,542,010 and $52,364, respectively. The higher balances of cash and cash
equivalents at December 31, 2003 were primarily due to late December interest-bearing deposits balances raised to fund loan growth and manage the Banks liquidity position.



Securities



The Banks investment securities portfolio amounted to $91,191,170, or 31.1% of total assets at December 31, 2003 compared to $89,200,779 or 32.6% of
total assets at December 31, 2002. On an average balance basis, the investment securities portfolio represented 32.9% and 34.7% of average interest-earning assets for the years ended December 31, 2003 and 2002, respectively. The average yield earned
on the portfolio was 3.63% in 2003, a decrease of 98 basis points from 4.61% earned in 2002.



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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, 2003, available-for-sale securities amounted to $84,999,973, an increase of $2,971,107, or 3.6%,
from December 31, 2002.



There were no sales of securities
available for sale during 2003 and 2002. Proceeds from maturities and prepayments of securities available for sale amounted to $57,073,223 in 2003 and $40,436,189 in 2002. At December 31, 2003, the portfolio had net unrealized gains of $234,627,
compared to net unrealized gains of $1,235,942 at December 31, 2002. These unrealized gains are reflected net of tax in shareholders equity as other comprehensive income.



Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive
intent and ability to hold to maturity. The held-to-maturity portfolio consists primarily of obligations of states and political subdivisions. At December 31, 2003, securities held to maturity totaled $6,191,197, a decrease of $980,716 from
$7,171,913 at December 31, 2002. The market value of the held-to-maturity portfolio at December 31, 2003 was $6,516,652, resulting in a net unrealized gain of $325,455.



Loans



The loan portfolio, which represents the Banks largest asset, is a significant source of both interest and fee income. Elements of the loan
portfolio are subject to differing levels of credit and interest rate risk. The Banks primary lending focus continues to be commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans. Total loans
averaged $170,191,619 during 2003, an increase of $25,032,333, or 17.2%, compared to an average of $145,159,286 in 2002. Growth in the average loan portfolio balance was generated primarily by an increase of $19,153,721, or 26.8%, in commercial
mortgage and construction wholesale loans. At December 31, 2003, total loans amounted to $163,950,306 compared to $151,049,736 at December 31, 2002, an increase of $12,900,570, or 8.5%. The average yield earned on the loan portfolio was 6.71% in
2003 compared to 7.13% in 2002, a decrease of 42 basis points. This decrease is primarily due to the lower interest rate environment that existed throughout 2003.



Commercial loans averaged $38,410,951 for 2003, an increase of $7,652,274, or 24.9%, compared to $30,758,677 for 2002.
Commercial loans are made to small to middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the commercial borrower. The
average yield on the commercial loan portfolio decreased 19 basis points to 7.21% in 2003 from 7.40% in 2002. The declining interest rate environment that existed throughout 2003, especially the lower average prime rate, and competitive loan pricing
pressures resulted in the decreased yield on this portfolio as well as the portfolio components discussed in the following paragraphs.



Commercial mortgages and construction wholesale loans averaged $90,701,292 for 2003, an increase of $19,153,721, or 26.8%, compared to $71,547,571 for
2002. Generally, these loans represent owner-occupied or investment properties and usually complement a broader commercial relationship with the borrower. Construction loans are structured to provide for advances only after work is completed and
inspected by qualified professionals. The average yield on the commercial mortgages and construction wholesale loan portfolio decreased 35 basis points to 6.14% for 2003 from 6.49% for 2002.



Residential mortgages and construction retail loans averaged $23,133,308 for
2003, an increase of $3,241,237, or 16.3% compared to $19,892,071 for 2002. These loans consist primarily of residential mortgage loans, home equity loans and business loans secured by residential real estate. The average yield on this portfolio
decreased 86 basis points to 5.52% for 2003 from 6.38% for 2002.



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The following table provides information concerning the interest rate sensitivity of the Banks
commercial and commercial real estate loans and construction loans at December 31, 2003.



|                                    |  |                |            |                               |   |                |  |   |            |  |   |            
|----------------------------------- |  | -------------- | ---------- | ----------------------------- | - | -------------- |  | - | ---------- |  | - | -----------
|                                    |  | Maturity Range |            | Total                        
|Type                                |  | WithinOneYear  |            | After One ButWithinFive Years |   | AfterFiveYears | 
|Commercial & Commercial real estate |  | $              | 21,219,227 |                               | $ | 45,608,487     |  | $ | 17,013,117 |  | $ | 83,840,831 
|Construction Loans                  |  |                | 42,370,695 |                               |   | 14,600,570     |  |   | 0          |  |   | 56,971,265 
|                                    |  |                |            |                               |   |                |  |   |            |  |   |            
|Total                               |  | $              | 63,589,922 |                               | $ | 60,209,057     |  | $ | 17,013,117 |  | $ | 140,812,096
|                                    |  |                |            |                               |   |                |  |   |            |  |   |            
|Fixed rate loans                    |  | $              | 5,737,881  |                               | $ | 37,849,728     |  | $ | 7,416,928  |  | $ | 56,154,085 
|Floating rate loans                 |  |                | 57,852,041 |                               |   | 22,359,329     |  |   | 9,596,189  |  |   | 84,658,006 
|                                    |  |                |            |                               |   |                |  |   |            |  |   |            
|Total                               |  | $              | 63,589,922 |                               | $ | 60,209,057     |  | $ | 17,013,117 |  | $ | 140,812,096
|                                    |  |                |            |                               |   |                |  |   |            |  |   |            



Non-Performing Assets



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



The Banks policy with regard to non-accrual loans varies by the type of loan involved. Generally, loans are placed on
a non-accrual status when they are 90 days past due unless these loans are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or
interest is in doubt. Consumer loans are generally charged off after they become 90 days past due. Subsequent payments are credited to income only if collection of principal is not in doubt.



Non-performing loans totaled $330,783 at December 31, 2003, an increase of
$172,471 from the $158,312 reported at December 31, 2002. The following table sets forth non-performing assets and risk elements in the Banks portfolio by type for the years indicated. As the table demonstrates, loan quality and ratios remain
strong. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.



Non-performing assets increased $171,950 to $339,754 at December 31, 2003 compared to $167,804 at December 31, 2002. Non-performing assets represented
0.12% of total assets at December 31, 2003 and 0.06% at December 31, 2002. Non-performing loans as a percentage of total loans were 0.20% at December 31, 2003, compared to 0.10% at December 31, 2002.



The Bank had $8,971 of other real estate owned at December 31, 2003 and
$9,492 of other real estate owned at December 31, 2002.



The
Bank had no restructured loans or potential problem loans at December 31, 2003 and 2002.



At December 31, 2003, the Bank had no loans that were 90 days or more past due but still accruing interest income compared to $2,156 in this category of non-performing loans at December 31, 2002. Managements
decision to accrue income on these loans was based on the level of collateral and the status of collection efforts.



23



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##### Table of Contents

Non-Performing Assets and Loans



|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | 2003 |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|Non-Performing loans:                             |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loans 90 days or more past due and still accruing |  | $    | 0       |   |      | $ | 2,156   |      |  | $ | 0       |   |  | $    | 471,040 |   |  | $ | 135,598 |  
|Non-accrual loans                                 |  |      | 330,783 |   |      |   | 156,156 |      |  |   | 618,102 |   |  |      | 106,959 |   |  |   | 501,756 |  
|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total non-performing loans                        |  |      | 330,783 |   |      |   | 158,312 |      |  |   | 618,102 |   |  |      | 577,999 |   |  |   | 637,354 |  
|Other real estate owned                           |  |      | 8,971   |   |      |   | 9,492   |      |  |   | 0       |   |  |      | 0       |   |  |   | 0       |  
|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total non-performing assets                       |  | $    | 339,754 |   |      | $ | 167,804 |      |  | $ | 618,102 |   |  | $    | 577,999 |   |  | $ | 637,354 |  
|                                                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Non-performing loans to total loans               |  |      | 0.20    | % |      |   | 0.10    | %    |  |   | 0.49    | % |  |      | 0.52    | % |  |   | 0.75    | %
|Non-performing assets to total assets             |  |      | 0.12    | % |      |   | 0.06    | %    |  |   | 0.28    | % |  |      | 0.32    | % |  |   | 0.43    | %



Allowance for Loan Losses and
Related Provision



The allowance for loan losses is
maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio
and other extensions of credit. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.



Management utilizes a systematic and documented allowance adequacy methodology for loan losses that requires specific allowance assessment for all loans,
including real estate mortgages and consumer loans. This methodology assigns reserves based upon credit risk ratings for all loans. The reserves are based upon various factors, including historical performance and the current economic environment.
Management continually reviews the process used to determine the adequacy of the allowance for loan losses. Allocations to the allowance for loan losses, both specific and general, are determined after this review. Loans are classified based on
internal reviews and evaluations performed by the lending staff. These evaluations are, in turn, examined by the Banks internal loan review specialist. A formal loan review function, independent of loan origination, is used to identify and
monitor risk classifications. The table below presents, for the years indicated, an analysis of the allowance for loan losses and other related data.



Allowance for Loan Losses



|                                                          |  |      |             |    |      |   |             |      |  |   |             |    |  |      |             |    |  |   |            |   
|--------------------------------------------------------- |  | ---- | ----------- | -- | ---- | - | ----------- | ---- |  | - | ----------- | -- |  | ---- | ----------- | -- |  | - | ---------- | --
|                                                          |  | 2003 |             |    | 2002 |   |             | 2001 |  |   | 2000        |    |  | 1999 |            
|Balance, beginning of period                              |  | $    | 1,669,882   |    |      | $ | 1,414,495   |      |  | $ | 1,132,555   |    |  | $    | 941,556     |    |  | $ | 775,530    |   
|Provision charged to operating expenses                   |  |      | 240,000     |    |      |   | 240,000     |      |  |   | 300,000     |    |  |      | 215,875     |    |  |   | 188,875    |   
|Loans charged off                                         |  |      | (123,666    | )  |      |   | (8,182      | )    |  |   | (20,973     | )  |  |      | (28,158     | )  |  |   | (26,662    | ) 
|Recoveries                                                |  |      | 416         |    |      |   | 23,569      |      |  |   | 2,913       |    |  |      | 3,282       |    |  |   | 3,813      |   
|                                                          |  |      |             |    |      |   |             |      |  |   |             |    |  |      |             |    |  |   |            |   
|Net (charge offs) / recoveries                            |  |      | (123,250    | )  |      |   | 15,387      |      |  |   | (18,060     | )  |  |      | (24,876     | )  |  |   | (22,849    | ) 
|                                                          |  |      |             |    |      |   |             |      |  |   |             |    |  |      |             |    |  |   |            |   
|Balance, end of period                                    |  | $    | 1,786,632   |    |      | $ | 1,669,882   |      |  | $ | 1,414,495   |    |  | $    | 1,132,555   |    |  | $ | 941,556    |   
|                                                          |  |      |             |    |      |   |             |      |  |   |             |    |  |      |             |    |  |   |            |   
|Loans:                                                    |  |      |             |    |      |   |             |      |  |   |             |    |  |      |             |    |  |   |            |   
|At year end                                               |  | $    | 163,950,306 |    |      | $ | 151,049,736 |      |  | $ | 124,937,483 |    |  | $    | 110,356,471 |    |  | $ | 84,917,615 |   
|Average during the year                                   |  |      | 170,191,619 |    |      |   | 145,159,286 |      |  |   | 123,944,552 |    |  |      | 99,472,064  |    |  |   | 87,145,813 |   
|Net recoveries (charge offs) to average loans outstanding |  |      | (0.07       | %) |      |   | 0.01        | %    |  |   | (0.01       | %) |  |      | (0.03       | %) |  |   | (0.03      | %)
|Allowance for loan losses to:                             |  |      |             |    |      |   |             |      |  |   |             |    |  |      |             |    |  |   |            |   
|Total loans at year end                                   |  |      | 1.09        | %  |      |   | 1.11        | %    |  |   | 1.13        | %  |  |      | 1.02        | %  |  |   | 1.11       | % 
|Non-performing loans                                      |  |      | 540.12      | %  |      |   | 270.16      | %    |  |   | 228.84      | %  |  |      | 195.94      | %  |  |   | 147.73     | % 



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##### Table of Contents

At December 31, 2003, the allowance for loan losses was $1,786,632 compared to $1,669,882 at December 31,
2002, an increase of $116,750, or 7.0%. The ratio of the allowance for loan losses to total loans at December 31, 2003 and 2002 was 1.09% and 1.11%, respectively. The allowance for loan losses as a percentage of non-performing loans was 540.12% at
December 31, 2003, compared to 270.16% at December 31, 2002. Management believes the quality of the loan portfolio remains strong and that the allowance for loan losses is adequate in relation to credit risk exposure levels.



The provision for loan losses was $240,000 for the years ended December 31,
2003 and 2002. Management believes the quality of the loan portfolio remains sound, the determination of the provision for loan losses amount was primarily due to the low balances in non-accrual loans and managements assessment of economic
conditions in the Banks marketplace. Net charge offs/recoveries in 2003 amounted to a net charge off of $123,250 in 2003 compared to a net recovery of $15,387 in 2002.



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



Allocation of the Allowance for Loan Losses



|                                        |  |                   |           |                                            |                   |   |        |                   |                                            |  |     |        |  |                                            |           |  |     |  
|--------------------------------------- |  | ----------------- | --------- | ------------------------------------------ | ----------------- | - | ------ | ----------------- | ------------------------------------------ |  | --- | ------ |  | ------------------------------------------ | --------- |  | --- | -
|                                        |  | December 31, 2003 |           |                                            | December 31, 2002 |   |        | December 31, 2001 |                                           
|                                        |  | Amount            |           | % of loans in each category to total loans |                   |   | Amount |                   | % of loans in each category to total loans |  |     | Amount |  | % of loans in each category to total loans |          
|Balance at end of period applicable to: |  |                   |           |                                            |                   |   |        |                   |                                            |  |     |        |  |                                            |           |  |     |  
|Domestic:                               |  |                   |           |                                            |                   |   |        |                   |                                            |  |     |        |  |                                            |           |  |     |  
|Commercial, financial, and agricultural |  | $                 | 1,054,113 |                                            | 51                | % |        | $                 | 985,230                                    |  | 59  | %      |  | $                                          | 707,248   |  | 51  | %
|Real estate  construction              |  |                   | 375,193   |                                            | 35                | % |        |                   | 350,675                                    |  | 22  | %      |  |                                            | 325,334   |  | 23  | %
|Real estate  residential mortgage      |  |                   | 107,198   |                                            | 5                 | % |        |                   | 100,193                                    |  | 6   | %      |  |                                            | 127,305   |  | 9   | %
|Installment loans to individuals        |  |                   | 178,663   |                                            | 8                 | % |        |                   | 166,988                                    |  | 10  | %      |  |                                            | 169,739   |  | 12  | %
|Lease financing                         |  |                   | 53,599    |                                            | 1                 | % |        |                   | 50,096                                     |  | 3   | %      |  |                                            | 70,725    |  | 5   | %
|Unallocated                             |  |                   | 17,866    |                                            |                  |   |        |                   | 16,700                                     |  |    |        |  |                                            | 14,144    |  |    |  
|                                        |  |                   |           |                                            |                   |   |        |                   |                                            |  |     |        |  |                                            |           |  |     |  
|                                        |  | $                 | 1,786,632 |                                            | 100               | % |        | $                 | 1,669,882                                  |  | 100 | %      |  | $                                          | 1,414,495 |  | 100 | %
|                                        |  |                   |           |                                            |                   |   |        |                   |                                            |  |     |        |  |                                            |           |  |     |  



Deposits



Deposits, which include demand deposits (interest bearing and non-interest
bearing), savings and time deposits, are a fundamental and cost-effective source of funding. The Bank offers a variety of products designed to attract and retain customers, with the Banks primary focus being on building and expanding long-term
relationships. Deposits in 2003 averaged $220,907,563, an increase of $11,888,170, or 5.7%, compared to $209,019,393 for 2002. At December 31, 2003, total deposits were $245,353,724, an increase of $21,204,260, or 9.5%, from $224,149,464 at December
31, 2002. The average rate paid on the Banks interest-bearing deposit balances for 2003 was 1.76%, decreasing from the 2.33% average rate for 2002.



A significant contributor to the level of deposit growth in the year ended December 31, 2003 were savings accounts which increased by $14,692,958, or
101.1%, from $14,533,798 at December 31, 2002 to $29,226,756 at December 31, 2003. Average non-interest bearing demand deposits were $41,318,131 for 2003, an increase of $2,296,976, or 5.9%, from $39,021,155 for 2002. 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, 1stChoice accounts, decreased modestly by $263,192,
to an average of $76,435,477 in 2003 from $76,698,669 for 2002. The average cost of interest-bearing demand deposits decreased 30 basis points to 0.98% in 2003 compared to 1.28% in 2002. Other time deposits, which consist primarily of retail
certificates of deposit, increased $4,051,129, or 6.9%, for 2003 to average $63,182,395 compared to $59,131,266



25



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##### Table of Contents

for 2002. The average cost of other time deposits decreased 89 basis points to 2.77% for 2003 from 3.66% for 2002.



Certificates of deposit $100,000 and over are primarily used as an additional
funding source to support balance sheet growth and as an alternative to other sources of borrowed funds. These deposits averaged $18,287,421 for 2003 and $18,619,750 for 2002. The average cost of these deposits decreased 62 basis points to 2.76% for
2003 compared with 3.38% for 2002.



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



Average Deposit Balances



|                                            |  |                 |             |                     |        |   |                 |      |                     |  |        |                 |  |                     |             |  |                 |   |                     |   |             |                 |        |                     |  |   |             |  |        |  
|------------------------------------------- |  | --------------- | ----------- | ------------------- | ------ | - | --------------- | ---- | ------------------- |  | ------ | --------------- |  | ------------------- | ----------- |  | --------------- | - | ------------------- | - | ----------- | --------------- | ------ | ------------------- |  | - | ----------- |  | ------ | -
|                                            |  | 2003            |             |                     | 2002   |   |                 | 2001 |                     |  | 2000   |                 |  | 1999                |            
|                                            |  | Average Balance |             | Percentage of Total |        |   | Average Balance |      | Percentage of Total |  |        | Average Balance |  | Percentage of Total |             |  | Average Balance |   | Percentage of Total |   |             | Average Balance |        | Percentage of Total | 
|Non-interest bearing demand Deposits        |  | $               | 41,318,131  |                     | 18.70  | % |                 | $    | 39,021,155          |  | 18.67  | %               |  | $                   | 30,209,573  |  | 17.72           | % |                     | $ | 25,596,993  |                 | 19.52  | %                   |  | $ | 21,842,138  |  | 18.87  | %
|Money market and NOW accounts               |  |                 | 76,435,477  |                     | 34.60  | % |                 |      | 76,698,669          |  | 36.69  | %               |  |                     | 50,474,834  |  | 29.60           | % |                     |   | 42,898,014  |                 | 32.71  | %                   |  |   | 33,681,758  |  | 29.10  | %
|Savings deposits                            |  |                 | 21,684,139  |                     | 9.82   | % |                 |      | 15,548,553          |  | 7.44   | %               |  |                     | 10,738,835  |  | 6.30            | % |                     |   | 10,600,178  |                 | 8.08   | %                   |  |   | 9,956,583   |  | 8.60   | %
|Certificates of deposit of $100,000 Or more |  |                 | 18,287,421  |                     | 8.28   | % |                 |      | 18,619,750          |  | 8.91   | %               |  |                     | 26,149,741  |  | 15.34           | % |                     |   | 8,446,002   |                 | 6.44   | %                   |  |   | 6,969,581   |  | 6.02   | %
|Other time deposits                         |  |                 | 63,182,395  |                     | 28.60  | % |                 |      | 59,131,266          |  | 28.29  | %               |  |                     | 52,943,869  |  | 31.04           | % |                     |   | 43,590,728  |                 | 33.25  | %                   |  |   | 43,300,649  |  | 37.41  | %
|                                            |  |                 |             |                     |        |   |                 |      |                     |  |        |                 |  |                     |             |  |                 |   |                     |   |             |                 |        |                     |  |   |             |  |        |  
|Total                                       |  | $               | 220,907,563 |                     | 100.00 | % |                 | $    | 209,019,393         |  | 100.00 | %               |  | $                   | 170,516,852 |  | 100.00          | % |                     | $ | 131,131,915 |                 | 100.00 | %                   |  | $ | 115,750,709 |  | 100.00 | %
|                                            |  |                 |             |                     |        |   |                 |      |                     |  |        |                 |  |                     |             |  |                 |   |                     |   |             |                 |        |                     |  |   |             |  |        |  



Other Borrowed Funds



Other borrowed funds are mainly comprised of repurchase
agreements, Federal Home Loan Bank (FHLB) borrowings, and Federal funds purchased. These borrowings are primarily used to fund asset growth not supported by deposit generation. For 2003, the average balance of other borrowed funds was
$23,985,934 compared to the average balance of $19,769,886 for 2002.



The balance of other borrowings was $15,500,000 at December 31, 2003, consisting entirely of FHLB borrowings of $15,500,000. The balance of other borrowings at December 31, 2002 consisted of FHLB borrowings of $15,500,000 and Federal funds
purchased of $2,500,000. The average cost of other borrowed funds decreased 69 basis points to 3.97% for 2003 compared with 4.66% for 2002.



During 2000, the Bank purchased three ten-year fixed rate convertible advances from the FHLB. These advances, in the amounts of $2,500,000, $5,000,000,
and $5,000,000 bear interest at the rates of 5.50%, 5.34%, and 5.06%, respectively. These advances are convertible quarterly at the option of the FHLB.



During 1999, the Bank purchased a $3,000,000 ten-year fixed rate advance from the FHLB that is convertible quarterly at the option of the FHLB. The
interest rate on this advance is 5.815%.



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



Shareholders Equity and Dividends



Shareholders equity at December 31, 2003 was $23,585,256, an increase of $2,590,414, or 12.3%, from $20,994,842 at December 31, 2002. Book value per common share at December 31, 2003 rose to $15.07 compared to
$13.58 at December 31, 2002. The increase in shareholders equity and book value per share resulted primarily from net income of $3,228,500, less the effect of stock buybacks plus the lower level of unrealized holding gains on securities.



During the period 1999  2003, the Company has achieved a
five year compounded growth rate for shareholders equity of 17.8%. In addition, the Companys book value per share has also increased over this period at a compounded growth rate of 18.8%. In lieu of cash dividends, the Company has
declared a stock dividend



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##### Table of Contents

every year since 1992, which has been paid every year since 1993. A 5% stock dividend was declared in the years 2003, 2002 and 2001.



The Companys common stock is quoted on the NASDAQ National Market
System, under the symbol FCCY.



The Company and the
Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the Federal Deposit Insurance Corporation. For information on regulatory capital, see Note 15 of the Notes to Consolidated Financial
Statements.



Off-Balance Sheet Arrangements and Contractual Obligations



Off-Balance Sheet Arrangements



The following table shows the amounts and expected maturities of significant
commitments as of December 31, 2003. Further discussion of these commitments is included in Note 13 to the Consolidated Financial Statements.



|                                      |  |                  |            |                    |   |                     |  |                |   |       |   |   |  |   |           
|------------------------------------- |  | ---------------- | ---------- | ------------------ | - | ------------------- |  | -------------- | - | ----- | - | - |  | - | ----------
|                                      |  | One Year Or Less |            | One to Three Years |   | Three to Five Years |  | OverFive Years |   | Total
|Standby letters of credit             |  | $                | 1,220,446  |                    | $ | 0                   |  | $              | 0 |       | $ | 0 |  | $ | 1,220,446 
|Commitments to sell residential loans |  | $                | 15,405,982 |                    | $ | 0                   |  | $              | 0 |       | $ | 0 |  | $ | 15,405,982



Contractual Obligations



The following table shows the significant contractual
obligations of the Company by expected payment period as of December 31, 2003. Further discussion of these commitments is included in Note 13 to the Consolidated Financial Statements.



|                        |  |                  |            |                    |   |                     |  |                 |           |       |   |            |  |   |           
|----------------------- |  | ---------------- | ---------- | ------------------ | - | ------------------- |  | --------------- | --------- | ----- | - | ---------- |  | - | ----------
|Contractual Obligation  |  | One Year Or Less |            | One to Three Years |   | Three to Five Years |  | Over Five Years |           | Total
|Long-term debt          |  | $                | 1,921,015  |                    | $ | 0                   |  | $               | 0         |       | $ | 15,500,000 |  | $ | 17,421,015
|Operating leases        |  | $                | 479,197    |                    | $ | 1,333,208           |  | $               | 1,308,058 |       | $ | 1,112,942  |  | $ | 4,233,405 
|Purchase obligations    |  | $                | 512,026    |                    | $ | 1,024,052           |  | $               | 0         |       | $ | 0          |  | $ | 1,536,078 
|Certificates of deposit |  | $                | 53,577,685 |                    | $ | 30,096,340          |  | $               | 2,696,465 |       | $ | 0          |  | $ | 86,370,490



Long-term debt
obligations includes fixed term borrowings from the Federal Home Loan Bank and Securities Sold under Agreements to Repurchase. The borrowings have defined terms and under certain circumstances are callable at the option of the lender. Operating
leases represent obligations entered into by the Company for the use of land and premises. The leases generally have escalation terms based upon certain defined indices. Purchase obligations represent legally binding and enforceable agreements to
purchase goods and services from third parties and consists primarily of contractual obligations under data processing service agreements.



The Company also has commitments and obligations under its employee benefit plans as described in Note 11 to the Consolidated Financial Statements.
Payments under these plans over the next year are not expected to be significant to the Companys financial statements.



27



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##### Table of Contents

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



The Bank has established a borrowing relationship with the FHLB and its correspondent banks which further supports and
enhances liquidity.



The Consolidated Statements of Cash Flows
present the changes in cash from operating, investing and financing activities. At December 31, 2003, the balance of cash and cash equivalents was $14,702,886.



Net cash provided by operating activities totaled $4,628,976 for 2003 compared to $146,487 for 2002. The primary source of funds is net income from
operations adjusted for provision for loan losses, depreciation expenses, and net amortization of premiums on securities.



Net cash used in investing activities totaled $17,618,399 for 2003 compared to $53,473,373 for 2002. The decrease in cash usage for 2003 compared to 2002
resulted from increase in loans and purchases of held to maturity.



Net cash provided by financing activities amounted to $18,097,935 for 2003 compared to $40,993,046 for 2002. The cash provided in 2003 resulted primarily from the increase in total deposits.



The securities portfolios are also a source of liquidity, providing cash
flows from maturities and periodic repayments of principal. During 2003, prepayments and maturities of investment securities totaled $57,073,223. Another source of liquidity is the loan portfolio, which provides a steady flow of payments and
maturities.



Interest Rate Sensitivity Analysis



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



The following tables set forth certain information relating to the Banks financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity or repricing and the fair value of such instruments at December 31, 2003.



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##### Table of Contents

Interest Rate Sensitivity Analysis At December 31, 2003



|                                   |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|---------------------------------- |  | --------------------------- | ------ | - | ------------------- | - | ------ | -------------------- |  | - | --------------------------------------- | - |  | ----- | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | -------- | - |  | - | -------
|($ in thousand)                    |  | Interest Sensitivity Period |        |   | TotalWithin OneYear |   |        | One Year ToTwo Years |  |   | Non-interest Sensitive andOver TwoYears |   |  | Total
|                                   |  | 30 Day                      |        |   | 90 Day              |   |        | 180 Day              |  |   | 365 Day                                 |   |  |       |        |  
|Earning Assets:                    |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|Total Investment Securities        |  | $                           | 1,164  |   |                     | $ | 4,079  |                      |  | $ | 5,460                                   |   |  | $     | 9,968  |   |  | $ | 20,671  |   |  | $ | 15,702 |   |  | $ | 54,818   |   |  | $ | 91,191 
|Loans                              |  |                             | 61,262 |   |                     |   | 11,211 |                      |  |   | 13,319                                  |   |  |       | 19,044 |   |  |   | 104,836 |   |  |   | 18,952 |   |  |   | 40,163   |   |  |   | 163,951
|Other Interest-earning assets      |  |                             | 23,121 |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   | 23,121  |   |  |   |        |   |  |   | 15,221   |   |  |   | 38,340 
|                                   |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|                                   |  |                             | 85,547 |   |                     |   | 15,290 |                      |  |   | 18,779                                  |   |  |       | 29,012 |   |  |   | 148,628 |   |  |   | 34,654 |   |  |   | 110,202  |   |  |   | 293,482
|                                   |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|Source of Funds:                   |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|Savings and time deposits          |  |                             | 28,439 |   |                     |   | 10,083 |                      |  |   | 13,882                                  |   |  |       | 17,696 |   |  |   | 70,100  |   |  |   | 30,832 |   |  |   | 14,665   |   |  |   | 115,597
|Other interest-bearing liabilities |  |                             | 53,855 |   |                     |   |        |                      |  |   | 5,000                                   |   |  |       |        |   |  |   | 58,855  |   |  |   | 3,023  |   |  |   | 47,640   |   |  |   | 109,518
|Non-interest-bearing sources       |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   | 68,369   |   |  |   | 68,369 
|                                   |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|                                   |  |                             | 82,294 |   |                     |   | 10,083 |                      |  |   | 18,882                                  |   |  |       | 17,696 |   |  |   | 128,955 |   |  |   | 33,855 |   |  |   | 130,674  |   |  |   | 293,484
|                                   |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|Asset (Liability) Sensitivity Gap: |  |                             |        |   |                     |   |        |                      |  |   |                                         |   |  |       |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |        
|Period Gap                         |  | $                           | 3,253  |   |                     | $ | 5,207  |                      |  |   | ($103                                   | ) |  | $     | 11,316 |   |  | $ | 19,673  |   |  | $ | 799    |   |  |   | ($20,472 | ) |  | $ | 0      
|Cumulative Gap                     |  | $                           | 3,253  |   |                     | $ | 8,460  |                      |  | $ | 8,357                                   |   |  | $     | 19,673 |   |  | $ | 19,673  |   |  | $ | 20,472 |   |  |   |          |   |  |   |        
|Cumulative Gap to Total Assets     |  |                             | 1.1    | % |                     |   | 2.9    | %                    |  |   | 2.8                                     | % |  |       | 6.7    | % |  |   | 6.7     | % |  |   | 8.9    | % |  |   |          |   |  |   |        



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



In addition to utilizing the gap ratio for interest rate risk assessment, management utilizes simulation analysis whereby the model estimates the variance in net income with a change in interest rates of plus or minus
300 basis points over 12 and 24 month periods. Given recent simulations, net interest income would be within policy guidelines regardless of the direction of market rates.



Recent Accounting Pronouncements



FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) was issued in January 2003 and was recently reissued as FASB
Interpretation No. 46 (revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R is applicable to all special-purpose entities (SPEs) in which the entity holds a variable interest no later than the end of the
first reporting period ending after December 15, 2003, and immediately to all entities created after January 31, 2003. The effective dates of FIN 46R vary depending on the type of reporting enterprise and the type of entity that the enterprise is
involved with. FIN 46 and FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. FIN 46 and FIN 46R provide guidance on the identification of entities controlled through means other than voting rights. FIN 46 and FIN 46R specify how a business enterprise should evaluate
its interest in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved.



Under the above accounting literature, the Company was
required to de-consolidate its investment in the Trust at December 31, 2003. The de-consolidation of subsidiary trusts of bank holding companies formed in connection with the issuance of trust preferred securities like the Trust resulted in the $5.0
million of trust preferred securities being classified and characterized as subordinated debentures that were issued from the Company to the Bank. In July 2003, the Board of Governors of the Federal Reserve System instructed bank holding companies
to continue to include the redeemable subordinated debentures in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to
include redeemable subordinated debentures in Tier 1 capital for regulatory capital purposes. As of December 31, 2003, assuming the Company was not allowed to include the $5.0 million in redeemable



29



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##### Table of Contents

subordinated debentures issued by the Trust in Tier 1 capital, the Company would have Tier 1 capital of 11.58% and a leverage ratio of 8.03%, each on a pro
forma basis.



FASB Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities, was issued in April 2003. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. This Statement is effective for contracts entered into or modified after September 30, 2003. The initial adoption of this Statement did not have a significant impact on the Companys consolidated financial
statements



FASB Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both
liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been
deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The adoption of this Statement did not have a significant impact on the Companys consolidated financial statements.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk.
|-------- | -----------------------------------------------------------



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 December 31, 2003 and 2002, the Companys variance in the economic value equity as a percentage of assets with an instantaneous and
sustained parallel shift of 200 basis points is within the negative 3% guideline, as shown in the tables below.



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



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Market Risk Analysis



December 31, 2003



|                                   |  |      |            |        |   |            |        |  |   |            |   
|---------------------------------- |  | ---- | ---------- | ------ | - | ---------- | ------ |  | - | ---------- | --
|Change in Rates                    |  | Flat |            | -200bp |   |            | +200bp | 
|Economic Value of Portfolio Equity |  | $    | 30,507,000 |        | $ | 27,599,000 |        |  | $ | 26,218,000 |   
|Change                             |  |      |            |        |   | (2,907,000 | )      |  |   | (4,288,000 | ) 
|Change as a % of assets            |  |      |            |        |   | (0.99      | %)     |  |   | (1.46      | %)



December 31, 2002



|                                   |  |      |            |        |   |            |        |  |   |            |   
|---------------------------------- |  | ---- | ---------- | ------ | - | ---------- | ------ |  | - | ---------- | --
|Change in Rates                    |  | Flat |            | -200bp |   |            | +200bp | 
|Economic Value of Portfolio Equity |  | $    | 25,681,000 |        | $ | 22,917,000 |        |  | $ | 22,645,000 |   
|Change                             |  |      |            |        |   | (2,764,000 | )      |  |   | (3,036,000 | ) 
|Change as a % of assets            |  |      |            |        |   | (1.03      | %)     |  |   | (1.13      | %)



|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------



Reference is made to Item 13(a)(1) and (2) to page F-1 for a list of financial statements and supplementary data required to be filed pursuant to this
Item 8. The information required by this Item 8 is provided on pages F-1 through F-23 hereof.



|Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------



Not applicable.



|Item 9A. | Controls and Procedures.
|-------- | ------------------------



The Companys Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Companys management, have
evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial
Officers have concluded that the Companys disclosure controls and procedures are effective.



The Companys Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Companys
internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



PART III



|Item 10. | Directors and Officers of the Registrant.
|-------- | -----------------------------------------



The information required by this item is incorporated by reference to the Companys Proxy Statement for its 2004 Annual Meeting of Shareholders under
the caption Directors and Executive Officers.



|Item 11. | Executive Compensation.
|-------- | -----------------------



The information required by this item is incorporated by reference to the Companys Proxy Statement for its 2004 Annual Meeting of Shareholders under
the caption Executive Compensation.



31



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##### Table of Contents

|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------



The following table sets forth certain information about the Companys (a) 1990 Employee Stock Option Plan for Key
Employees, (b) 1996 Employee Stock Option Plan, (c) 2000 Employee Stock Option and Restricted Stock Plan, and (d) Directors Stock Option and Restricted Stock Plan. These plans are the Companys only equity compensation plans.



EQUITY COMPENSATION PLAN INFORMATION



The following table provides information about the Companys common
stock that may be issued upon the exercise of options, warrants and rights under all of the Companys equity compensation plans as of December 31, 2003.



|                                                              |  |                                                                                            |  |                                                                             |       |                                                                                                                                           |        
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan category                                                 |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights(a) |  | Weighted-averageexercise price ofoutstanding options,warrants and rights(b) |       | Number of securitiesremaining availablefor
futureissuance under equity compensation plans(excluding securitiesreflected incolumn (a)) (c)
|Equity compensation plans approved by security holders(1)     |  | 91,118                                                                                     |  | $                                                                           | 9.51  |                                                                                                                                           | 140,407
|Equity compensation plans not approved by security holders(2) |  | 28,788                                                                                     |  | $                                                                           | 16.80 |                                                                                                                                           | 31,987 
|Total                                                         |  | 119,906                                                                                    |  | $                                                                           | 11.26 |                                                                                                                                           | 172,394



|(1) | Includes the Companys 1990 Employee Stock Option Plan for Key Employees, 1996 Employee Stock Option Plan, and Employee Stock Option and Restricted Stock Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



The 1990 Employee Stock Option Plan for Key
Employees was adopted by the Board of the Bank and approved by the shareholders of the Bank in March 1990. The 1996 Employee Stock Option Plan was adopted by the Board of the Bank and approved by shareholders of the Bank in March 1997. In 1999, as
part of the formation of the Company as a holding company for the Bank, these plans were each amended so that no further grants may be made thereunder, and each option to purchase one share of Bank Common Stock was converted into an option to
purchase one share of Company Common Stock.



The
Companys 2000 Employee Stock Option and Restricted Stock Plan was adopted by the Board of the Company and approved by the shareholders in April 2000.



|(2) | Directors Stock Option and Restricted Stock Plan.
|--- | -------------------------------------------------



The Companys Directors Stock Option and Restricted Stock Plan was adopted by the Board, and became effective, on April 22, 1999, prior to the
listing of the Companys common stock on the Nasdaq National Market System. The plan provides for grants of non-qualified stock options and restricted stock awards to directors of the Company and its subsidiaries. Participants in the plan



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##### Table of Contents

may be granted non-qualified stock options or restricted stock. All stock option grants have an exercise price per share of no less than the fair market
value per share of common stock on the grant date and may have a term of no longer than 10 years after the grant date.



Additional information required by this item is incorporated by reference to the Companys Proxy Statement for its 2004 Annual Meeting of
Shareholders under the caption Stock Ownership of Management and Principal Shareholders.



|Item 13. | Certain Relationships and Related Transactions.
|-------- | -----------------------------------------------



This information required by this item is incorporated by reference to the Companys Proxy Statement for its 2004 Annual Meeting of Shareholders
under the caption Certain Transactions With Management.



|Item 14. | Principal Accountant Fees and Services.
|-------- | ---------------------------------------



The information regarding principal accounting fees and services and the Companys pre-approval policies and procedures for audit and non-audit
services provided by the Companys independent accountants is incorporated by reference to the Companys Proxy Statement for its 2004 Annual Meeting of Shareholders under the caption Principal Accountant Fees and Services.



PART IV



|Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
|-------- | -----------------------------------------------------------------



(a) Financial Statements and Financial Statement Schedules



The following documents are filed as part of this report:



| | 1. | Financial Statements of 1st Constitution Bancorp.
| | -- | -------------------------------------------------



Consolidated Statements of Condition  December 31, 2003 and 2002.



Consolidated Statements of Income  Years Ended December 31, 2003, 2002 and 2001.



Consolidated Statements of Changes in Shareholders
Equity  Years Ended December 31, 2003, 2002 and 2001.



Consolidated Statements of Cash Flows  years Ended December 31, 2003, 2002, and 2001.



Independent Auditors Report



These statements are incorporated by reference to the Companys Annual Report to Shareholders for the year ended December 31, 2003.



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



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##### Table of Contents

|3. | Exhibits
|-- | --------



|           |  |                                                                                                                                                                                                                                                                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                             
|3 (i) *    |  | Certificate of Incorporation of the Company (conformed copy)                                                                                                                                                                                                                                                                            
|           | 
|3 (i)(A) * |  | Amendment to Certificate of Incorporation of the Company                                                                                                                                                                                                                                                                                
|           | 
|3 (ii)     |  | Bylaws of the Company (incorporated by reference to Exhibit 3(ii) to the Companys Form 10-QSB filed with the SEC on May 14, 2003)                                                                                                                                                                                                      
|           | 
|4.1        |  | Specimen Share of Common Stock (incorporated by reference to the Companys Form 10-KSB filed with the SEC on March 22, 2002)                                                                                                                                                                                                            
|           | 
|4.2        |  | Amended and Restated Declaration of Trust of 1st Constitution Capital Trust I dated as of April 10, 2002 among the Company, as sponsor, Wilmington Trust Company, as Delaware and institutional
trustee, and the Administrators named therein (incorporated by reference to the Companys Form 10-QSB filed with the SEC on May 8, 2002)
|           | 
|4.3        |  | Indenture dated as of April 10, 2002 between the Company, as issuer, and Wilmington Trust Company, as trustee, relating to the Floating Rate Junior Subordinated Debt Securities due 2032
(incorporated by reference to the Companys Form 10-QSB filed with the SEC on May 8, 2002)                                                    
|           | 
|4.4        |  | Guarantee Agreement dated as of April 10, 2002 between the Company and the Wilmington Trust Company, as guarantee trustee (incorporated by reference to the Companys Form 10-QSB filed with
the SEC on May 8, 2002)                                                                                                                    
|           | 
|4.5        |  | Rights Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp and Registrar and Transfer Corporation (incorporated by reference to the Companys Form 8-A filed with the SEC
on March 18, 2004).                                                                                                                       
|           | 
|10.1 #     |  | 1st Constitution Bancorp Supplemental Executive Retirement Plan, dated as of October 1, 2002 (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13,
2002)                                                                                                                                           
|           | 
|10.2 #     |  | 1st Constitution Bancorp Directors Deferral Plan, dated as of October 1, 2002 (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13,
2002)                                                                                                                                                         
|           | 
|10.3 #     |  | 1st Constitution Bancorp Directors Insurance Plan, dated as of October 1, 2002 (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13,
2002)                                                                                                                                                         
|           | 
|10.4 #     |  | 1st Constitution Bancorp Form of Executive Life Insurance Agreement (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13, 2002)                                                                                                                                                                    
|           | 
|10.5 #     |  | Amended and Restated 1990 Stock Option Plan for Key Employees, as amended (incorporated by reference to Exhibit No. 10.1 to the Companys Form 10-QSB filed with the SEC on August 9,
2002)                                                                                                                                             



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##### Table of Contents

|          |  |                                                                                                                                                                                                                                                             
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6      |  | 1996 Employee Stock Option Plan, as amended (incorporated by reference to Exhibit No. 10.2 to the Companys Form 10-QSB filed with the SEC on August 9, 2002)                                                                                               
|          | 
|10.7      |  | 2000 Employee Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit No. 6.3 to the Companys Form 10-SB filed with the SEC on June 15, 2001)                                                                                         
|          | 
|10.8   #  |  | Directors Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit No. 6.4 to the Companys Form 10-SB filed with the SEC on June 15, 2001)                                                                                             
|          | 
|10.9   #  |  | Employment Agreement between the Company and Robert F. Mangano dated April 22, 1999 (incorporated by reference to Exhibit No. 6.5 to the Companys Form 10-SB filed with the SEC on June 15,
2001)                                                          
|          | 
|10.10   # |  | Agreement for Consulting Services between the Company and Edward D. Knapp (incorporated by reference to Exhibit 10.10 to the Companys Form 10-KSB filed with the SEC on March 20,
2003)                                                                    
|          | 
|10.11 * # |  | Amendment to 1st Constitution Bancorp Directors Insurance Plan, dated as of February 19, 2004                                                                                                                                                               
|          | 
|13.1      |  | 2001 Annual Report to Security Holders (incorporated by reference to the Companys Form 10-KSB filed with the SEC on March 22, 2002)                                                                                                                        
|          | 
|14 *      |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                         
|          | 
|21        |  | Subsidiaries of the Company (incorporated by reference to the Companys Form 10-KSB filed with the SEC on March 20, 2003)                                                                                                                                   
|          | 
|23 *      |  | Independent Auditors Consent                                                                                                                                                                                                                               
|          | 
|31.1 *    |  | Certification of Robert F. Mangano, Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                             
|          | 
|31.2 *    |  | Certification of Joseph M. Reardon, Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                             
|          | 
|32 *      |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, Chief Executive Officer of the Company, and
Joseph M. Reardon, Chief Financial Officer of the Company.

---

|* | Filed herewith.
|- | ---------------



|# | A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
|- | ---------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

(b) Reports on Form 8-K. During the last quarter of the period covered by this report, no Current
Reports on Form 8-K were filed by the Company with the Commission. On October 29, 2003, the Company furnished the Commission with information regarding earnings and other financial results for the quarter ended September 30, 2003, pursuant to Item
12 of Form 8-K.



(c) Exhibits.



Exhibits required by Section 601 of Regulation S-K (see (a) above).



(d) Financial Statement Schedules



See the notes to the Consolidated Financial Statements included in this
report.





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##### Table of Contents



1STCONSTITUTION BANCORP



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|                                                                                                                | 
|Independent Auditors Report                                                                                    |  | F-2 
|                                                                                                                | 
|Consolidated Statements of Condition  December 31, 2003 and 2002                                               |  | F-3 
|                                                                                                                | 
|Consolidated Statements of Income  Years Ended December 31, 2003, 2002 and 2001                                |  | F-4 
|                                                                                                                | 
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31, 2003, 2002 and 2001 |  | F-5 
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001                      |  | F-6 
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | F-7 



F-1



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



To the
Shareholders and Board of Directors

of 1STConstitution Bancorp:



We have
audited the accompanying consolidated statements of condition of 1STConstitution Bancorp and subsidiaries as of
December 31, 2003 and 2002, 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, 2003. These consolidated financial statements are
the responsibility of the Company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 1STConstitution Bancorp and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.



KPMG LLP



Short Hills, New Jersey

February 6, 2004



F-2



---

##### Table of Contents

1STCONSTITUTION BANCORP

STATEMENTS OF CONDITION



December 31, 2003 and 2002



|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                                              |  | 2003 |             |   | 2002 |  
|ASSETS                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|CASH AND DUE FROM BANKS                                                                                                                                                                       |  | $    | 6,987,850   |   |      | $ | 9,542,010   |  
|FEDERAL FUNDS SOLD / SHORT TERM INVESTMENTS                                                                                                                                                   |  |      | 7,715,036   |   |      |   | 52,364      |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Total cash and cash equivalents                                                                                                                                                               |  |      | 14,702,886  |   |      |   | 9,594,374   |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|SECURITIES (Notes 2 and 8):                                                                                                                                                                   |  |      |             |   |      |   |             |  
|Available for sale, at market value                                                                                                                                                           |  |      | 84,999,973  |   |      |   | 82,028,866  |  
|Held to maturity (market value of $6,516,652 and $7,434,716 in 2003 and 2002, respectively)                                                                                                   |  |      | 6,191,197   |   |      |   | 7,171,913   |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Total securities                                                                                                                                                                              |  |      | 91,191,170  |   |      |   | 89,200,779  |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|LOANS HELD FOR SALE (Note 3)                                                                                                                                                                  |  |      | 15,405,982  |   |      |   | 16,299,472  |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|LOANS (Notes 3, 4 and 5)                                                                                                                                                                      |  |      | 163,950,306 |   |      |   | 151,049,736 |  
|Less - Allowance for loan losses                                                                                                                                                              |  |      | (1,786,632  | ) |      |   | (1,669,882  | )
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Net loans                                                                                                                                                                                     |  |      | 162,163,674 |   |      |   | 149,379,854 |  
|PREMISES AND EQUIPMENT, net (Note 6)                                                                                                                                                          |  |      | 1,361,517   |   |      |   | 1,276,942   |  
|ACCRUED INTEREST RECEIVABLE                                                                                                                                                                   |  |      | 1,169,015   |   |      |   | 1,263,003   |  
|BANK-OWNED LIFE INSURANCE (Note 11)                                                                                                                                                           |  |      | 6,331,006   |   |      |   | 6,069,705   |  
|OTHER ASSETS                                                                                                                                                                                  |  |      | 1,157,924   |   |      |   | 778,214     |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Total assets                                                                                                                                                                                  |  | $    | 293,483,174 |   |      | $ | 273,862,343 |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                          |  |      |             |   |      |   |             |  
|LIABILITIES:                                                                                                                                                                                  |  |      |             |   |      |   |             |  
|Deposits (Note 7)                                                                                                                                                                             |  |      |             |   |      |   |             |  
|Non-interest bearing                                                                                                                                                                          |  | $    | 42,661,432  |   |      | $ | 44,964,217  |  
|Interest bearing                                                                                                                                                                              |  |      | 202,692,292 |   |      |   | 179,185,247 |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Total deposits                                                                                                                                                                                |  |      | 245,353,724 |   |      |   | 224,149,464 |  
|SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note 8)                                                                                                                                       |  |      | 1,921,015   |   |      |   | 2,554,815   |  
|OTHER BORROWINGS (Note 8)                                                                                                                                                                     |  |      | 15,500,000  |   |      |   | 18,000,000  |  
|REDEEMABLE SUBORDINATED DEBENTURES (Note 9)                                                                                                                                                   |  |      | 5,155,000   |   |      |   | 5,155,000   |  
|ACCRUED INTEREST PAYABLE                                                                                                                                                                      |  |      | 906,576     |   |      |   | 1,211,902   |  
|ACCRUED EXPENSES AND OTHER LIABILITIES                                                                                                                                                        |  |      | 1,061,603   |   |      |   | 1,796,320   |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                                                                                             |  |      | 269,897,918 |   |      |   | 252,867,501 |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|COMMITMENTS AND CONTINGENCIES (Note 13)                                                                                                                                                       |  |      |             |   |      |   |             |  
|SHAREHOLDERS EQUITY (Notes 12 and 15):                                                                                                                                                       |  |      |             |   |      |   |             |  
|Common stock, no par value; 15,000,000 shares authorized; 1,565,367 and 1,554,566 shares issued and 1,565,163 and 1,545,986 shares outstanding
as of December 31, 2003 and 2002, respectively |  |      | 19,694,828  |   |      |   | 17,320,091  |  
|Retained earnings                                                                                                                                                                             |  |      | 3,745,784   |   |      |   | 2,978,873   |  
|Treasury Stock, at cost, 204 shares and 8,580 shares at December 31, 2003 and 2002, respectively                                                                                              |  |      | (5,517      | ) |      |   | (119,844    | )
|Accumulated other comprehensive income                                                                                                                                                        |  |      | 150,161     |   |      |   | 815,722     |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Total shareholders equity                                                                                                                                                                    |  |      | 23,585,256  |   |      |   | 20,994,842  |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  
|Total liabilities and shareholders equity                                                                                                                                                    |  | $    | 293,483,174 |   |      | $ | 273,862,343 |  
|                                                                                                                                                                                              |  |      |             |   |      |   |             |  



F-3



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##### Table of Contents

1STCONSTITUTION BANCORP

CONSOLIDATED STATEMENTS OF INCOME



For the Years Ended December 31, 2003, 2002 and 2001



|                                                                                    |  |      |            |      |   |            |  |   |           
|----------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                                                    |  | 2003 |            | 2002 |   | 2001      
|INTEREST INCOME:                                                                    |  |      |            |      |   |            |  |   |           
|Interest and fees on loans                                                          |  | $    | 11,425,762 |      | $ | 10,346,801 |  | $ | 10,555,037
|Interest on securities:                                                             |  |      |            |      |   |            |  |   |           
|Taxable                                                                             |  |      | 2,619,813  |      |   | 3,598,437  |  |   | 3,671,869 
|Tax-exempt                                                                          |  |      | 311,764    |      |   | 164,419    |  |   | 156,805   
|Interest on Federal funds sold and short-term investments                           |  |      | 29,458     |      |   | 198,659    |  |   | 412,274   
|                                                                                    |  |      |            |      |   |            |  |   |           
|Total interest income                                                               |  |      | 14,386,797 |      |   | 14,308,316 |  |   | 14,795,985
|                                                                                    |  |      |            |      |   |            |  |   |           
|INTEREST EXPENSE:                                                                   |  |      |            |      |   |            |  |   |           
|Interest on deposits                                                                |  |      | 3,163,255  |      |   | 3,961,209  |  |   | 5,702,633 
|Interest on securities sold under agreements to repurchase and other borrowed funds |  |      | 952,910    |      |   | 921,982    |  |   | 1,038,505 
|Interest on redeemable subordinated debentures                                      |  |      | 257,852    |      |   | 216,081    |  |   |          
|                                                                                    |  |      |            |      |   |            |  |   |           
|Total interest expense                                                              |  |      | 4,374,017  |      |   | 5,099,272  |  |   | 6,741,138 
|                                                                                    |  |      |            |      |   |            |  |   |           
|Net interest income                                                                 |  |      | 10,012,780 |      |   | 9,209,044  |  |   | 8,054,847 
|PROVISION FOR LOAN LOSSES (Note 4)                                                  |  |      | 240,000    |      |   | 240,000    |  |   | 300,000   
|                                                                                    |  |      |            |      |   |            |  |   |           
|Net interest income after provision for loan losses                                 |  |      | 9,772,780  |      |   | 8,969,044  |  |   | 7,754,847 
|                                                                                    |  |      |            |      |   |            |  |   |           
|NON-INTEREST INCOME:                                                                |  |      |            |      |   |            |  |   |           
|Service charges on deposit accounts                                                 |  |      | 559,698    |      |   | 517,415    |  |   | 402,312   
|Gain on sale of loans held for sale                                                 |  |      | 1,284,913  |      |   | 676,208    |  |   | 402,923   
|Gain on sale of securities available for sale                                       |  |      |           |      |   |           |  |   | 131,436   
|Income on Bank-owned life insurance                                                 |  |      | 261,301    |      |   | 69,705     |  |   |          
|Other income                                                                        |  |      | 295,437    |      |   | 262,198    |  |   | 249,911   
|                                                                                    |  |      |            |      |   |            |  |   |           
|Total other income                                                                  |  |      | 2,401,349  |      |   | 1,525,526  |  |   | 1,186,582 
|                                                                                    |  |      |            |      |   |            |  |   |           
|NON-INTEREST EXPENSES:                                                              |  |      |            |      |   |            |  |   |           
|Salaries and employee benefits (Note 11)                                            |  |      | 3,979,655  |      |   | 3,229,793  |  |   | 2,714,070 
|Occupancy expense (Note 13)                                                         |  |      | 818,545    |      |   | 740,088    |  |   | 724,088   
|Other operating expenses (Note 14)                                                  |  |      | 2,370,522  |      |   | 2,318,000  |  |   | 2,114,133 
|                                                                                    |  |      |            |      |   |            |  |   |           
|Total other expenses                                                                |  |      | 7,168,722  |      |   | 6,287,881  |  |   | 5,552,291 
|                                                                                    |  |      |            |      |   |            |  |   |           
|Income before income taxes                                                          |  |      | 5,005,407  |      |   | 4,206,689  |  |   | 3,389,138 
|INCOME TAXES (Note 10)                                                              |  |      | 1,776,907  |      |   | 1,519,367  |  |   | 1,237,137 
|                                                                                    |  |      |            |      |   |            |  |   |           
|Net income                                                                          |  | $    | 3,228,500  |      | $ | 2,687,322  |  | $ | 2,152,001 
|                                                                                    |  |      |            |      |   |            |  |   |           
|NET INCOME PER SHARE                                                                |  |      |            |      |   |            |  |   |           
|Basic                                                                               |  | $    | 2.07       |      | $ | 1.74       |  | $ | 1.39      
|Diluted                                                                             |  | $    | 1.97       |      | $ | 1.65       |  | $ | 1.34      
|                                                                                    |  |      |            |      |   |            |  |   |           
|WEIGHTED AVERAGE SHARES OUTSTANDING                                                 |  |      |            |      |   |            |  |   |           
|Basic                                                                               |  |      | 1,560,601  |      |   | 1,544,846  |  |   | 1,542,957 
|Diluted                                                                             |  |      | 1,636,798  |      |   | 1,629,361  |  |   | 1,601,157 
|                                                                                    |  |      |            |      |   |            |  |   |           



F-4



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##### Table of Contents

1STCONSTITUTION BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



For the Years Ended December 31, 2003, 2002 and 2001



|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------------- | - | ---------- | -------------- |  | --------- | -------------------------------------------- |  | - | -------------------------- | - |  | - | ---------- | -
|                                                                                                            |  | Common Stock |            | RetainedEarnings |   |            | Treasury Stock |  |           | Accumulated OtherComprehensive (Loss) Income |  |   | Total Shareholders Equity |  
|BALANCE, December 31, 2000                                                                                  |  | $            | 13,912,814 |                  | $ | 1,496,268  |                |  | ($20,204  | )                                            |  |   | ($168,048                  | ) |  | $ | 15,220,830 |  
|Treasury Stock, 4,610 shares, at cost                                                                       |  |              |            |                  |   |            |                |  | (62,986   | )                                            |  |   |                            |   |  |   | (62,986    | )
|5% stock dividend declared in December, 2001 including fractional share cash payments (66,900 shares)       |  |              | 1,285,525  |                  |   | (1,287,832 | )              |  |           |                                              |  |   |                            |   |  |   | (2,307     | )
|Comprehensive Income:                                                                                       |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|Net income  2001                                                                                           |  |              |            |                  |   | 2,152,001  |                |  |           |                                              |  |   |                            |   |  |   | 2,152,001  |  
|Other comprehensive income Unrealized gain on securities available for sale, net of tax expense of $109,290 |  |              |            |                  |   |            |                |  |           |                                              |  |   | 212,154                    |   |  |   | 212,154    |  
|Less reclassification adjustment for gains included in net income, net of tax of ($44,688)                  |  |              |            |                  |   |            |                |  |           |                                              |  |   | (86,748                    | ) |  |   | (86,748    | )
|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|Comprehensive Income                                                                                        |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   | 2,277,407  |  
|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|BALANCE, December 31, 2001                                                                                  |  | $            | 15,198,339 |                  | $ | 2,360,437  |                |  | ($83,190  | )                                            |  |   | ($42,642                   | ) |  | $ | 17,432,944 |  
|Exercise of stock options (5,637 shares)                                                                    |  |              | 53,195     |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   | 53,195     |  
|Treasury Stock, 2,861 shares at cost                                                                        |  |              |            |                  |   |            |                |  | (36,654   | )                                            |  |   |                            |   |  |   | (36,654    | )
|5% stock dividend declared December 2002, including fractional share cash payments (70,527 shares)          |  |              | 2,068,557  |                  |   | (2,068,886 | )              |  |           |                                              |  |   |                            |   |  |   | (329       | )
|Comprehensive Income:                                                                                       |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|Net income  2002                                                                                           |  |              |            |                  |   | 2,687,322  |                |  |           |                                              |  |   |                            |   |  |   | 2,687,322  |  
|Unrealized gain on securities available for sale, net of tax expense of $445,807                            |  |              |            |                  |   |            |                |  |           |                                              |  |   | 858,364                    |   |  |   | 858,364    |  
|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|Comprehensive Income                                                                                        |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   | 3,545,686  |  
|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|BALANCE, December 31, 2002                                                                                  |  | $            | 17,320,091 |                  | $ | 2,978,873  |                |  | ($119,844 | )                                            |  | $ | 815,722                    |   |  | $ | 20,994,842 |  
|Exercise of stock options, net                                                                              |  |              | 188,822    |                  |   | (275,674   | )              |  | 114,327   |                                              |  |   |                            |   |  |   | 27,475     |  
|5% stock dividend declared December 2003, including fractional share cash payments (74,541 shares)          |  |              | 2,185,915  |                  |   | (2,185,915 | )              |  |           |                                              |  |   |                            |   |  |   |            |  
|Comprehensive Income:                                                                                       |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|Net income  2003                                                                                           |  |              |            |                  |   | 3,228,500  |                |  |           |                                              |  |   |                            |   |  |   | 3,228,500  |  
|Unrealized gain on securities available for sale, net of tax (benefit) of ($335,754)                        |  |              |            |                  |   |            |                |  |           |                                              |  |   | (665,561                   | ) |  |   | (665,561   | )
|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|Comprehensive Income                                                                                        |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   | 2,562,939  |  
|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  
|BALANCE, December 31, 2003                                                                                  |  | $            | 19,694,828 |                  | $ | 3,745,784  |                |  | ($5,517   | )                                            |  | $ | 150,161                    |   |  | $ | 23,585,256 |  
|                                                                                                            |  |              |            |                  |   |            |                |  |           |                                              |  |   |                            |   |  |   |            |  



F-5



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##### Table of Contents

1STCONSTITUTION BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS



For the Years Ended December 31, 2003, 2002 and 2001



|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                            |  | 2003 |             |   | 2002 |   |             | 2001 | 
|OPERATING ACTIVITIES:                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                                  |  | $    | 3,228,500   |   |      | $ | 2,687,322   |      |  | $ | 2,152,001   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities- |  |      |             |   |      |   |             |      |  |   |             |  
|Provision for loan losses                                                                   |  |      | 240,000     |   |      |   | 240,000     |      |  |   | 300,000     |  
|Depreciation and amortization                                                               |  |      | 327,446     |   |      |   | 317,720     |      |  |   | 221,716     |  
|Net amortization of premiums on securities                                                  |  |      | 1,190,853   |   |      |   | 520,346     |      |  |   | 55,241      |  
|Gain on sale of loans held for sale                                                         |  |      | (1,284,913  | ) |      |   | (676,208    | )    |  |   | (402,923    | )
|Gain on sale of securities available for sale                                               |  |      |            |   |      |   |            |      |  |   | (131,436    | )
|Originations of loans held for sale                                                         |  |      | (91,972,465 | ) |      |   | (63,511,458 | )    |  |   | (61,706,352 | )
|Income on Bank-owned life insurance                                                         |  |      | (261,301    | ) |      |   | (69,705     | )    |  |   |            |  
|Proceeds from sales of loans held for sale                                                  |  |      | 94,150,868  |   |      |   | 60,499,707  |      |  |   | 56,575,771  |  
|Decrease (increase) in accrued interest receivable                                          |  |      | 93,988      |   |      |   | (215,333    | )    |  |   | 240,071     |  
|Increase in other assets                                                                    |  |      | (43,957     | ) |      |   | (631,586    | )    |  |   | (46,600     | )
|(Decrease) increase in accrued interest payable                                             |  |      | (305,326    | ) |      |   | (345,490    | )    |  |   | 15,953      |  
|(Decrease) increase in accrued expenses and other liabilities                               |  |      | (734,717    | ) |      |   | 1,331,172   |      |  |   | 345,513     |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) operating activities                                         |  |      | 4,628,976   |   |      |   | 146,487     |      |  |   | (2,381,045  | )
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|INVESTING ACTIVITIES:                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Purchases of securities - Available for sale                                                |  |      | (62,222,441 | ) |      |   | (60,068,896 | )    |  |   | (53,656,400 | )
|Held to maturity                                                                            |  |      | (198,102    | ) |      |   | (2,344,038  | )    |  |   | (2,829,268  | )
|Proceeds from maturities and prepayments of securities - Available for sale                 |  |      | 57,073,223  |   |      |   | 40,436,189  |      |  |   | 33,742,940  |  
|Held to maturity                                                                            |  |      | 1,164,762   |   |      |   | 1,196,156   |      |  |   | 5,298,016   |  
|Proceeds from sales of securities available for sale                                        |  |      |            |   |      |   | 7,112,177   |      |  |   | 3,504,450   |  
|Purchase of Bank owned life insurance                                                       |  |      |            |   |      |   | (6,000,000  | )    |  |   |            |  
|Net increase in loans                                                                       |  |      | (13,023,820 | ) |      |   | (26,096,866 | )    |  |   | (14,599,072 | )
|Capital expenditures                                                                        |  |      | (412,021    | ) |      |   | (595,918    | )    |  |   | (280,622    | )
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                                       |  |      | (17,618,399 | ) |      |   | (53,473,373 | )    |  |   | (25,212,229 | )
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|FINANCING ACTIVITIES:                                                                       |  |      |             |   |      |   |             |      |  |   |             |  
|Issuance of common stock, net                                                               |  |      | 27,475      |   |      |   | 52,866      |      |  |   |            |  
|Purchase of Treasury Stock                                                                  |  |      |            |   |      |   | (36,654     | )    |  |   | (62,986     | )
|Net increase in demand, savings and time deposits                                           |  |      | 21,204,260  |   |      |   | 34,730,202  |      |  |   | 49,247,369  |  
|Net decrease in securities sold under agreements to repurchase                              |  |      | (633,800    | ) |      |   | (1,253,368  | )    |  |   | (7,202,861  | )
|Net (decrease) increase in other borrowings                                                 |  |      | (2,500,000  | ) |      |   | 2,500,000   |      |  |   |            |  
|Proceeds from issuance of trust preferred securities                                        |  |      |            |   |      |   | 5,000,000   |      |  |   |            |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                                   |  |      | 18,097,935  |   |      |   | 40,993,046  |      |  |   | 41,981,522  |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|Increase (decrease) in cash and cash equivalents                                            |  |      | 5,108,512   |   |      |   | (12,333,840 | )    |  |   | 14,388,248  |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                              |  |      | 9,594,374   |   |      |   | 21,928,214  |      |  |   | 7,539,966   |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                    |  | $    | 14,702,886  |   |      | $ | 9,594,374   |      |  | $ | 21,928,214  |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Cash paid during the year for - Interest                                                    |  | $    | 4,679,343   |   |      | $ | 5,444,762   |      |  | $ | 6,725,185   |  
|Income taxes                                                                                |  |      | 1,909,578   |   |      |   | 1,643,980   |      |  |   | 1,658,493   |  
|                                                                                            |  |      |             |   |      |   |             |      |  |   |             |  



F-6



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##### Table of Contents

1STCONSTITUTION BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



1. Summary
of Significant Accounting Policies



General



1STConstitution Bancorp, (the Company) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and was organized
under the laws of the State of New Jersey in February 1999. The Company is parent to 1st Constitution Bank (the Bank), a state chartered commercial bank which commenced operations in July 1989, and 1STConstitution Capital Trust I, a statutory business trust. The Bank provides community banking services to a broad range of customers, including
corporations, individuals, partnerships and other community organizations in the central New Jersey area. The Bank operates seven branches in Cranbury, Hamilton Square, Plainsboro, Montgomery, Princeton and Perth Amboy, New Jersey.



Principles Of Consolidation



The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, 1STConstitution Capital Trust I (the Trust) and the Bank
and the Banks wholly-owned subsidiaries, 1STConstitution Investment Company and FCB Assets Holdings, Inc. All
significant inter-company accounts and transactions have been eliminated. In accordance with the Companys adoption of Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, The
Company de-consolidated the accounts and related activity of 1stConstitution Capital Trust I. See Adoption of
Significant Accounting Standards below.



Use of Estimates in
the Preparation of Financial Statements



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



Securities



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



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



Allowance for Loan Losses



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



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



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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 ten 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. Realized gains and losses on loans held for sale are recognized at settlement date and are determined based on the cost, including deferred net loan origination fees and the costs of the specific loans sold.



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.



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 below are the pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transaction and Disclosure which assumes the fair value based method of accounting had been adopted.



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|                                                                                                                                 |  |      |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                                                 |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Net income - As reported                                                                                                         |  |      | 3,228,500 |   |      | $ | 2,687,322 |      |  | $ | 2,152,001 |  
|Deduct: Stock-based employee compensation determined under fair value based method for stock options, net of related tax
effects |  |      | (17,548   | ) |      |   | (8,862    | )    |  |   | (251      | )
|                                                                                                                                 |  |      |           |   |      |   |           |      |  |   |           |  
|Pro forma                                                                                                                        |  | $    | 3,210,952 |   |      | $ | 2,678,460 |      |  | $ | 2,151,750 |  
|                                                                                                                                 |  |      |           |   |      |   |           |      |  |   |           |  
|Net income per share -                                                                                                           |  |      |           |   |      |   |           |      |  |   |           |  
|As reported -                                                                                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Basic                                                                                                                            |  | $    | 2.07      |   |      | $ | 1.74      |      |  | $ | 1.39      |  
|Diluted                                                                                                                          |  | $    | 1.97      |   |      | $ | 1.65      |      |  | $ | 1.34      |  
|Pro forma -                                                                                                                      |  |      |           |   |      |   |           |      |  |   |           |  
|Basic                                                                                                                            |  | $    | 2.06      |   |      | $ | 1.73      |      |  | $ | 1.39      |  
|Diluted                                                                                                                          |  | $    | 1.97      |   |      | $ | 1.65      |      |  | $ | 1.34      |  



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 2003 and 2002: dividend yield of 0%; expected volatility of 35% in 2003 and 2002;
risk-free interest rates of 3.27% and 3.03%, respectively; and expected lives of 5 years.



Benefit Plans



The
Company provides certain retirement benefits to employees under a 401(k) plan. The Companys contributions to the 401(k) plan are expensed as incurred. The Company also provides retirement benefits to certain employees under a supplemental
executive retirement plan. The plan is unfunded and the Company accrues actuarial determined benefit costs over the estimated service period of the employees in the plan.



Cash And Cash Equivalents



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



Reclassifications



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



Net Income Per Share



Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding plus the weighted-average number of net shares that
would be issued upon exercise of dilutive stock options and grants pursuant to the treasury stock method. Weighted average shares for the basic net income per share computation for the years ended December 31, 2003, 2002 and 2001 were 1,560,601,
1,544,846 and 1,542,957, respectively. For the diluted net income per share computation, common stock equivalents of 76,197, 84,515 and 58,200 are included for the years ended December 31, 2003, 2002 and 2001, respectively. All share information
reported in the statements of income reflect a 5% stock dividend declared December 18, 2003 paid on January 31, 2004 to shareholders of record on January 15, 2004.



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.



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Adoption of Significant Accounting Standards



FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46) was issued in January 2003 and was recently reissued as FASB Interpretation No. 46 (revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R is applicable to all special-purpose entities
(SPEs) in which the entity holds a variable interest no later than the end of the first reporting period ending after December 15, 2003, and immediately to all entities created after January 31, 2003. The effective dates of FIN 46R vary
depending on the type of reporting enterprise and the type of entity that the enterprise is involved with. FIN 46 and FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 and FIN 46R provide guidance on the identification of entities controlled through means
other than voting rights. FIN 46 and FIN 46R specify how a business enterprise should evaluate its interest in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary
beneficiary if the entity does not effectively disperse risks among the parties involved.



Under the above accounting literature, the Company was required to de-consolidate its investment in the Trust at December 31, 2003. The de-consolidation of subsidiary trusts of bank holding companies formed in
connection with the issuance of trust preferred securities like the Trust resulted in the $5.0 million of trust preferred securities being classified and characterized as subordinated debentures that were issued from the holding company to the
Trust. In July 2003, the Board of Governors of the Federal Reserve System instructed bank holding companies to continue to include the redeemable subordinated debentures in their Tier 1 capital for regulatory capital purposes until notice is given
to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to include redeemable subordinated debentures in Tier 1 capital for regulatory capital purposes. As of December 31, 2003, assuming the Company
was not allowed to include the $5.0 million in redeemable subordinated debentures issued by the Trust in Tier 1 capital, the Company would have Tier 1 capital of 11.58% and a leverage ratio of 8.03%, each on a pro forma basis.



2. Securities



Amortized cost, gross unrealized gains and losses, and the estimated market
value by security type as of December 31, is as follows:



|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|-------------------------------------------------------------------------------------- |  | -------------- | ---------- | ---------------------- | - | ----------------------- |  | ---------------------- | ------- |  | - | ----------
|2003                                                                                   |  | Amortized Cost |            | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Market Value
|Available for sale-                                                                    |  |                |            |                        |   |                         |  |                        |         |  |   |           
|U. S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $              | 45,775,988 |                        | $ | 173,837                 |  | $                      | 554,470 |  | $ | 45,395,355
|Mortgage backed securities                                                             |  |                | 31,455,825 |                        |   | 731,392                 |  |                        | 41,231  |  |   | 32,145,986
|Obligations of State and Political subdivisions                                        |  |                | 3,587,086  |                        |   | 16,494                  |  |                        | 33,220  |  |   | 3,570,360 
|FHLB stock and other securities                                                        |  |                | 3,946,447  |                        |   | 19,485                  |  |                        | 77,660  |  |   | 3,888,272 
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|                                                                                       |  | $              | 84,765,346 |                        | $ | 941,208                 |  | $                      | 706,581 |  | $ | 84,999,973
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|Held to maturity-                                                                      |  |                |            |                        |   |                         |  |                        |         |  |   |           
|Mortgage backed securities                                                             |  | $              | 955,970    |                        | $ | 50,884                  |  | $                      | 0       |  | $ | 1,006,854 
|Obligations of State and Political subdivisions                                        |  |                | 5,235,227  |                        |   | 274,571                 |  |                        | 0       |  |   | 5,509,798 
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|                                                                                       |  | $              | 6,191,197  |                        | $ | 325,455                 |  | $                      | 0       |  | $ | 6,516,652 
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           



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##### Table of Contents

|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|-------------------------------------------------------------------------------------- |  | -------------- | ---------- | ---------------------- | - | ----------------------- |  | ---------------------- | ------- |  | - | ----------
|2002                                                                                   |  | Amortized Cost |            | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Market Value
|Available for sale-                                                                    |  |                |            |                        |   |                         |  |                        |         |  |   |           
|U. S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $              | 34,593,765 |                        | $ | 382,423                 |  | $                      | 48,698  |  | $ | 34,927,491
|Mortgage backed securities                                                             |  |                | 40,556,571 |                        |   | 1,017,976               |  |                        | 3,225   |  |   | 41,571,322
|FHLB stock and other securities                                                        |  |                | 5,642,589  |                        |   | 44,980                  |  |                        | 157,515 |  |   | 5,530,054 
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|                                                                                       |  | $              | 80,792,924 |                        | $ | 1,445,380               |  | $                      | 209,438 |  | $ | 82,028,866
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|Held to maturity-                                                                      |  |                |            |                        |   |                         |  |                        |         |  |   |           
|Mortgage backed securities                                                             |  | $              | 1,650,982  |                        | $ | 90,694                  |  | $                      | 0       |  | $ | 1,741,676 
|Obligations of State and Political subdivisions                                        |  |                | 5,520,931  |                        |   | 172,109                 |  |                        | 0       |  |   | 5,693,040 
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           
|                                                                                       |  | $              | 7,171,913  |                        | $ | 262,803                 |  | $                      | 0       |  | $ | 7,434,716 
|                                                                                       |  |                |            |                        |   |                         |  |                        |         |  |   |           



Gross unrealized
losses on securities and the estimated market value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2003 is as follows:



|                                                                             |  |                        |            |                   |                     |         |                        |       |                   |           |  |                        |   |                   |   |            |  |    |         |  
|---------------------------------------------------------------------------- |  | ---------------------- | ---------- | ----------------- | ------------------- | ------- | ---------------------- | ----- | ----------------- | --------- |  | ---------------------- | - | ----------------- | - | ---------- |  | -- | ------- | -
|                                                                             |  | Less than 12 months    |            |                   | 12 months or longer |         |                        | Total |                  
|                                                                             |  | Estimated Market Value |            | Unrealized Losses |                     |         | Estimated Market Value |       | Unrealized Losses |           |  | Estimated Market Value |   | Unrealized Losses |  
|U.S. Treasury obligations and direct obligations of U.S. Government agencies |  | $                      | 24,563,139 |                   | ($                  | 551,678 | )                      |       | $                 | 830,608   |  | ($2,792                | ) |                   | $ | 25,393,747 |  | ($ | 554,470 | )
|Mortgage backed securities                                                   |  |                        | 2,607,230  |                   |                     | (41,231 | )                      |       |                   | 0         |  | 0                      |   |                   |   | 2,607,230  |  |    | (41,231 | )
|Obligations of State and Political Subdivisions                              |  |                        | 2,152,364  |                   |                     | (33,220 | )                      |       |                   | 0         |  | 0                      |   |                   |   | 2,152,364  |  |    | (33,220 | )
|FHLB stock and other securities                                              |  |                        | 0          |                   |                     | 0       |                        |       |                   | 1,381,010 |  | (77,660                | ) |                   |   | 1,381,010  |  |    | (77,660 | )
|                                                                             |  |                        |            |                   |                     |         |                        |       |                   |           |  |                        |   |                   |   |            |  |    |         |  
|Total temporarily impaired securities                                        |  | $                      | 29,322,733 |                   | ($                  | 626,129 | )                      |       | $                 | 2,211,618 |  | ($80,452               | ) |                   | $ | 31,534,351 |  | ($ | 706,581 | )
|                                                                             |  |                        |            |                   |                     |         |                        |       |                   |           |  |                        |   |                   |   |            |  |    |         |  



U.S. Treasury
obligations and direct obligations of U.S. Government agencies: The unrealized losses on investments in these securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the
securities at a price less than the par value of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than temporarily
impaired.



Mortgage-backed securities: The unrealized losses on
investments in mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by the issuer, primarily government or government sponsored agencies. It is expected that the securities
would not be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.



FHLB stock and other securities: The investments in these securities with unrealized losses are comprised of corporate trust preferred securities that
mature in 2027. The unrealized losses on these securities were caused by interest rate increases. The contractual terms of the bonds do not allow the issuer to settle the securities at a price less than the face value of the bonds, which is greater
than the amortized cost of the bonds. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until a market price recovery
or maturity, these investments are not considered other-than-temporarily impaired.



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##### Table of Contents

The amortized cost, estimated market value and weighted average yield of debt securities at December 31,
2003, 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. Federal Home Loan Bank stock
is included in Due after ten years.



|                                       |  |                |            |                        |   |                         |  |      |  
|-------------------------------------- |  | -------------- | ---------- | ---------------------- | - | ----------------------- |  | ---- | -
|                                       |  | Amortized Cost |            | Estimated Market Value |   | Weighted Average Yield* | 
|Available for sale-                    |  |                |            |                        |   |                         |  |      |  
|Due in one year or less                |  | $              | 1,744,271  |                        | $ | 1,763,921               |  | 5.48 | %
|Due after one year through five years  |  |                | 11,057,912 |                        |   | 11,052,766              |  | 3.37 | %
|Due after five years through ten years |  |                | 22,051,693 |                        |   | 22,255,483              |  | 3.58 | %
|Due after ten years                    |  |                | 49,911,470 |                        |   | 49,927,803              |  | 3.99 | %
|                                       |  |                |            |                        |   |                         |  |      |  
|Total                                  |  | $              | 84,765,346 |                        | $ | 84,999,973              |  | 3.82 | %
|                                       |  |                |            |                        |   |                         |  |      |  
|Held to maturity-                      |  |                |            |                        |   |                         |  |      |  
|Due in one year or less                |  | $              | 150,742    |                        | $ | 155,609                 |  | 4.65 | %
|Due after one year through five years  |  |                | 1,734,265  |                        |   | 1,817,056               |  | 4.22 | %
|Due after five years through ten years |  |                | 2,299,702  |                        |   | 2,422,868               |  | 4.40 | %
|Due after ten years                    |  |                | 2,006,488  |                        |   | 2,121,119               |  | 4.68 | %
|                                       |  |                |            |                        |   |                         |  |      |  
|Total                                  |  | $              | 6,191,197  |                        | $ | 6,516,652               |  | 4.44 | %
|                                       |  |                |            |                        |   |                         |  |      |  



|* | computed on a tax equivalent basis.
|- | -----------------------------------



There were no sales of securities in 2003
or 2002. Gross gains on securities sales were $131,436 in 2001.



As of December 31, 2003 and 2002, securities having a book value of $25,614,650 and $35,437,878, 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, 2003 and 2002 are as
follows:



|                                      |  |      |             |   |      |   |             |  
|------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                      |  | 2003 |             |   | 2002 |  
|Construction loans                    |  | $    | 56,971,265  |   |      | $ | 32,342,880  |  
|Residential real estate loans         |  |      | 8,059,032   |   |      |   | 9,023,228   |  
|Commercial and commercial real estate |  |      | 83,840,831  |   |      |   | 89,415,759  |  
|Loans to individuals                  |  |      | 13,236,895  |   |      |   | 14,851,742  |  
|Lease financing                       |  |      | 1,054,198   |   |      |   | 4,773,528   |  
|All other loans                       |  |      | 1,230,297   |   |      |   | 1,055,560   |  
|                                      |  |      |             |   |      |   |             |  
|                                      |  |      | 164,392,518 |   |      |   | 151,462,697 |  
|Less: Deferred origination fees, net  |  |      | (442,212    | ) |      |   | (412,961    | )
|                                      |  |      |             |   |      |   |             |  
|                                      |  | $    | 163,950,306 |   |      | $ | 151,049,736 |  
|                                      |  |      |             |   |      |   |             |  



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 $15,405,982 at
December 31, 2003 and $16,299,472 at December 31, 2002. The Bank sells residential mortgage loans in the secondary market on a non-recourse basis. The related loan servicing rights are generally released to the purchaser. Loans held for sale at
December 31, 2003 and 2002 are residential mortgage loans that the Bank intends to sell under forward contracts providing for delivery to purchasers generally within a two month period.



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4. Allowance for Loan Losses



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



|                                |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Balance, beginning of year      |  | $    | 1,669,882 |   |      | $ | 1,414,495 |      |  | $ | 1,132,555 |  
|Provision charged to operations |  |      | 240,000   |   |      |   | 240,000   |      |  |   | 300,000   |  
|Loans charged off               |  |      | (123,666  | ) |      |   | (8,182    | )    |  |   | (20,973   | )
|Recoveries of loans charged off |  |      | 416       |   |      |   | 23,569    |      |  |   | 2,913     |  
|                                |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, end of year            |  | $    | 1,786,632 |   |      | $ | 1,669,882 |      |  | $ | 1,414,495 |  
|                                |  |      |           |   |      |   |           |      |  |   |           |  



The amount of loans
which were not accruing interest amounted to $330,783 and $156,156 at December 31, 2003 and 2002, respectively. Impaired loans totaled $330,783 and $151,114 at December 31, 2003 and 2002, respectively. There was no valuation allowance on impaired
loans at December 31, 2003 and December 31, 2002. There were no loans 90 days or more past due and still accruing at December 31, 2003. Loans 90 days or more past due and still accruing totaled $2,156 at December 21, 2002.



Additional income before taxes amounting to $16,993, $16,450 and $15,214
would have been recognized in 2003, 2002 and 2001, respectively, if interest on all loans had been recorded based upon original contract terms. No interest was recognized on non-accrual loans in 2003, 2002 or 2001.



The average recorded investment in impaired loans for the years ended
December 31, 2003, 2002 and 2001, was approximately $240,949, $380,176, and $322,500, respectively.



5. Loans to Related Parties



Activity related to loans to directors, executive officers and their affiliated interests during 2003 is as follows:



|                           |  |   |            |  
|-------------------------- |  | - | ---------- | -
|Balance, beginning of year |  | $ | 3,745,994  |  
|Loans granted              |  |   | 2,462,418  |  
|Repayments of loans        |  |   | (1,023,078 | )
|                           |  |   |            |  
|Balance, end of year       |  | $ | 5,185,334  |  
|                           |  |   |            |  



All such loans were
made under customary terms and conditions and were current as to principal and interest payments as of December 31, 2003 and 2002.



6. Premises And Equipment



Premises and equipment consist of the following as of December 31, 2003 and 2002:



|                               |  |      |            |   |      |   |            |  
|------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                               |  | 2003 |            |   | 2002 |  
|Leasehold improvements         |  | $    | 709,318    |   |      | $ | 689,091    |  
|Furniture and equipment        |  |      | 2,428,614  |   |      |   | 2,036,987  |  
|                               |  |      |            |   |      |   |            |  
|                               |  |      | 3,137,932  |   |      |   | 2,726,078  |  
|Less- Accumulated depreciation |  |      | (1,776,415 | ) |      |   | (1,449,136 | )
|                               |  |      |            |   |      |   |            |  
|                               |  | $    | 1,361,517  |   |      | $ | 1,276,942  |  
|                               |  |      |            |   |      |   |            |  



7. Deposits



Deposits at December 31, 2003 and 2002 consist of the
following:



|                     |  |      |             |      |   |            
|-------------------- |  | ---- | ----------- | ---- | - | -----------
|                     |  | 2003 |             | 2002
|Demand               |  |      |             |      |   |            
|Non-interest bearing |  | $    | 42,661,432  |      | $ | 44,964,217 
|Interest bearing     |  |      | 87,095,046  |      |   | 86,101,405 
|Savings              |  |      | 29,226,756  |      |   | 14,533,798 
|Time                 |  |      | 86,370,490  |      |   | 78,550,044 
|                     |  |      |             |      |   |            
|                     |  | $    | 245,353,724 |      | $ | 224,149,464
|                     |  |      |             |      |   |            



F-13



---

##### Table of Contents

Individual time deposits $100,000 or greater amounted to $14,200,907 and $18,524,848 at December 31, 2003
and 2002, respectively. As of December 31, 2003, time deposits mature as follows: $53,577,685 in 2004; $18,923,883 in 2005; $7,497,889 in 2006; $3,674,568 in 2007; and $2,696,465 in 2008.



8. Securities Sold Under Agreements to Repurchase and Other Borrowings



Securities sold under agreements to repurchase are summarized as follows:



|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                              |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Balance outstanding at year end               |  | $    | 1,921,015 |   |      | $ | 2,554,815 |      |  | $ | 3,808,183 |  
|Weighted average interest rate at year end    |  |      | 1.15      | % |      |   | 0.89      | %    |  |   | 2.00      | %
|Average daily balance outstanding during year |  | $    | 2,290,866 |   |      | $ | 4,124,680 |      |  | $ | 4,303,963 |  
|Weighted average interest rate during year    |  |      | 1.46      | % |      |   | 1.77      | %    |  |   | 4.50      | %
|Highest month-end outstanding balance         |  | $    | 2,562,549 |   |      | $ | 4,198,060 |      |  | $ | 4,452,285 |  



Collateral, consisting
of investment securities, underlying the agreements is held by an outside custodian.



The balance of other borrowings at December 31, 2003 consisted of Federal Home Loan Bank (FHLB) borrowings of $15,500,000. The balance of other borrowings was $18,000,000 at December 31, 2002 consisting of
FHLB borrowings of $15,500,000 and Federal funds purchased of $2,500,000.



During 2000, the Bank purchased three ten-year fixed rate convertible advances from the FHLB. These advances, in the amounts of $2,500,000, $5,000,000, and $5,000,000 bear interest at the rates of 5.50%, 5.34%, and
5.06%, respectively. These advances are convertible quarterly at the option of the FHLB.



During 1999, the Bank purchased a $3,000,000 ten-year fixed rate advance from the FHLB that is convertible quarterly at the option of the FHLB. The interest rate on this advance is 5.815%.



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



9. Redeemable Subordinated Debentures



On April 10, 2002, 1STConstitution Capital Trust I (the Trust), a statutory business trust, and a wholly owned subsidiary of the Company, issued $5.0 million
of variable rate Trust Preferred Securities in a pooled institutional placement transaction maturing April 22, 2032. The Trust utilized the $5.0 million proceeds along with $155,000 invested in the Trust by the Company to purchase $5,155,000 of
subordinated debentures issued by the Company. The Subordinated Debentures have terms that mirror the Trust Preferred Securities. The Trust exists for the sole purpose of issuing Trust Preferred Securities. These Subordinated Debentures constitute
the sole assets of the Trust. These Subordinated Debentures are redeemable in whole or part prior to maturity after April 22, 2007. The Trust is obligated to distribute all proceeds of a redemption, whether voluntary or upon maturity, to holders of
the Trust Preferred Securities. The Companys obligation with respect to the Trust Preferred Securities and the Subordinated Debentures, when taken together, provides a full and unconditional guarantee on a subordinated basis by the Company of
the obligations of the Trust to pay amounts when due on the Trust Preferred Securities.



10. Income Taxes



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



|         |  |      |           |   |      |   |           |      |  |   |           |  
|-------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|         |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Federal- |  |      |           |   |      |   |           |      |  |   |           |  
|Current  |  | $    | 1,537,053 |   |      | $ | 1,371,755 |      |  | $ | 1,145,517 |  
|Deferred |  |      | (104,330  | ) |      |   | (99,254   | )    |  |   | (82,780   | )
|         |  |      |           |   |      |   |           |      |  |   |           |  
|         |  |      | 1,432,723 |   |      |   | 1,272,501 |      |  |   | 1,062,737 |  
|         |  |      |           |   |      |   |           |      |  |   |           |  
|State-   |  |      |           |   |      |   |           |      |  |   |           |  
|Current  |  |      | 362,411   |   |      |   | 264,206   |      |  |   | 188,862   |  
|Deferred |  |      | (18,227   | ) |      |   | (17,340   | )    |  |   | (14,462   | )
|         |  |      |           |   |      |   |           |      |  |   |           |  
|         |  |      | 344,184   |   |      |   | 246,866   |      |  |   | 174,400   |  
|         |  |      |           |   |      |   |           |      |  |   |           |  
|         |  | $    | 1,776,907 |   |      | $ | 1,519,367 |      |  | $ | 1,237,137 |  
|         |  |      |           |   |      |   |           |      |  |   |           |  



F-14



---

##### Table of Contents

Income tax (benefit) expense included in other comprehensive income is ($335,754), $445,807 and ($44,688)
in 2003, 2002 and 2001, respectively. A comparison of income tax expense at the Federal statutory rate in 2003, 2002 and 2001 to the Companys provision for income taxes is as follows:



|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                    |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Federal income tax                                  |  | $    | 1,701,838 |   |      | $ | 1,430,274 |      |  | $ | 1,152,307 |  
|Add (deduct) effect of:                             |  |      |           |   |      |   |           |      |  |   |           |  
|State income taxes net of federal income tax effect |  |      | 227,161   |   |      |   | 162,932   |      |  |   | 115,104   |  
|Tax-exempt interest income                          |  |      | (106,000  | ) |      |   | (55,902   | )    |  |   | (53,314   | )
|Bank-owned life insurance                           |  |      | (88,842   | ) |      |   |          |      |  |   |          |  
|Other items, net                                    |  |      | 42,750    |   |      |   | (17,937   | )    |  |   | 23,040    |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Provision for income taxes                          |  | $    | 1,776,907 |   |      | $ | 1,519,367 |      |  | $ | 1,237,137 |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  



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:



|                                                 |  |      |         |      |   |        
|------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                 |  | 2003 |         | 2002
|Deferred tax assets-                             |  |      |         |      |   |        
|Allowance for loan losses                        |  | $    | 713,581 |      | $ | 665,787
|Employee Benefits                                |  |      | 93,397  |      |   |       
|Other                                            |  |      | 2,136   |      |   | 20,770 
|                                                 |  |      |         |      |   |        
|Total deferred tax assets                        |  |      | 809,114 |      |   | 686,557
|                                                 |  |      |         |      |   |        
|Deferred tax liabilities-                        |  |      |         |      |   |        
|Unrealized gain on securities available for sale |  |      | 84,466  |      |   | 420,220
|                                                 |  |      |         |      |   |        
|Total deferred tax liabilities                   |  |      | 84,466  |      |   | 420,220
|                                                 |  |      |         |      |   |        
|Net deferred tax asset                           |  | $    | 724,648 |      | $ | 266,337
|                                                 |  |      |         |      |   |        



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.



11. Benefit Plans



Retirement Savings Plan



The Bank has a 401(K) plan which covers substantially all employees with six
months or more of service. The plan permits all eligible employees to make basic contributions to the plan up to 12% of base compensation. Under the plan, the Bank provided a matching contribution of 50% in 2003, 2002 and 2001 up to 6% of base
compensation. Employer contributions to the plan amounted to $57,830 in 2003, $39,945 in 2002, and $33,259 in 2001.



Benefit Plans



During 2002, the Bank established a salary continuation plan for key executives and a director deferred compensation plan for its board members. The plans
provide for yearly retirement benefits to be paid over a specified period. In addition, there is an officer group term replacement plan for divisional officers. The present value of the benefits accrued under these plans are being recognized over
the estimated service period of the employees in the plan. The accrued liability as of December 31, 2003 and 2002 is approximately $233,845 and $46,769, respectively, and is included in other liabilities in the accompanying consolidated statements
of condition. Compensation expense of approximately $233,845 and $46,769 is included in the accompanying consolidated statements of income for the years ended December 31, 2003 and 2002, respectively.



In connection with the benefit plans, the Bank has purchased $6 million in
life insurance policies on the lives of its executives, directors and divisional officers. The Bank is the owner and beneficiary of the policies. The cash surrender values of the policies are approximately $6.3 million and $6.1 million as of
December 31, 2003 and 2002, respectively.



F-15



---

##### Table of Contents

12. Shareholders Equity



The Companys shareholders have approved stock option plans for directors and key employees. The Company has also
entered into an employment agreement pursuant to which additional options were awarded to its President. The Bank accounts for the award of stock options in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost
has been recognized. Had compensation cost for these option awards been determined consistent with FASB Statement No. 123, as amended, the Banks net income and net income per share for 2003, 2002 and 2001 would have been reduced to the
following pro forma amounts:



A summary of the status of the
Companys stock options at December 31, 2003, 2002 and 2001 and changes during the years then ended is presented below:



|                                                                          |  |         |   |      |                    |           |        |         |   |                    |   |           |  |         |                    |  |   |          
|------------------------------------------------------------------------- |  | ------- | - | ---- | ------------------ | --------- | ------ | ------- | - | ------------------ | - | --------- |  | ------- | ------------------ |  | - | ---------
|                                                                          |  | 2003    |   | 2002 |                    | 2001     
|                                                                          |  | Shares  |   |      | WeightedAvg. Price |           | Shares |         |   | WeightedAvg. Price |   | Shares    |  |         | WeightedAvg. Price
|Outstanding, at beginning of year                                         |  | 135,631 |   |      | $                  | 10.13     |        | 137,857 |   |                    | $ | 9.49      |  | 131,359 |                    |  | $ | 8.30     
|Granted                                                                   |  | 3,885   |   |      |                    | 27.99     |        | 5,077   |   |                    |   | 25.21     |  | 9,261   |                    |  |   | 16.80    
|Exercised                                                                 |  | (19,614 | ) |      |                    | 6.97      |        | (5,919  | ) |                    |   | 7.42      |  | 0       |                    |  |   |          
|Forfeited                                                                 |  |        |   |      |                    |          |        | (1,384  | ) |                    |   | 10.99     |  | (2,764  | )                  |  |   | 9.88     
|                                                                          |  |         |   |      |                    |           |        |         |   |                    |   |           |  |         |                    |  |   |          
|Outstanding, at end of year(2003 Range of Exercise Prices - $6.40-$27.99) |  | 119,902 |   |      | $                  | 11.18     |        | 135,631 |   |                    | $ | 10.13     |  | 137,857 |                    |  | $ | 9.49     
|                                                                          |  |         |   |      |                    |           |        |         |   |                    |   |           |  |         |                    |  |   |          
|Exercisable, at end of year(2003 Range of Exercise Prices - $6.40-$27.99) |  | 119,902 |   |      | $                  | 11.18     |        | 131,326 |   |                    | $ | 8.93      |  | 128,596 |                    |  | $ | 8.94     
|                                                                          |  |         |   |      |                    |           |        |         |   |                    |   |           |  |         |                    |  |   |          
|Weighted average remaining contractual life                               |  |         |   |      |                    | 5.1 years |        |         |   |                    |   | 6.7 years |  |         |                    |  |   | 6.8 years
|Weighted average fair value of options granted during the year            |  |         |   |      | $                  | 10.65     |        |         |   |                    | $ | 9.07      |  |         |                    |  | $ | 5.35     



In December 2003, 2002
and 2001, the Company declared a 5% stock dividend to shareholders. All amounts in the table above and elsewhere in these notes have been adjusted to reflect such stock dividends.



13. Commitments and Contingencies



The Banks main office is leased at a monthly rental of $15,667 plus real estate taxes and certain common space charges
allocated by the landlord. The lease expires in December 2010 and contains renewal options for two additional five-year terms at the Banks discretion.



As of December 31, 2003, future minimum rental payments under noncancellable operating leases are as follows:



|           |  |   |          
|---------- |  | - | ---------
|2004       |  | $ | 479,197  
|2005       |  |   | 444,037  
|2006       |  |   | 418,433  
|2007       |  |   | 430,738  
|2008       |  |   | 418,660  
|Thereafter |  |   | 2,042,340



Rent expense
aggregated $557,592, $525,318 and $497,483 for the years ended December 31, 2003, 2002 and 2001, 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 Company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.



F-16



---

##### Table of Contents

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 $91,176,446 to its borrowers as of December 31, 2003.



The Bank issues financial standby letters of credit that are within the scope of FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
These are irrevocable undertakings by the Bank to guarantee payment of a specified financial obligation. Most of the Banks financial standby letters of credit arise in connection with lending relationships and have terms of one year or less.
The maximum potential future payments the Bank could be required to make equals the contract amount of the standby letters of credit and amounted to $1,220,446 at December 31, 2003. The Banks recognized liability for financial standby letters
of credit was insignificant at December 31, 2003.



The Bank
also enters into forward contracts to sell residential mortgage loans it has closed (loans held for sale) or that it expects to close (commitments to originate loans held for sale). These contracts are used to reduce the Banks market price
risk during the period from the commitment date to the sale date. The notional amount of the Banks forward sales contracts was approximately $15.4 million at December 31, 2003 and $16.3 million at December 31, 2002. Changes in fair value of
the forward sales contracts, and the related loan origination commitments and closed loans, were not significant at December 31, 2003.



Litigation



The Company 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 Company 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 Companys financial position or results of operations.



14. Other Operating Expenses



The components of other operating expenses for the years ended December 31, 2003, 2002 and 2001 are as follows:



|                                        |  |      |           |      |   |           |  |   |          
|--------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                        |  | 2003 |           | 2002 |   | 2001     
|Equipment expense                       |  | $    | 434,933   |      | $ | 451,054   |  | $ | 310,702  
|Marketing                               |  |      | 225,860   |      |   | 237,268   |  |   | 190,233  
|Computer services                       |  |      | 498,081   |      |   | 432,875   |  |   | 494,686  
|Regulatory, professional and other fees |  |      | 548,440   |      |   | 436,701   |  |   | 384,720  
|Office expense                          |  |      | 312,055   |      |   | 311,346   |  |   | 330,358  
|All other expenses                      |  |      | 351,153   |      |   | 448,756   |  |   | 403,434  
|                                        |  |      |           |      |   |           |  |   |          
|                                        |  | $    | 2,370,522 |      | $ | 2,318,000 |  | $ | 2,114,133
|                                        |  |      |           |      |   |           |  |   |          



15. Regulatory
Requirements



The Bank is subject to various regulatory
capital requirements administered by the Federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Banks and the Company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). As of December 31, 2003, the Bank meets all capital adequacy requirements to which it is subject.



To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table. As of December 31, 2003, the most recent notification from the Banks primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Banks category.



F-17



---

##### Table of Contents

Certain bank regulatory limitations exist on the availability of Bank assets available for the payment of dividends without prior approval of bank regulatory
authorities.



The Companys actual capital amounts and
ratios as of December 31, 2003 and 2002 are as follows:



|                                         |  |        |            |       |                              |   |        |                                                               |            |  |    |        |  |       |            |  |     |  
|---------------------------------------- |  | ------ | ---------- | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ---------- |  | -- | ------ |  | ----- | ---------- |  | --- | -
|                                         |  | Actual |            |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |           
|                                         |  | Amount |            | Ratio |                              |   | Amount |                                                               | Ratio      |  |    | Amount |  | Ratio |           
|As of December 31, 2003 -                |  |        |            |       |                              |   |        |                                                               |            |  |    |        |  |       |            |  |     |  
|Total capital (to Risk Weighted Assets)  |  | $      | 30,221,727 |       | 14.94                        | % |        | $                                                             | 16,184,080 |  | 38 | %      |  | $     | 20,230,100 |  | 310 | %
|Tier I Capital (to Risk Weighted Assets) |  |        | 28,435,095 |       | 14.06                        | % |        |                                                               | 8,092,040  |  | 34 | %      |  |       | 12,138,060 |  | 36  | %
|Tier I Capital (to Average Assets)       |  |        | 28,435,095 |       | 9.74                         | % |        |                                                               | 11,677,680 |  | 34 | %      |  |       | 14,597,100 |  | 35  | %
|                                         |  |        |            |       |                              |  
|As of December 31, 2002 -                |  |        |            |       |                              |   |        |                                                               |            |  |    |        |  |       |            |  |     |  
|Total capital (to Risk Weighted Assets)  |  | $      | 26,849,002 |       | 14.75                        | % |        | $                                                             | 14,557,600 |  | 38 | %      |  | $     | 18,197,000 |  | 310 | %
|Tier I Capital (to Risk Weighted Assets) |  |        | 25,179,120 |       | 13.84                        | % |        |                                                               | 7,278,800  |  | 34 | %      |  |       | 10,918,200 |  | 36  | %
|Tier I Capital (to Average Assets)       |  |        | 25,179,120 |       | 9.64                         | % |        |                                                               | 10,453,080 |  | 34 | %      |  |       | 13,066,350 |  | 35  | %



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



16. Estimated Fair Value Of Financial Instruments



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



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



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



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



|                                               |  |                   |             |                     |   |               |  |                     |             |  |   |            
|---------------------------------------------- |  | ----------------- | ----------- | ------------------- | - | ------------- |  | ------------------- | ----------- |  | - | -----------
|                                               |  | December 31, 2003 |             | December 31, 2002  
|                                               |  | CarryingValue     |             | EstimatedFair Value |   | CarryingValue |  | EstimatedFair Value
|Cash and cash equivalents                      |  | $                 | 14,702,886  |                     | $ | 14,702,886    |  | $                   | 9,594,374   |  | $ | 9,594,374  
|Securities available for sale                  |  |                   | 84,999,973  |                     |   | 84,999,973    |  |                     | 82,028,866  |  |   | 82,028,866 
|Securities held to maturity                    |  |                   | 6,191,197   |                     |   | 6,516,652     |  |                     | 7,171,913   |  |   | 7,434,715  
|Loans held for sale                            |  |                   | 15,405,982  |                     |   | 15,405,982    |  |                     | 16,299,472  |  |   | 16,299,472 
|Gross loans                                    |  |                   | 163,950,306 |                     |   | 165,728,000   |  |                     | 151,049,736 |  |   | 152,811,000
|Deposits                                       |  |                   | 245,353,724 |                     |   | 246,017,000   |  |                     | 224,149,464 |  |   | 225,202,466
|Securities sold under agreements to repurchase |  |                   | 1,921,015   |                     |   | 1,921,015     |  |                     | 2,554,815   |  |   | 2,554,815  
|Other borrowings                               |  |                   | 15,500,000  |                     |   | 17,408,000    |  |                     | 18,000,000  |  |   | 19,921,000 



F-18



---

##### Table of Contents

Loan commitments and standby letters of credit as of December 31, 2003 and 2002 are based on fees charged
for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit is nominal.



17. Condensed Financial Statements of 1stConstitution Bancorp (Parent Company Only)



The following information of the Company includes only financial statements as of and for the years ended December 31, 2003 and 2002 and should be read in conjunction with the notes to the consolidated financial statements.



CONDENSED STATEMENTS OF CONDITION



|                                                                            |  |                         |            |   |                   |   |            |  
|--------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                            |  | December 31, 2003       |            |   | December 31, 2002 |  
|Assets:                                                                     |  |                         |            |   |                   |   |            |  
|Cash                                                                        |  | $                       | 13,150     |   |                   | $ | 5,050      |  
|Securities available for sale                                               |  |                         | 155,000    |   |                   |   | 155,000    |  
|Investment in subsidiaries                                                  |  |                         | 28,326,056 |   |                   |   | 25,819,579 |  
|Other assets                                                                |  |                         | 246,050    |   |                   |   | 170,213    |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Total Assets                                                                |  | $                       | 28,740,256 |   |                   | $ | 26,149,842 |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Liabilities And Shareholders Equity                                        |  |                         |            |   |                   |   |            |  
|Subordinated debentures                                                     |  | $                       | 5,155,000  |   |                   | $ | 5,155,000  |  
|Shareholders equity                                                        |  |                         | 23,585,256 |   |                   |   | 20,994,842 |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Total Liabilities and Shareholders Equity                                  |  | $                       | 28,740,256 |   |                   | $ | 26,149,842 |  
|                                                                            |  |                         |            |   |                   |   |            |  
|CONDENSED STATEMENTS OF INCOME                                              |  |                         |            |  
|                                                                            |  | Year ended December 31, |           
|                                                                            |  | 2003                    |            |   | 2002              |  
|Operating Income:                                                           |  |                         |            |   |                   |   |            |  
|Interest Income                                                             |  | $                       | 7,994      |   |                   | $ | 6,708      |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Total Operating Income                                                      |  |                         | 7,994      |   |                   |   | 6,708      |  
|Operating Expense:                                                          |  |                         |            |   |                   |   |            |  
|Interest Expense                                                            |  |                         | 265,845    |   |                   |   | 222,789    |  
|Other Expense                                                               |  |                         | 32,004     |   |                   |   | 24,003     |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Total Operating Expense                                                     |  |                         | 297,849    |   |                   |   | 246,792    |  
|Loss before income taxes and equity in undistributed income of subsidiaries |  |                         | (289,855   | ) |                   |   | (240,084   | )
|Federal income tax benefit                                                  |  |                         | (104,419   | ) |                   |   | (87,379    | )
|                                                                            |  |                         |            |   |                   |   |            |  
|Loss before equity in undistributed income of subsidiaries                  |  |                         | (185,436   | ) |                   |   | (152,705   | )
|Equity in undistributed income of subsidiaries                              |  |                         | 3,413,936  |   |                   |   | 2,840,027  |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Net Income                                                                  |  | $                       | 3,228,500  |   |                   | $ | 2,687,322  |  
|                                                                            |  |                         |            |   |                   |   |            |  
|CONDENSED STATEMENTS OF CASH FLOWS                                          |  |                         |            |  
|                                                                            |  | Year ended December 31, |           
|                                                                            |  | 2003                    |            |   | 2002              |  
|Cash Flows From Operating Activities:                                       |  |                         |            |   |                   |   |            |  
|Net Income                                                                  |  | $                       | 3,228,500  |   |                   | $ | 2,687,322  |  
|Adjustments:                                                                |  |                         |            |   |                   |   |            |  
|Increase in other assets                                                    |  |                         | (75,837    | ) |                   |   | (170,205   | )
|Equity in undistributed income of subsidiaries                              |  |                         | (3,413,936 | ) |                   |   | (2,840,027 | )
|                                                                            |  |                         |            |   |                   |   |            |  
|Net Cash Used In Operating Activities                                       |  |                         | (261,273   | ) |                   |   | (322,910   | )
|                                                                            |  |                         |            |   |                   |   |            |  
|Cash Flows from Investing Activities:                                       |  |                         |            |   |                   |   |            |  
|Repayment of investments in subsidiaries                                    |  |                         | 269,373    |   |                   |   |           |  
|Investing in subsidiaries                                                   |  |                         |           |   |                   |   | (4,827,040 | )
|                                                                            |  |                         |            |   |                   |   |            |  
|Net Cash provided by (used in) Investing Activities                         |  |                         | 269,373    |   |                   |   | (4,827,040 | )
|                                                                            |  |                         |            |   |                   |   |            |  
|Cash Flows from Financing Activities:                                       |  |                         |            |   |                   |   |            |  
|Proceeds from issuance of subordinated debentures                           |  |                         |           |   |                   |   | 5,155,000  |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Net Cash provided by Financing Activities                                   |  |                         |           |   |                   |   | 5,155,000  |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Net increase in cash                                                        |  |                         | 8,100      |   |                   |   | 5,050      |  
|Cash as of beginning of year                                                |  |                         | 5,050      |   |                   |   |           |  
|                                                                            |  |                         |            |   |                   |   |            |  
|Cash as of end of year                                                      |  | $                       | 13,150     |   |                   | $ | 5,050      |  
|                                                                            |  |                         |            |   |                   |   |            |  



F-19



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |                         |  |                   |  |                                                                                      
|-------------------- |  |  |  | ----------------------- |  | ----------------- |  | -------------------------------------------------------------------------------------
|                     |  |  |  | 1STCONSTITUTION BANCORP
|                     |  |  | 
|Date: March 18, 2004 |  |  |  | By:                     |  | ROBERT F. MANGANO
|                     |  |  |  |                         |  |                   | 
|                     |  |  |  |                         |  |                   |  | Robert F. Mangano President and Chief Executive Officer (Principal Executive Officer)



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



|                                         |  |                                                                               |  |               
|---------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                                |  | Capacity                                                                      |  | Date          
|                                         |  |                                                                              
|EDWARD D. KNAPPEdward D. Knapp           |  | Chairman of the Board                                                         |  | March 18, 2004
|                                         |  |                                                                              
|ROBERT F. MANGANORobert F. Mangano       |  | President, Chief Executive Officer and Director (Principal Executive Officer) |  | March 18, 2004
|                                         |  |                                                                              
|CHARLES S. CROW, IIICharles S. Crow, III |  | Director                                                                      |  | March 18, 2004
|                                         |  |                                                                              
|WILLIAM M. RUEWilliam M. Rue             |  | Director                                                                      |  | March 18, 2004
|                                         |  |                                                                              
|FRANK E. WALSH, IIIFrank E. Walsh, III   |  | Director                                                                      |  | March 18, 2004
|                                         |  |                                                                              
|JOSEPH M. REARDONJoseph M. Reardon       |  | Senior Vice President and Treasurer (Principal Accounting Officer)            |  | March 18, 2004



37



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1STCONSTITUTION BANCORP

INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                             
|3 (i) *     |  | Certificate of Incorporation of the Company (conformed copy)                                                                                                                                                                                                                                                                            
|            | 
|3 (i)(A) *  |  | Amendment to Certificate of Incorporation of the Company                                                                                                                                                                                                                                                                                
|            | 
|3 (ii)      |  | Bylaws of the Company (incorporated by reference to Exhibit 3(ii) to the Companys Form 10-QSB filed with the SEC on May 14, 2003)                                                                                                                                                                                                      
|            | 
|4.1         |  | Specimen Share of Common Stock (incorporated by reference to the Companys Form 10-KSB filed with the SEC on March 22, 2002)                                                                                                                                                                                                            
|            | 
|4.2         |  | Amended and Restated Declaration of Trust of 1st Constitution Capital Trust I dated as of April 10, 2002 among the Company, as sponsor, Wilmington Trust Company, as Delaware and institutional
trustee, and the Administrators named therein (incorporated by reference to the Companys Form 10-QSB filed with the SEC on May 8, 2002)
|            | 
|4.3         |  | Indenture dated as of April 10, 2002 between the Company, as issuer, and Wilmington Trust Company, as trustee, relating to the Floating Rate Junior Subordinated Debt Securities due 2032
(incorporated by reference to the Companys Form 10-QSB filed with the SEC on May 8, 2002)                                                    
|            | 
|4.4         |  | Guarantee Agreement dated as of April 10, 2002 between the Registrant and the Wilmington Trust Company, as guarantee trustee (incorporated by reference to the Companys Form 10-QSB filed
with the SEC on May 8, 2002)                                                                                                                 
|            | 
|4.5         |  | Rights Agreement, dated as of March 18, 2004, between the Company and Registrar and Transfer Corporation (incorporated by reference to the Companys Form 8-A filed with the SEC on March 18,
2004).                                                                                                                                    
|            | 
|10.1 #      |  | 1st Constitution Bancorp Supplemental Executive Retirement Plan, dated as of October 1, 2002 (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13,
2002)                                                                                                                                           
|            | 
|10.2 #      |  | 1st Constitution Bancorp Directors Deferral Plan, dated as of October 1, 2002 (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13,
2002)                                                                                                                                                         
|            | 
|10.3 #      |  | 1st Constitution Bancorp Directors Insurance Plan, dated as of October 1, 2002 (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13,
2002)                                                                                                                                                         
|            | 
|10.4 #      |  | 1st Constitution Bancorp Form of Executive Life Insurance Agreement (Incorporated by reference to the Companys Form 10-QSB filed with the SEC on November 13, 2002)                                                                                                                                                                    





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##### Table of Contents

|          |  |                                                                                                                                                                                                                                                             
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5 #    |  | Amended and Restated 1990 Stock Option Plan for Key Employees, as amended (incorporated by reference to Exhibit No. 10.1 to the Companys Form 10-QSB filed with the SEC on August 9,
2002)                                                                 
|          | 
|10.6      |  | 1996 Employee Stock Option Plan, as amended (incorporated by reference to Exhibit No. 10.2 to the Companys Form 10-QSB filed with the SEC on August 9, 2002)                                                                                               
|          | 
|10.7      |  | 2000 Employee Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit No. 6.3 to the Companys Form 10-SB filed with the SEC on June 15, 2001)                                                                                         
|          | 
|10.8   #  |  | Directors Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit No. 6.4 to the Companys Form 10-SB filed with the SEC on June 15, 2001)                                                                                             
|          | 
|10.9   #  |  | Employment Agreement between the Company and Robert F. Mangano dated April 22, 1999 (incorporated by reference to Exhibit No. 6.5 to the Companys Form 10-SB filed with the SEC on June 15,
2001)                                                          
|          | 
|10.10   # |  | Agreement for Consulting Services between the Company and Edward D. Knapp (incorporated by reference to Exhibit 10.10 to the Companys Form 10-KSB filed with the SEC on March 20,
2003)                                                                    
|          | 
|10.11 * # |  | Amendment to 1st Constitution Bancorp Directors Insurance Plan, dated as of February 19, 2004                                                                                                                                                               
|          | 
|13.1      |  | 2001 Annual Report to Security Holders (incorporated by reference to the Companys Form 10-KSB filed with the SEC on March 22, 2002)                                                                                                                        
|          | 
|14 *      |  | Code of Business Conduct and Ethics                                                                                                                                                                                                                         
|          | 
|21        |  | Subsidiaries of the Company (incorporated by reference to the Companys Form 10-KSB filed with the SEC on March 20, 2003)                                                                                                                                   
|          | 
|23 *      |  | Independent Auditors Consent                                                                                                                                                                                                                               
|          | 
|31.1 *    |  | Certification of Robert F. Mangano, Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                             
|          | 
|31.2 *    |  | Certification of Joseph M. Reardon, Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                             
|          | 
|32 *      |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, Chief Executive Officer of the Company, and
Joseph M. Reardon, Chief Financial Officer of the Company.

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|* | Filed herewith.
|- | ---------------



|# | A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
|- | ---------------------------------------------------------------------------------------------------------------------------------