##### 



Financial Highlights



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

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

1



---



##### 






2001





PRESIDENTS MESSAGE

To Our Shareholders:

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

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

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

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

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

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

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



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##### 





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

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

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

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

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

-s- Robert F. Mangano

Robert F. Mangano





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##### 



CONSOLIDATED STATEMENTS OF CONDITION

DECEMBER 31, 2001 AND 2000


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

See accompanying notes to consolidated financial statements.

4



---



##### 



CONSOLIDATED STATEMENTS OF INCOME

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


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

See accompanying notes to consolidated
financial statements.

5



---



##### 



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

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

6

See accompanying notes to
consolidated financial statements.



---



##### 



CONSOLIDATED STATEMENTS OF CASH
FLOWS

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


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

7

See accompanying notes to consolidated financial
statements.



---



##### 



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

(1) Summary of Significant Accounting Policies

General-

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

Principles of Consolidation-

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

Use of Estimates in the Preparation of Financial
Statements-

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

Securities-

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

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

Allowance for Loan Losses-

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

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

8



---



##### 



Premises and Equipment

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

Loans-

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

Income Taxes-

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

Other Real Estate-

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

Stock-Based Compensation-

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

9



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##### 



Cash and Cash Equivalents-

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

Reclassifications-

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

Net Income per Share-

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

Comprehensive Income-

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

(2) Securities

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

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

10



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##### 



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

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

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




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

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

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

11



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##### 



(3) Loans and Loans Held for
Sale

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

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

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

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

(4) Allowance for Loan Losses

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

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

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

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

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

12



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##### 



(5) Loans to Related Parties

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

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

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

(6) Premises and Equipment

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

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

(7) Deposits

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

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

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

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

Securities sold under agreements to repurchase
are summarized as follows:

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

13



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##### 



Collateral underlying the agreements is held by
an outside custodian.

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

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

(9) Income Taxes

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

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

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

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

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

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

14



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##### 



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

(10) Shareholders Equity

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



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

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

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

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

15



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##### 



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

(11) Commitments and Contingencies

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

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

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

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

Commitments with Off-Balance Sheet
Risk

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

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

Litigation

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

16



---



##### 



(12) Other Operating Expenses

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

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

(13) Regulatory Requirements

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

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

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

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

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

17



---



##### 



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

(14) Estimated Fair Value of Financial
Instruments

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

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

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

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

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

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

18



---



##### 



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

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

Statements of Condition

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

Statements of Income

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

Statements of Cash Flows

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

19



---



##### 



INDEPENDENT AUDITORS REPORT

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

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

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

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

-s- KPMG LLP

Short Hills, New Jersey

January 11, 2002


20



---



##### 



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

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

2001 Overview

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

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

Summary of Financial Performance

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

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

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

Results of Operations

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

Net Interest Income

Net interest income, the Banks largest and most
significant component of operating income, is the difference between
interest and fees earned on loans and other earning assets, and
interest paid on deposits and borrowed funds. This component
represented 84.3% of the Banks net revenues in 2001. Net interest
income also depends upon the relative amount of interest earnings
assets, interest-bearing liabilities, and the interest rate earned or
paid on them.

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

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

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

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

21



---



##### 



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

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

22



---



##### 





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

23



---



##### 






Rate/Volume Table

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

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

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

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

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

24



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##### 



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

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

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

Non-Interest Income

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

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

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

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

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

Non-Interest Expense

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

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

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

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

25



---



##### 



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

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

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

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

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



| |  | 
| |  | 
| |  | 

Non-interest Expenses

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



| |  | 
| |  | 
| |  | 

26



---



##### 



Financial Condition

Interest-Earning Assets and Interest-Bearing
Liabilities

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

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

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

Cash and Cash Equivalents

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

Securities

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

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

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

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

Loans

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

27



---



##### 



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

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

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

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

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

Non-Performing Assets

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

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

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

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

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

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

28



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##### 






Non-Performing Assets and Loans

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




Allowance for Loan Losses and Related
Provision

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

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

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

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

| | 
| | 
| | 

Allowance for Loan Losses

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

| |  | 
| |  | 
| |  | 

29



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##### 



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

Allocation of the Allowance for Loan
Losses

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

Deposits

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

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

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

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

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

Average Deposit Balances

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

30



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##### 



Other Borrowed Funds

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

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

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

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

Shareholders' Equity and Dividends

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

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

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

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

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

Liquidity

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

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

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

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

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

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

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

31



---



##### 



The securities portfolios are also a source of
liquidity, providing cash flows from maturities and periodic
repayments of principal. During 2001, maturities of investment
securities totaled $39,040,956. Contractual and anticipated
principal payments from the securities portfolios are expected to be
approximately $11,096,399 in 2002. Another source of liquidity is the
loan portfolio, which provides a steady flow of payments and
maturities.

Interest Rate Sensitivity Analysis

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

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

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

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

Market Risk Analysis

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

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



---

Market Risk Analysis



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



---

32



---



##### 



INTEREST RATE SENSITIVITY ANALYSIS AT
DECEMBER 31, 2001

($ in thousands)

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

Recent Accounting Pronouncements

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

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

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

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

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

33



---



##### 



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


Forward-Looking Statements

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

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

Factors that may cause results to differ from
those results expressed or implied, include, but are not limited
to, the overall economy and the interest rate environment; the
ability of customers to repay their obligations; the adequacy of
the allowance for loan losses; competition; significant changes
in accounting, tax or regulatory practices and requirements; and
technological changes. Although Management has taken certain
steps to mitigate any negative effect of the aforementioned
items, significant unfavorable changes could severely impact the
assumptions used and have an adverse effect on profitability.

34



---



##### 



Unaudited Quarterly Financial Data

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



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

35



---



##### 



DIRECTORS, ADVISORY BOARD &
OFFICERS

DIRECTORS OF 1ST CONSTITUTION
BANCORP

Charles S. Crow, III


Edward D.
Knapp  Chairman


Robert F. Mangano,
President & CEO


William M. Rue,
C.P.C.U.


Frank E. Walsh, III


DIRECTORS OF 1ST CONSTITUTION BANK

C. Malcolm Bash


Peter A. Cantu


Charles S. Crow, III


Harvey W. Gleeksman


Robert H.
Greenwood, Esq., Bank Counsel


Edward D.
Knapp  Chairman


Robert F. Mangano,
President & CEO


William M. Rue,
C.P.C.U.


Roy D. Tartaglia


Frank E. Walsh, III


Barry Weshnak


ADVISORY BOARD

John R. Boag


Thomas R. Farino,
Jr., Esq.


Edward A.M. Furfey


Thomas Jay Hall,
Esq.


Sam Juffe


Russell T. Kivler,
Esq.


Dean P. Koehler,
C.P.A.


Gerald F.
Metzheiser, Chairman


Jerry Wagner


Anthony Wilcenski


Barbara Wright


OFFICERS

Robert F. Mangano,
President & CEO


Jeffrey Apostolou,
Vice President, Residential Mortgages


Richard S.
Copeland, Vice President, Construction Lending


Patricia Rantowich,
Vice President, Operations


Joseph M. Reardon,
Vice President & Treasurer


Kenneth Rowinsky,
Vice President & Auditor


Beverly J. Tindall,
Vice President, Operations


Irving W. Wischik,
Vice President, Commercial Lending


Andrew M. Glatz,
Assistant Vice President, SBA Lending


Andrea Pagiazitis,
Assistant Vice President, Retail Banking


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


Amer Saleem,
Assistant Vice President, Commercial Lending


Jeffrey R. Wittes,
Assistant Vice President


Elaine C. Homoky,
Assistant Treasurer


Marie Rapisarda,
Assistant Treasurer




|                        |  |                                                                                                                                                                                                                                                                                                          
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|MAIN OFFICE             |  | 2650 Route 130, P.O. Box 634, Cranbury, New
        Jersey 08512 

        Phone: 609-655-4500          Fax:
        609-655-5653                                                                                                                                                                        
|                       
|VILLAGE OFFICE          |  | 74 North Main Street, Cranbury, New Jersey
        08512 

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

36