**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934.**

 

**For the quarterly period endedSeptember 30, 2004.**

 

**OR**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934.**

 

**Commission file number 333-84114**

 

**1st Colonial Bancorp, Inc.**

(Exact name ofregistrant as specified in its charter)

 
| **Pennsylvania**                                                 |   | **01-0715542**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **1040  Haddon Avenue  Collingswood, NJ**                        |   | **08108**                             |
| (Address of  Principal  Executive Offices)                       |   | (Zip Code)                            |
|                                                             |   |                                  |
| **(856)  858-1100**                                              |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 
|   | Yes   ý |   | No   o |   |
|--------|-----------------------------|--------|-----------------------|--------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 
| **Class**                        | ** ** | **Number of Shares Outstanding  as of November 12, 2004** |
|----------------------------------|------------|----------------------------------------------------------------|
| ** **                       | ** ** | ** **                                                     |
| Common Stock,  without par value |       | 2,251,642                                                      |

 

 

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INDEX TO FORM10-QSB

 
| PART I.  FINANCIAL INFORMATION |                                                                                                                                              |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                              |   |
| Item  1.                            | Financial Statements                                                                                                                              |   |
|                                |                                                                                                                                              |   |
|                                | Consolidated  Statements of Financial Condition September 30, 2004 (Unaudited) and  December 31, 2003                                   |   |
|                                |                                                                                                                                              |   |
|                                | Consolidated  Statements of Income and Comprehensive Income (Loss) (Unaudited) - For the  Three and Nine Months Ended September 30, 2004 and 2003 |   |
|                                |                                                                                                                                              |   |
|                                | Consolidated  Statements of Cash Flows – (Unaudited) For the Nine Months Ended September  30, 2004 and 2003                                  |   |
|                                |                                                                                                                                              |   |
|                                | Notes to Financial  Statements                                                                                                                    |   |
|                                |                                                                                                                                              |   |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                       |   |
|                                |                                                                                                                                              |   |
| Item 3.                             | Controls and  Procedures                                                                                                                          |   |
|                                |                                                                                                                                              |   |
| PART II.                            | OTHER  INFORMATION                                                                                                                                |   |
|                                |                                                                                                                                              |   |
| Item 6.                             | Exhibits                                                                                                                                          |   |
|                                |                                                                                                                                              |   |
| Signatures                          |                                                                                                                                              |
|                                |                                                                                                                                              |   |
| CEO  and CFO Certifications         |                                                                                                                                              |

 

2

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PART 1 - FINANCIALINFORMATION

1st COLONIALBANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF FINANCIAL CONDITION

 

(Dollars in thousands)

 
| ** **                                                                                                                                    | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| **Assets:**                                                                                                                                   |       |                    |       |                   |       |
| Cash and due  from banks                                                                                                                      |       | $                       | 4,670      |                   | $          | 6,281 |   |
| Federal funds  sold                                                                                                                           |       | 19,386                  |       | 9,735                  |       |
| Interest bearing  deposits                                                                                                                    |       | —                  |       | 500                    |       |
| Investments held  to maturity (fair value of $10,747 at September 30, 2004 and $5,796 at  December 31, 2003)                                  |       | 10,756                  |       | 5,808                  |       |
| Securities  available for sale (amortized cost of $34,080 at September 30, 2004 and $28,107  at December 31, 2003)                       |       | 34,013                  |       | 27,985                 |       |
| Mortgages loans  available for sale                                                                                                           |       | 375                     |       | 281                    |       |
| Loans                                                                                                                                         |       | 74,233                  |       | 66,550                 |       |
| Less: Allowance  for loan losses                                                                                                              |       | (946                    | )          | (768                   | )          |
| Net loans                                                                                                                                     |       | 73,287                  |       | 65,782                 |       |
| Bank premises  and equipment, net                                                                                                             |       | 980                     |       | 935                    |       |
| Accrued interest  receivable                                                                                                                  |       | 425                     |       | 373                    |       |
| Deferred tax  assets                                                                                                                          |       | 289                     |       | 301                    |       |
| Other assets                                                                                                                                  |       | 266                     |       | 91                     |       |
| Total Assets                                                                                                                                  |       | $                       | 144,447    |                   | $          | 118,072 |   |
|                                                                                                                                          |       |                    |       |                   |       |
| **Liabilities:**                                                                                                                              |       |                    |       |                   |       |
| Demand deposits                                                                                                                               |       | $                       | 56,268     |                   | $          | 57,717 |   |
| Savings deposits                                                                                                                              |       | 28,264                  |       | 20,374                 |       |
| Other time  deposits                                                                                                                          |       | 36,121                  |       | 26,232                 |       |
| Total deposits                                                                                                                                |       | 120,653                 |       | 104,323                |       |
|                                                                                                                                          |       |                    |       |                   |       |
| Short-term  borrowings                                                                                                                        |       | 6,402                   |       | 4,087                  |       |
| Accrued interest  payable                                                                                                                     |       | 16                      |       | 8                      |       |
| Taxes payable                                                                                                                                 |       | 74                      |       | 48                     |       |
| Other  liabilities                                                                                                                            |       | 40                      |       | 55                     |       |
| Total  liabilities                                                                                                                            |       | $                       | 127,185    |                   | $          | 108,521 |   |
| **Shareholders’  equity:**                                                                                                               |       |                    |       |                   |       |
| Common stock (no  par value)                                                                                                                  |       |                    |       |                   |       |
| Authorized:  5,000,000 shares, issued and outstanding: 2,251,642 shares at September 30,  2004 and 1,414,677 shares at December 31, 2003 |       | —                  |       | —                 |       |
| Preferred stock,  1,000,000 shares authorized, no shares issued                                                                               |       | —                  |       | —                 |       |
| Additional paid  in capital                                                                                                                   |       | 17,003                  |       | 9,238                  |       |
| Retained  earnings                                                                                                                            |       | 299                     |       | 386                    |       |
| Accumulated  other comprehensive income, net                                                                                                  |       | (40                     | )          | (73                    | )          |
| Total shareholders’  equity                                                                                                              |       | 17,262                  |       | 9,551                  |       |
| Total  liabilities & shareholders’ equity                                                                                            |       | $                       | 144,447    |                   | $          | 118,072 |   |

 

The accompanying notesare an integral part of these statements.

 

3

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1st COLONIALBANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF INCOME

AND COMPREHENSIVEINCOME(LOSS) (UNAUDITED)

FOR THE THREE ANDNINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

 

(Dollars in thousands,except per share data)

 
| ** **                                           | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income:                                     |       |                                       |       |                                      |       |   |   |   |   |
| Interest and  fees on loans                          |       | 1,096                                      |       | $                                         | 960        |   | $ | 3,124 |   | $ | 2,780 |   |
| Interest on  federal funds sold                      |       | 45                                         |       | 23                                        |       | 87 |   | 68 |   |
| Interest and  dividends on investments:              |       |                                       |       |                                      |       |   |   |   |   |
| Taxable                                              |       | 241                                        |       | 204                                       |       | 632 |   | 656 |   |
| Nontaxable                                           |       | 33                                         |       | 15                                        |       | 71 |   | 30 |   |
| Total interest  income                               |       | 1,415                                      |       | 1,202                                     |       | 3,914 |   | 3,534 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Interest  expense:                                   |       |                                       |       |                                      |       |   |   |   |   |
| Interest on  demand deposits                         |       | 122                                        |       | 130                                       |       | 388 |   | 383 |   |
| Interest on  savings deposits                        |       | 30                                         |       | 27                                        |       | 68 |   | 108 |   |
| Interest on time  deposits                           |       | 179                                        |       | 128                                       |       | 501 |   | 410 |   |
| Interest on  short-term borrowings                   |       | 7                                          |       | 11                                        |       | 16 |   | 35 |   |
| Total interest  expense                              |       | 338                                        |       | 296                                       |       | 973 |   | 936 |   |
| Net interest  income                                 |       | 1,077                                      |       | 906                                       |       | 2,941 |   | 2,598 |   |
| Provision for  loan losses                           |       | 67                                         |       | 60                                        |       | 192 |   | 180 |   |
| Net interest  income after provision for loan losses |       | 1,010                                      |       | 846                                       |       | 2,749 |   | 2,418 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Other income:                                        |       |                                       |       |                                      |       |   |   |   |   |
| Service charges  on deposit accounts                 |       | 35                                         |       | 37                                        |       | 107 |   | 105 |   |
| Gain on sale of  mortgage loans                      |       | 12                                         |       | 41                                        |       | 45 |   | 91 |   |
| Other income,  service charges and fees              |       | 20                                         |       | 13                                        |       | 56 |   | 38 |   |
| Total other  income                                  |       | 67                                         |       | 91                                        |       | 208 |   | 234 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Other expenses:                                      |       |                                       |       |                                      |       |   |   |   |   |
| Salaries, wages  and employee benefits               |       | 343                                        |       | 300                                       |       | 975 |   | 870 |   |
| Occupancy and  equipment expenses                    |       | 100                                        |       | 89                                        |       | 286 |   | 249 |   |
| Advertising  expense                                 |       | 39                                         |       | 40                                        |       | 76 |   | 118 |   |
| Data processing  expense                             |       | 68                                         |       | 74                                        |       | 226 |   | 205 |   |
| Professional  Fees                                   |       | 60                                         |       | 45                                        |       | 188 |   | 159 |   |
| Other Operating  Expenses                            |       | 171                                        |       | 161                                       |       | 524 |   | 446 |   |
| Total other  expenses                                |       | 781                                        |       | 709                                       |       | 2,275 |   | 2,047 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Income before  income taxes                          |       | 296                                        |       | 228                                       |       | 682 |   | 605 |   |
| Income tax  expense                                  |       | 120                                        |       | 92                                        |       | 273 |   | 244 |   |
| Net income                                           |       | $                                          | 176        |                                      | $          | 136 |   | $ | 409 |   | $ | 361 |   |
| Other  comprehensive income(loss)                    |       | 304                                        |       | (176                                      | )          | 33 |   | (162 | ) |
| Total  comprehensive income(loss)                    |       | $                                          | 480        |                                      | $          | (40 | ) | $ | 442 |   | $ | 199 |   |
|                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Net income per  share information:                   |       |                                       |       |                                      |       |   |   |   |   |
| Basic earnings  per share                            |       | $                                          | 0.08       |                                      | $          | 0.10 |   | $ | 0.22 |   | $ | 0.26 |   |
| Diluted earnings  per share                          |       | $                                          | 0.08       |                                      | $          | 0.09 |   | $ | 0.21 |   | $ | 0.25 |   |

 

The accompanying notesare an integral part of these statements.

 

4

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1st COLONIALBANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF CASH FLOWS (UNAUDITED)

 

(Dollars in thousands)

 
| ** **                                                                                                     | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2004**                                          | ** ** | **2003** | ** ** |
|                                                                                                           |       |                                              |       |   |   |
| Net income                                                                                                     |       | $                                                 | 409        |   | $ | 361 |   |
| Adjustments to  reconcile net income to net cash provided/(used) by operating activities:                      |       |                                              |       |   |   |
| Depreciation and  amortization                                                                                 |       | 110                                               |       | 83 |   |
| Amortization of  premium (discount)on securities, net                                                          |       | 117                                               |       | 143 |   |
| Amortization of  deferred loan fees/cost, net                                                                  |       | 6                                                 |       | 23 |   |
| Deferred taxes                                                                                                 |       | (10                                               | )          | (5 | ) |
| Gain on sale of  mortgage loans available for sale                                                             |       | (45                                               | )          | (91 | ) |
| Loss on  retirement of fixed assets                                                                            |       | 2                                                 |       | — |   |
| Provision for  loan losses                                                                                     |       | 192                                               |       | 180 |   |
| Cash disbursed  for mortgage banking activities                                                                |       | (11,114                                           | )          | (19,639 | ) |
| Cash received  for mortgage banking activities                                                                 |       | 11,065                                            |       | 19,287 |   |
| Increase in  accrued interest receivable                                                                       |       | (52                                               | )          | (78 | ) |
| Increase in  other assets                                                                                      |       | (175                                              | )          | (141 | ) |
| Increase(decrease)in  accrued interest payable                                                                 |       | 8                                                 |       | (3 | ) |
| Increase(decrease)  in income taxes payable                                                                    |       | 26                                                |       | (11 | ) |
| (Decrease)increase  in other liabilities                                                                       |       | (15                                               | )          | 27 |   |
| Total  Adjustments                                                                                             |       | 115                                               |       | (225 | ) |
| Net cash  provided by operating activities                                                                     |       | 524                                               |       | 136 |   |
|                                                                                                           |       |                                              |       |   |   |
| Cash flows used  in investing activities:                                                                      |       |                                              |       |   |   |
| Proceeds from  maturity and sale of securities available-for-sale                                              |       | 7,200                                             |       | 24,001 |   |
| Proceeds from  maturity of securities held to maturity                                                         |       | 5,004                                             |       | 613 |   |
| Purchases of  securities available-for-sale                                                                    |       | (16,201                                           | )          | (29,278 | ) |
| Purchases of  securities held to maturity                                                                      |       | (9,952                                            | )          | (5,068 | ) |
| Repayment of  principal of securities available-for-sale                                                       |       | 2,911                                             |       | 4,040 |   |
| Increase in  loans receivable, net                                                                             |       | (7,703                                            | )          | (9,527 | ) |
| Capital  expenditures                                                                                          |       | (157                                              | )          | (280 | ) |
| Net cash used in  investing activities                                                                         |       | (18,898                                           | )          | (15,499 | ) |
|                                                                                                           |       |                                              |       |   |   |
| Cash flows from  financing activities:                                                                         |       |                                              |       |   |   |
| Net increase in  deposits                                                                                      |       | 16,330                                            |       | 15,384 | ) |
| Net  increase(decrease) in short-term borrowings                                                               |       | 2,315                                             |       | (1,538 | ) |
| Exercise of  warrants                                                                                          |       | 78                                                |       | 7 |   |
| Net proceeds  from sale of common stock                                                                        |       | 7,191                                             |       | (9 | ) |
|                                                                                                           |       |                                              |       |   |   |
| Net cash  provided by financing activities                                                                     |       | 25,914                                            |       | 13,844 |   |
| Net  increase(decrease) in cash and cash equivalents                                                           |       | 7,540                                             |       | (1,519 | ) |
| Cash and cash  equivalents as of beginning of period                                                           |       | 16,516                                            |       | 12,161 |   |
| Cash and cash  equivalents as of September 30,                                                                 |       | $                                                 | 24,056     |   | $ | 10,642 |   |
|                                                                                                           |       |                                              |       |   |   |
| Supplemental  disclosure of cash flow information:                                                             |       |                                              |       |   |   |
| Cash paid during  the period for:                                                                              |       |                                              |       |   |   |
| Interest                                                                                                       |       | $                                                 | 965        |   | $ | 933 |   |
| Income taxes                                                                                                   |       | 257                                               |       | 258 |   |
| Noncash items:                                                                                                 |       |                                              |       |   |   |
| Change in  unrealized gains for securities available-for-sale, net of taxes of ($22)for 2004  and $98 for 2003 |       | 33                                                |       | (162 | ) |
| Transferred from  retained earnings to additional Paid in capital as a result of the 5% stock  dividend        |       | 496                                               |       | 279 |   |

 

The accompanying notesare an integral part of these statements.

 

5

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NOTES TO FINANCIAL STATEMENTS

 

**Note 1.   General**

 

1st Colonial Bancorp, Inc. (the “Company”) was formedon February 26, 2002 pursuant to the filing of Articles of Incorporationwith the Commonwealth of Pennsylvania. Prior to June 30, 2002, the Company did not have any materialassets or liabilities.  On June 30,2002, the Company acquired 1st Colonial National Bank (the “Bank”) pursuant tothe merger of the Bank with and into Interim 1st Colonial National Bank (“Interim”),a wholly-owned subsidiary of the Company. The acquisition was part of the reorganization of the Bank from astand-alone national bank to a bank holding company structure.

 

In the reorganization, each existing shareholder ofthe Bank received an equal number of shares of the Company’s common stock inexchange for his or her Bank common stock. The shares of the Company’s common stock issued in the reorganizationwere registered under the Securities Act of 1933, as amended, pursuant to theCompany’s Registration Statement No. 333-84114 filed with the SEC.  The reorganization was accounted for in amanner similar to a pooling of interests. The Bank’s business and operations were unchanged by the reorganizationand merger.

 

**Note 2.   Summary of Significant Accounting Policies**

 

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiary, 1st Colonial NationalBank.  Any material intercompany balancesand transactions have been eliminated in consolidation.

 

In the opinion of management, the accompanyingunaudited financial statements contain adjustments consisting only of normalrecurring adjustments, necessary to present fairly the consolidated financialposition of the Company as of September 30, 2004 and December 31, 2003 andthe consolidated results of operations for the three and nine month periodsended September 30, 2004 and 2003. The accounting policies and reporting practices of the Company are inaccordance with U.S. generally accepted accounting principles and have beenfollowed on a consistent basis.

 

The accompanying financial statements have beenprepared in accordance with instructions for Form 10-QSB and accordingly do notinclude all of the detailed schedules, information and notes necessary for afair presentation of financial condition, results of operations and cash flowsin accordance with U.S. generally accepted accounting principles.

 

The results of operations for the three and ninemonths ended September 30, 2004 are not necessarily indicative of the resultsto be expected for the full year.

 

The preparation of financial statements in conformitywith U.S. generally accepted accounting requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of

 

6

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the financial statements and the reported amounts of income andexpenses during the reporting period. Actual results could differ from thoseestimates.  Material estimates that areparticularly susceptible to significant change in the near-term relate to thedetermination of the allowance for loan losses and the valuation of thedeferred tax assets.

 

**Note 3.   Earnings Per Share**

 

Basic earnings per commonshare is calculated on the basis of the weighted average number of commonshares outstanding.  Diluted earnings percommon share includes dilutive common stock equivalents as computed under thetreasury stock method using average common stock prices for the respectiveperiod.  All share and per share amountshave been adjusted to account for the 5% stock dividend paid on April 15, 2004and the 5% stock dividend paid on April 15, 2003.  Options and warrants to purchase 501,659 and456,338 shares of common stock were outstanding at September 30, 2004 and2003, respectively, and to the extent dilutive, were included in thecomputation of earnings per diluted common share.

 

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per common sharecalculations.

 

(Dollars are inthousands, except per share data)

 
| ** **                                                                                 | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                               | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                                                                 |       |                                   |       |                                       |       |   |   |   |   |
| Net Income                                                                                 |       | $                                      | 176        |                                       | $          | 136 |   | $ | 409 |   | $ | 361 |   |
|                                                                                       |       |                                   |       |                                       |       |   |   |   |   |
| Denominator for  basic earnings per share- weighted average shares                         |       | 2,251                                  |       | 1,411                                      |       | 1,898 |   | 1,411 |   |
| Effect of  dilutive securities(1):                                                         |       |                                   |       |                                       |       |   |   |   |   |
| Director and  employee stock options                                                       |       | 11                                     |       | 11                                         |       | 14 |   | 7 |   |
| Warrants                                                                                   |       | 21                                     |       | 27                                         |       | 40 |   | 12 |   |
|                                                                                       |       |                                   |       |                                       |       |   |   |   |   |
| Denominator for  diluted earnings per share- weighted average shares and assumed exercised |       | 2,283                                  |       | 1,449                                      |       | 1,952 |   | 1,430 |   |
|                                                                                       |       |                                   |       |                                       |       |   |   |   |   |
| Basic earnings  per share                                                                  |       | $                                      | 0.08       |                                       | $          | 0.10 |   | $ | 0.22 |   | $ | 0.26 |   |
| Diluted earnings  per share                                                                |       | $                                      | 0.08       |                                       | $          | 0.09 |   | $ | 0.21 |   | $ | 0.25 |   |

 

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(1) For the three months ended September 30, 2004,57,300 options and 97,023 warrants are anti-dilutive and are not included inthe above calculations.  For the ninemonths ended September 30, 2004, 48,300 options are anti-dilutive and are notincluded in the above calculations.  Forthe three months ended September 30, 2003, all warrants and options weredilutive and are included in the above calculations.  For the nine

 

7

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months ended September 30, 2003, 97,023 warrants and11,026 options are anti-dilutive and are not included in the abovecalculations.

 

Warrants were issued to the Bank’s underwriter inconnection with the Bank’s initial public offering of common stock in June 2000.  The total number of these warrantsoutstanding at September 30, 2004 entitled the holders to purchase97,023 shares of common stock at a purchase price of $9.56 per share.  These warrants are exercisable untilJune 29, 2005.

 

On June 29, 2000, the Bank issued stock optionsto the Bank’s employees entitling them to purchase a total of 17,224 shares ofBank common stock.  Eighty percent ofthese options have vested and are exercisable, and the remainder will vest andbecome exercisable on June 29, 2005. These options are exercisable at $6.60 per share for a period of tenyears after the grant date.  At September30, 2004, all of these options were still outstanding.

 

On June 29, 2000, the Bank also issued stockoptions to the Bank’s directors entitling them to purchase a total of 5,230shares of Bank common stock.  Theseoptions are fully vested and exercisable at $6.60 per share for a period of tenyears after the date of the grant.   Ofthese options, at September 30, 2004, options to purchase 4,619 shares werestill outstanding.

 

In April 2001, options to purchase a total of 7,277shares of Bank common stock were granted to the Bank’s directors at an exerciseprice of $8.25 per share.  These optionsare fully vested and expire ten years from the date of the grant. Of theseoptions, at September 30, 2004, options to purchase 6,384 shares were stilloutstanding.

 

In June 2001, options to purchase a total of4,315 shares of Bank common stock were granted to certain Bank employees at anexercise price of $8.25 per share, 60% of which are vested and an additional20% become vested on each anniversary of the grant date.  These options expire ten years from the dateof the grant.  At September 30, 2004, allof these options were still outstanding.

 

On February 20, 2002, options to purchase a total of11,030 shares of Bank common stock were granted to certain Bank employees at anexercise price of $9.30 per share.  AtSeptember 30, 2004, 10,753 of these options were still outstanding, 40% ofwhich are vested and an additional 20% become vested on each anniversary of thegrant date.  These options expire tenyears from the date of the grant.

 

On June 12, 2002, options to purchase a total of8,895 shares of Bank common stock were granted to the Bank’s directors at anexercise price of $8.69 per share.  Theseoptions are fully vested and expire ten years from the date of the grant.  At September 30, 2004, all of these optionswere still outstanding.

 

When the Company becamethe holding company for the Bank in June 2002, all outstanding warrants andoptions issued by the Bank with respect to Bank common stock became warrantsand stock options to purchase the common stock of the Company.

 

8

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Warrants were issued to purchasers of the Company’scommon stock in an offering that closed on December 16, 2002.  Warrants were issued to purchase up to280,475 shares of the Company’s common stock at a price of $8.71 pershare.  These warrants are immediatelyexercisable and expire on December 16, 2005. At September 30, 2004, 267,958 of these warrants were still outstanding.

 

On January 15, 2003, options to purchase a total of11,028 shares of Company common stock were granted to certain Bank employees atan exercise price of $7.82 per share, 20% of which are vested and an additional20% become vested on each anniversary of the grant date.  These options expire ten years from the dateof the grant.  At September 30, 2004, allof these options were still outstanding.

 

On January 15, 2003,options to purchase a total of 8,280 shares of Company common stock weregranted to the Bank’s directors at an exercise price of $7.82 per share.  These options are fully vested and expire tenyears from the date of the grant.  AtSeptember 30, 2004, all of these options were still outstanding.

 

On April 22, 2003,options to purchase a total of 7,880 shares of Company common stock weregranted to the Bank’s directors at an exercise price of $8.71 per share.  These options are fully vested and expire tenyears from the date of the grant.  AtSeptember 30, 2004, all of these options were still outstanding.

 

On January 2, 2004,options to purchase a total of 32,550 shares of common stock were granted tocertain Bank employees at an exercise price of $10.89 per share.  These options become fully vested one yearfrom the date of the grant and expire ten years from the date of thegrant.  At September 30, 2004, all ofthese options were still outstanding.

 

On January 2, 2004,options to purchase a total of 15,750 shares of common stock were granted tothe Bank’s directors at an exercise price of $10.89 per share.  These options become fully vested elevenmonths from the date of the grant and expire ten years from the date of thegrant.  At September 30, 2004, all ofthese options were still outstanding.

 

On May 19, 2004 optionsto purchase a total of 9,000 shares of common stock were granted to the Bank’sdirectors at an exercise price of $9.88 per share.  These options become fully vested elevenmonths from the date of the grant and expire ten years from the date of thegrant.  At September 30, 2004, all ofthese options were outstanding.

 

**Note 4.   Allowance for Loan Losses**

 

The Bank determines the provision for loan lossesthrough a quarterly analysis of the allowance for loan losses.  Factors such as changes in the nature andvolume of the portfolio, overall portfolio quality, concentrations of creditrisk, review of specific problem loans, current economic conditions and trendsthat may affect the ability of borrowers to pay, and prior loss experiencewithin the various categories of the portfolio are considered when reviewingthe risks in the portfolio.  All loansgreater than $100,000 and all classified loans are analyzed

 

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individually.  While managementbelieves the allowance for loan losses is currently appropriate, futureadditions to the allowance may be necessary based on changes in generaleconomic conditions and/or the condition of specific borrowers.  The allowance is reviewed quarterly by theBoard of Directors and senior management of the Bank.  In addition, various regulatory agencies, asan integral part of their examination process, periodically review theallowance for loan losses.  Such agenciesmay require the Bank to recognize additions to the allowance based on theirjudgments about information available to them at the time of their examination.

 

In addition to management review, an external serviceprovides a detailed loan review analysis. In the course of a year, all loans in excess of $100,000 are reviewedand rated by this external source.  Inaddition, other smaller loans are reviewed on a random basis.

 

At each quarterly review cycle, all classified loansare assigned a specific reserve allocation based on the guidelines establishedin the Bank’s credit policy which was approved by the Board of Directors.  These could range from 2.5%-10% of theprincipal balance of special mention loans; 10%-25% of substandard loans;50%-75% of loans rated doubtful and 100% of any loan rated loss.

 

The principal balance of any classified loan isdeducted from the general portfolio classification.  The general category is currently segregatedby commercial real estate loans, commercial and industrial loans, residentialreal estate loans, construction loans and other consumer loans.  Each category of loan is then assigned lossfactors based on a review of the following areas:  (i) historical losses (due to limitedloss experience, we use the loss experience of peer banks as reported in theUniform Bank Performance Report); (ii) policies and procedures;(iii) economic conditions; (iv) nature and volume;(v) management; (vi) oversight; (vii) concentrations; and(viii) external factors.  After thededuction of the classified loans, the sum of the assigned loss factors is thenapplied to the outstanding balance of the respective category.

 

**Note 5.   Litigation**

 

We are periodically parties to or otherwise involvedin legal proceedings arising in the normal course of business, such as claimsto enforce liens, claims involving the making and servicing of real propertyloans, and other issues incident to our business.  We do not believe that there is any pendingor threatened proceeding against us which, if determined adversely, would havea material effect on our business or financial position.

 

**Note 6.   Stock Options**

 

At September 30, 2004, the Company has two stock-basedcompensation plans, which are described more fully in note 3.  The Company accounts for those plans underthe recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations.  No stock-based employeecompensation cost is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.  Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition 

 

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provision of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
| ** **                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
| ** **                   | ** ** | **As reported**        | ** ** | **Pro forma  Compensation  expense** | ** ** | **Pro forma  earnings** | ** ** | **As reported** | ** ** | **Pro forma  Compensation  expense** | ** ** | **Pro forma  earnings** | ** ** |
|                         |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net income                   |       | $                      | 176        |   | 92 |   | 84 |   | 136 |   | 25 |   | 111 |   |
| Basic earnings per  share    |       | 0.08                   |       | 0.04 |   | 0.04 |   | 0.10 |   | 0.02 |   | 0.08 |   |
| Dilutive  earnings per share |       | 0.08                   |       | 0.04 |   | 0.04 |   | 0.09 |   | 0.01 |   | 0.08 |   |
|                              |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                   | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
| ** **                   | ** ** | **As reported**        | ** ** | **Pro forma  Compensation  expense** | ** ** | **Pro forma  earnings** | ** ** | **As reported** | ** ** | **Pro forma  Compensation  expense** | ** ** | **Pro forma  earnings** | ** ** |
|                         |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net income                   |       | $                      | 409        |   | 247 |   | 162 |   | 361 |   | 77 |   | 284 |   |
| Basic earnings per  share    |       | 0.22                   |       | 0.13 |   | 0.09 |   | 0.26 |   | 0.06 |   | 0.20 |   |
| Dilutive  earnings per share |       | 0.21                   |       | 0.13 |   | 0.08 |   | 0.25 |   | 0.05 |   | 0.20 |   |
|                              |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

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**Note 7.   Common Stock Offering**

 

On April 26, 2004, theCompany completed its offering of common stock. In the offering, the Company sold, through Ryan Beck & Co., Inc. asunderwriter, 828,000 shares at an offering price of $10.00 per share.  Net proceeds were $7.2 million.  The proceeds are being used to fund, amongother things, the continued growth of the Bank, including the establishment ofadditional branches.

 

**Note 8.  Recent Accounting Pronouncements**

 

In September 2004, the Emerging Issues Task Force(EITF) issued Financial Accounting Standards Board (FASB) Staff Position (FSP)EITF Issue No. 03-1-1, *Effective Date ofParagraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments*.  The proposed FSP would provide implementationguidance with respect to debt securities that are impaired solely due tointerest rates and/or sector spreads and analyzed for other-than-temporaryimpairment under paragraph 16 of EITF Issue No. 03-1.  The Board has directed the FASB staff todelay the effective date for the measurement and recognition guidance containedin paragraphs 10-20 of EITF Issue No. 03-1. This delay does not suspend the requirement to recognize other-than-temporaryimpairments as required by existing authoritative literature.  The delay of the effective date forparagraphs 10-20 of EITF Issue No. 03-1 will be superseded concurrently withthe final issuance of proposed FSB EITF Issue No. 03-1-a, *ImplicationGuidance for the Application of Paragraph 16 of EITF Issue No. 03-1, TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments. *The disclosureguidance in paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. The Company will evaluate any potential impact of this revised proposedstatement when it is available.

 

In March 2004, the FASBissued an exposure draft, *Share-Based Payment – AnAmendment of Statements No. 123 and 95* that addresses the accountingfor equity-based compensation arrangements, including employee stockoptions.  Upon implementation of thechanges proposed in this statement, entities would no longer be able to accountfor equity-based compensation using the intrinsic value method under Opinion No.25.  Entities would be required to measurethe cost of employee services received in exchange for awards of equityinstruments at the grant date of the award using a fair value basedmethod.  The comment period for thisproposed statement ended on June 30, 2004. In October 2004, FASB announced that for public entities, this proposedstatement would apply prospectively for reporting periods, beginning after June15, 2005 as if all equity-based compensation awards granted, modified orsettled after December 15, 1994 had been accounted for using a fair value basedmethod of accounting.  The Company iscurrently evaluating the potential impact of the proposed statement.

 

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Note 9.  Comprehensive Income

 

Accounting principlesgenerally require that recognized revenue, expense, gains and losses beincluded in net income. Although certain changes in assets and liabilities,such as unrealized gains and losses on available for sales securities arereported as a separate component of the equity section of the balance sheet,such items, along with net income, are components of comprehensive income. Thecomponents of other comprehensive income (loss) and related tax effects were asfollows:

 

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| ** **                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                          | ** ** | **(In thousands)**                    | ** ** |
| ** **                                                          | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Unrealized  holding gains (losses) on available for sale securities |       | 505                                   |       | (283                                 | )          | 55 |   | (260 | ) |
| Reclassification  adjustment for gains realized in income           |       | —                                |       | —                               |       | — |   | — |   |
| Net unrealized  gain (losses)                                       |       | 505                                   |       | (283                                 | )          | 55 |   | (260 | ) |
| Income tax  effect                                                  |       | (201                                  | )          | 107                                  |       | (22 | ) | 98 |   |
| Other  comprehensive income (loss)                                  |       | 304                                   |       | (176                                 | )          | 33 |   | (162 | ) |

 

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**Item 2.****                                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**GENERAL**

 

The following presents management’s discussion andanalysis of our financial condition and results of operations and should beread in conjunction with the financial statements and related notes included inthe Company’s Form 10-KSB for the year ended December 31, 2003 filed withthe Securities and Exchange Commission on March 23, 2004.  This Form 10-QSB contains forward-lookingstatements.* *Youcan find many of these statements before and after words such as “may,” “could,”“should,” “will,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “project,”“intend,” “plan,” “seek,” “assume” or similar expressions.

 

These forward-looking statements, implicitly andexplicitly, include the assumptions underlying the statements and otherinformation with respect to our beliefs, plans, objectives, goals,expectations, anticipations, estimates, intentions, financial condition,results of operations, future performance and business, including our:

 

•                  plans for the use of the net proceedsof our underwritten public offering of 828,000 shares of common stock,which was completed on April 26, 2004;

 

•                  expectations for continued acceptanceand success in the banking and business communities in our market area;

 

•                  expectations as to the amount, mix,yield and other characteristics of the deposits and loans we expect to acquireand make; and

 

•                  expectations and estimates withrespect to our revenues, expenses, earnings, return on equity, return onassets, efficiency ratio, asset quality and other financial data and capitaland performance ratios.

 

Although we believe that the expectations reflected inour forward-looking statements are reasonable, these statements involve risksand uncertainties that are subject to change based on various important factors(some of which are beyond our control). The following factors, among others, could cause our financialperformance to differ materially from our goals, plans, objectives, intentions,expectations, and other forward-looking statements:

 

•                  the strength of the United Stateseconomy in general and the strength of the regional and local economies inwhich we conduct operations;

 

•                  the effects of, and changes in,trade, monetary and fiscal policies and laws, including interest rate policiesof the Board of Governors of the Federal Reserve System;

 

•                  inflation, interest rate, market andmonetary fluctuations;

 

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•                  our ability to branch in successfullocations;

 

•                  our ability to maintain and continueto obtain the desired customers and employees;

 

•                  our timely development of newproducts and services in a changing environment, including the features,pricing and quality compared to the products and services of our competitors;

 

•                  the willingness of prospectivecustomers to substitute our products and services for the bank products andservices they currently use, and the impact of competition from banks, thriftsand others in our market;

 

•                  changes in the timing and structureof our growth and related transactions and other changed facts andcircumstances resulting from the passage of time;

 

•                  the impact of changes in financialservices policies, laws and regulations, including laws, regulations andpolicies concerning taxes, banking, securities and insurance, and theapplication thereof by regulatory bodies;

 

•                  technological changes;

 

•                  change in consumer spending andsavings habits; and

 

•                  regulatory or judicial proceedings.

 

If one or more of the factors affecting ourforward-looking information and statements proves incorrect, then our actualresults, performance or achievements could differ materially from thoseexpressed in, or implied by, forward-looking information and statementscontained in this form 10-QSB. Therefore, we caution you not to place undue reliance on ourforward-looking information and statements.

 

We do not intend to update our forward-lookinginformation and statements, whether written or oral, to reflect change.  All forward-looking statements attributableto us are expressly qualified by these cautionary statements.

 

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**Overview**

 

Effective June 30, 2002, the Bank became a whollyowned subsidiary of the Company, which has no material operations other thanownership of the Bank.  Therefore, thefinancial statements of  the Companyprior to June 30, 2002 are the historical statements of the Bank.  All per share data has been restated for theeffect of the 10% stock dividend paid on January 15, 2002 to shareholdersof record as of January 2, 2002, the 5% stock dividend paid on April 15,2003 to shareholders of record as of April 1, 2003 and the 5% stockdividend paid on April 15, 2004 to shareholders of record as of April 1,2004.

 

The Bank conducts community banking activities byaccepting deposits from the public and investing the proceeds in loans andinvestment securities.  The Bank’slending products include commercial loans and lines of credit, consumer andhome equity loans, and multi-family residential and non-residential real estateloans.  In order to manage its liquidityand interest rate risk, the Bank maintains an investment portfolio consistingof municipal, U.S. government and mortgage-backed securities, most of which areinvestment grade.  The Bank’s loan andinvestment portfolios are funded with deposits as well as collateralizedborrowings secured by the Bank’s investment securities.

 

Our earnings are largely dependent upon net interestincome (the difference between what we earn on our loans and investments andwhat we pay on deposits and borrowings). In addition to net interest income, our net income is impacted by ourloan loss provision, other income (mostly deposit fees and income from sale ofloans held for sale) and other expense (such as salaries and benefits,professional fees, occupancy cost and data processing expenses).  In 2005, the Company will be required tocomply with Section 404 of the Sarbanes-Oxley Act of 2002, which amongother things requires us to formalize and document an extensive internalcontrol structure and detailed procedures for financial reporting.  It is estimated that the cost ofimplementation and compliance in 2005 could range from $224,000 to $280,000.

 

The Bank’s main office is located at 1040 HaddonAvenue, Collingswood, New Jersey.   TheBank has one additional branch located in Westville, New Jersey.  At September 30, 2004, the Bank had 24full-time and 4 part-time employees.

 

**CRITICALACCOUNTING MATTERS**

 

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of income and expenses duringthe reporting period.  Actual resultscould differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near-term relate to the determination of the allowance for loanlosses and the valuation of the deferred tax assets.

 

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Seenote 4 to the financial statements in Item 1 above for a description of the Bank’spolicies with respect to the allowance for loan losses.

 

Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases, as well as operating loss carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. A valuation allowance is established against deferred tax assets when,in the judgment of management, it is more likely than not that such deferredtax assets will not become available. The realizability of deferred tax assets is dependent upon variousfactors, including the generation of future taxable income, the existence oftaxes paid and recoverable, the reversal of deferred tax liabilities, and taxplanning strategies.

 

**FINANCIALCONDITION**

 

TheCompany’s assets totaled $144.4 million at September 30, 2004, ascompared to $118.1 million at December 31, 2003, an increase of $26.3million or 22.3%. This increase was primarily funded by an increase of $16.3million in deposits and $2.3 million in short-term borrowings.  In addition, the Company realized netproceeds of approximately $7.2 million from the sale of 828,000 shares of theCompany’s common stock that was completed on April 26, 2004.  The Bank’s assets at September 30, 2004,consisted primarily of cash and cash equivalents, including federal funds soldand interest bearing deposits, which totaled $24.1 million, investmentsecurities, which totaled $44.8 million, and loans, including loans availablefor sale, which totaled $74.6 million. The Bank’s premises and equipment totaled $980,000 at September 30,2004, consisting primarily of leasehold improvements at the Collingswood main officeand land and improvements for the Westville branch.  The Bank’s assets at December 31, 2003consisted primarily of cash and cash equivalents, including federal funds soldand interest bearing deposits, which totaled $16.5 million, investment securitieswhich totaled $33.8 million, and loans, including loans available for sale,which totaled $66.8 million.

 

Duringthe first nine months of 2004, we continued to concentrate our efforts inbuilding our loan portfolio.  Totalloans, including loans available for sale, increased during such period by $7.8million, or 11.6%.  Deposits totaled$120.7 million at September 30, 2004, as compared to $104.3 million at December 31,2003, an increase of $16.3 million or 15.7%. Non-interest bearing demand deposits totaled $23.7 million andinterest-bearing demand deposits totaled $32.6 million at September 30,2004, as compared to $20.4 million and $37.3 million, respectively, at December 31,2003.  A $3.3 million increase innon-interest bearing demand accounts was offset by a decrease of $2.7 millionin interest bearing municipal demand deposits and a $2.7 million decrease ininterest bearing labor union demand deposits. Other interest bearing demand deposits increased by $755,000.  Savings deposits totaled $28.3 million andcertificates of deposit totaled $36.1 million at September 30, 2004, ascompared to $20.4 and $26.2 million, respectively, at December 31,2003.  The increase in savings depositsis primarily due to a large deposit into a money market account.  There were also a number of new largecertificates opened in August 2004.

 

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**RESULTSOF OPERATIONS**

 

Three months endedSeptember 30, 2004 compared to the three months ended September 30,2003.

 

*General.******* **Net income increased29.4% to $176,000 for the three months ended September 30, 2004, ascompared to net income of $136,000 for the period ended September 30,2003.  This increase was due to a$171,000 increase in net interest income, partially offset by a decrease of$24,000 in other income and a $72,000 increase in other expense.  The provision for loan losses increased by$7,000 to $67,000 for the three months ended September 30, 2004 comparedto the comparable period in 2003.  Due tohigher operating income, income tax expense increased by $28,000.

 

Basic earnings per share were $0.08 for the threemonths ended September 30, 2004 compared to $0.10 for the three monthsended September 30, 2003.  Thisdecrease was due primarily to the sale of 828,000 shares that was completed on April 26,2004.  For the same reason diluted  earnings per share decreased to $0.08 for thethree months ended September 30, 2004 from $0.09 for the comparable priorperiod.

 

*Net Interest Income*.  Interest income increased by $213,000 to$1.4 million, primarily due to an increase in interest and fees on loansof $136,000 for the three months ended September 30, 2004.  Average loans and loans available for saleoutstanding increased by $11.9 million or 19.0% from the prior period,which more than offset the decline in the average yield on the loanportfolio.  While short-term interestrates have been rising in 2004, the effective yield on loans is still below the 2003 levels.  The average yield on our loan portfoliodeclined from 6.09% for the three month period ended September 30, 2003 to5.86% for the current three month period due to fact that the yields on theloan portfolio do not adjust as quickly as other short term interestrates.   Interest on federal funds soldand interest bearing deposits increased by $22,000 due to an increase of $3.0million in average balances.  The yieldon federal funds sold and interest bearing deposits increased to 1.49% for thethree months ended September 30, 2004 compared to 1.03% for the comparableperiod ended September 30, 2003. The average balance of the investment portfolio increased $9.6 millionfrom the prior period. Due to this increase, interest and dividends oninvestments increased by $55,000 for the three months ended September 30,2004 compared to the three months ended September 30, 2003.  The average tax-equivalent yield oninvestment securities remained unchanged at 2.60% .

 

Total interest expense increased $42,000 from theprior period, due principally to a $19.9 million increase in average interestbearing liabilities ameliorated by a decline in the cost from 1.55% for thethree months ended September 30, 2003 to 1.40% for the currentperiod.  Our net interest margin was3.33% for the three months ended September 30, 2004 as compared to 3.41%for the prior period ended September 30, 2003, as our interest-earningassets have not repriced as quickly as our interest-bearing liabilities.

 

*Provision for Loan Losses*.  The provision for loan losses increased to$67,000 for three months ended September 30, 2004 compared to $60,000 forthe prior period.  Factors such aschanges in the nature and volume of the portfolio, overall portfolio quality,concentrations of

 

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credit risk, review ofspecific problem loans, current economic conditions and trends that may affectthe ability of borrowers to pay, and prior loss experience within the variouscategories of the portfolio are considered when reviewing the risks in theportfolio.  The allowance for loan losseswas $946,000 at September 30, 2004, or 1.27% of total outstanding loans,compared to $768,000 or 1.15% of total outstanding loans at December 31,2003.

 

*TotalOther Income*.  Otherincome, primarily service charges on deposit accounts and gains on sale ofmortgages held for sale, was $67,000 for the three months ended September 30,2004 compared to $91,000 for the three months ended September 30,2003.    Fees from deposit accountholders for the three months ended September 30, 2004 were approximately$35,000 compared to $37,000 in the prior period.  For the three months ended September 30,2004, we recorded fees on the sale of residential mortgage loans held for saleof $12,000 compared to $41,000 in the prior period.  This decline was primarily due to decreasedrefinancing activity as a result of higher interest rates during the current three month period.  In general, we sell all newly originatedfixed-rate residential mortgage loans into the secondary market on a servicingreleased basis.  The increase in otherincome, service charges and fees of $7,000 to $20,000 in 2004 from $13,000 in2003, was primarily due to increased business volume.

 

*Total Other Expense*.  Total other expenses for the three monthsended September 30, 2004 increased $72,000 or 10.2% to $781,000 comparedto $709,000 in the prior period.  Most ofthe increases were due to growth related factors:

 

•                  Employee related expenses were$343,000 for the period compared to $300,000 for the three months ended September 30,2003, reflecting additions to our staff as well as normal compensationincreases.

 

•                  Occupancy and equipment expensesincreased $11,000 to $100,000 for the three months ended September 30,2004, compared to $89,000 in the prior period. Additional equipment for new staff, normal equipment upgrades andincreased maintenance costs accounted for these increases.

 

•                  Due to renegotiated contract pricingwith our data processing provider, data processing expenses decreased 8.1% to$68,000 for the three months ended September 30, 2004 compared to $74,000for the prior period.

 

•                  Professional services, includingaudit, loan review, and legal expenses, increased $15,000 to $60,000 during thethree months ended September 30, 2004 compared to $45,000 for thecomparable prior period.  This increasewas primarily related to our growth, as well as increased compliance costsresulting from the impact of the Sarbanes-Oxley Act of 2002 and similar lawsand regulations.

 

•                  Other operating expenses includedpostage, ATM charges, telephone expenses, business development costs and othermiscellaneous expenses.  Due to growthand increased business activity, other operating expenses increased $10,000 or6.3% to $171,000 for the three months ended September 30, 2004, comparedto $161,000 for the three months ended September 30, 2003.

 

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*IncomeTaxes*.  Our recordedincome tax expense for the three months ended September 30, 2004 was$120,000 compared to $92,000 in the prior period.  The increase in income tax expense is due tohigher pre-tax income for the three months ended September 30, 2004 ascompared to the prior period.  Theeffective rates for the three months ended September 30, 2004 and 2003were 40.5% and 40.4%, respectively.

 

Nine months ended September 30,2004 compared to the nine months ended September 30, 2003.

 

*General.******* **Net income increased13.3% to $409,000 for the nine months ended September 30, 2004, ascompared to net income of $361,000 for the period ended September 30,2003.  This increase was due to a$343,000 increase in net interest income, partially offset by a $228,000increase in other expense.  Other incomedecreased $26,000 to $208,000 for the nine months ended September 30, 2004compared to $234,000 in the prior period. The provision for loan losses increased by $12,000 to $192,000 for thenine months ended September 30, 2004 compared to the comparable period in2003.  Due to higher operating income,income tax expense increased by $29,000.

 

Basic earnings per share were $0.22 for the ninemonths ended September 30, 2004 compared to $0.26 for the nine monthsended September 30, 2003. Diluted earnings per share declined to $0.21 forthe nine months ended September 30, 2004 compared to $0.25 per share forthe prior period. These decreases were due primarily to the sale of 828,000shares of common stock that was completed on April 26, 2004.

 

*Net Interest Income*.  Interest income increased by $380,000 to$3.9 million, primarily due to an increase in interest and fees on loansof $344,000.  Average loans and loansavailable for sale outstanding increased by $12.6 million or 21.6% fromthe prior period, which more than offset the decline in the average yield onthe loan portfolio.  While short-termyields have increased during the most recent quarter, the overall level ofinterest rates for 2004 is lower than the comparable period in 2003.  The average yield on our loan portfoliodeclined from 6.35% for the nine month period ended September 30, 2003 to5.87% for the current nine month period due to the declining interest rateenvironment.  Interest on federal fundssold and interest bearing deposits increased by $19,000 for the nine monthsended September 30, 2004 compared to the comparable prior period.  An increase of $2.1 million in averagebalances combined with an increase of 0.06% in yield to 1.20% accounted for thechange.  Interest and dividends oninvestments for the nine months ended September 30, 2004 increased $17,000from the prior period.  The increase of$6.1 million in the average balance of the investment portfolio more thanoffset the decline in yields due to the overall decline in market rates fromthe comparable prior period.  The averagetax-equivalent yield on investment securities declined to 2.57% in 2004 from2.92% in 2003.

 

Total interest expense increased $37,000 from theprior period, due principally to an increase in interest bearing liabilitiespartially offset by the year-to-date decline in market interest rates.  A $11.9 million increase in average interestbearing liabilities was ameliorated by the lower rates paid on deposit accountsand short-term borrowings, as the cost of interest-bearing liabilities declinedfrom 1.64% in 2003 to 1.47% in 2004.  Ournet interest margin was

 

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3.33% for the nine monthsended September 30, 2004 as compared to 3.86% for the prior period ended September 30,2003, as our interest-earning assets repriced downward to a greater degree thanour interest-bearing liabilities.

 

*Provision for Loan Losses*.  The provision for loan losses increased to$192,000 for nine months ended September 30, 2004 compared to $180,000 forthe prior period.  Factors such aschanges in the nature and volume of the portfolio, overall portfolio quality,concentrations of credit risk, review of specific problem loans, currenteconomic conditions and trends that may affect the ability of borrowers to pay,and prior loss experience within the various categories of the portfolio areconsidered when reviewing the risks in the portfolio.

 

*TotalOther Income*.  Otherincome, primarily service charges on deposit accounts and gains on sale ofmortgages held for sale, declined $26,000 or 11.1% to $208,000 for the ninemonths ended September 30, 2004 compared to the nine months ended September 30,2003.  Fees from deposit account holdersfor the nine months ended September 30, 2004 were approximately $107,000compared to $105,000 in the prior period. For the nine months ended September 30, 2004, we recorded fees onthe sale of residential mortgage loans held for sale of $45,000 compared to$91,000 in the prior period.  Thisdecline was primarily due to decreased refinancing activity as a result of  higher interest rates on residential mortgageloans during the current nine month period.  In general, we sell all newly originated fixed-rate residential mortgageloans into the secondary market on a servicing released basis.  The increase in other income, service chargesand fees  of $18,000 in 2004 to $56,000from $38,000 in 2003, was primarily due to an increase in business volume.

 

*Total Other Expense*.  Total other expenses for the nine monthsended September 30, 2004 increased $228,000 or 11.1% to $2.3 millioncompared to $2.0 million in the prior period. Most of the increases were due to growth related factors:

 

•                  Employee related expenses were$975,000 for the current period compared to $870,000 for the nine months ended September 30,2003, reflecting additions to our staff as well as normal compensation increases.

 

•                  Occupancy and equipment expensesincreased $37,000 to $286,000 for the nine months ended September 30,2004, compared to $249,000 in the prior period. Additional equipment for new staff, normal equipment upgrades andincreased maintenance costs accounted for these increases.

 

•                  Increases in data processing expensesdue to increased business volume was somewhat offset by lower fees resultingfrom a renegotiation of our contract with our data processing provider.  Data processing increased 10.2% to $226,000for the nine months ended September 30, 2004 compared to $205,000 for theprior period.

 

•                  Professional services, includingaudit, loan review, and legal expenses increased $29,000 to $188,000 during thenine months ended September 30, 2004 compared to $159,000 for thecomparable prior period.  This increasewas primarily related to our growth, as well as increased compliance costs

 

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resulting from theimpact of the Sarbanes-Oxley Act of 2002 and similar laws and regulations.

 

•                  Other operating expenses includedpostage, ATM charges, telephone expenses, business development costs and othermiscellaneous expenses.  Due to growthand increased business activity, other operating expenses increased $78,000 or17.5% to $524,000 for the nine months ended September 30, 2004, comparedto $446,000 for the nine months ended September 30, 2003.

 

•                  The increases above were partiallyoffset by a decrease in advertising expenses of $42,000 for the nine monthsended September 30, 2004 to $76,000 compared to $118,000 in the priorperiod.  The prior period containedactivity relating to our Westville opening and other marketing campaignsdesigned to increase community awareness of our presence, products andcapabilities.

 

*IncomeTaxes*.  Our recordedincome tax expense for the nine months ended September 30, 2004 was$273,000 compared to $244,000 in the prior period.  The increase in income tax expense is due tohigher pre-tax income for the nine months ended September 30, 2004 ascompared to the prior period.  Theeffective rates for the nine months ended September 30, 2004 and 2003 were40.0% and 40.3%, respectively.

 

**KEYFINANCIAL RATIOS**

 
| ** **                            | ** ** | **As of or for the nine months  ended September 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                                   | ** ** | **2003** | ** ** |
|                                  |       |                                                       |       |   |   |
| Return on average assets (1)          |       | 0.44                                                       | %          | 0.46 | % |
| Return on average equity (1)          |       | 3.68                                                       | %          | 5.14 | % |
| Net interest margin (1)               |       | 3.33                                                       | %          | 3.86 | % |
| Efficiency ratio (1) (2)              |       | 72.25                                                      | %          | 72.27 | % |
| Non-interest income/operating revenue |       | 6.60                                                       | %          | 8.26 | % |
| Non-performing assets/assets          |       | 0.02                                                       | %          | 0.00 | % |
| Net charge offs/average loans (1)     |       | 0.07                                                       | %          | 0.01 | % |
| Allowance for loan losses/loans       |       | 1.27                                                       | %          | 1.18 | % |

 

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(1)                                  Theseratios are annualized.

(2)                                  Efficiencyratio is total other expense divided by the sum of net interest income andtotal other income.

 

**LIQUIDITY**

 

Liquidityrepresents the ability to meet present and future financial obligations througheither the sale or maturity of existing assets or the acquisition of additionalfunds through deposits and borrowings. Liquid assets include cash, federal funds sold, securities classified asavailable for sale, and loans maturing within one year.  As a result of the Bank’s management ofliquid assets, and the ability to generate liquidity through deposits andshort-term customer

 

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repos, managementbelieves that the Bank maintains overall liquidity sufficient to satisfy itsdeposit requirements and meet its customers’ credit needs.  In addition, the Bank maintains a $2.4secured line of credit and a $5.0 million unsecured line of credit withcommercial banks.

 

At September 30,2004, cash, securities classified as available for sale, interest bearingdeposits, and federal funds sold were 40.2% of total assets.  Asset liquidity is also provided by managingloans and the maturity of investment securities.  To the extent possible, loans are funded withdeposits or other funding with coinciding maturity or repricing dates.  At September 30, 2004, our ratio ofdeposits to total loans was 162.5%.

 

Netcash provided by operating activities for the nine months ended September 30,2004 was $524,000 as compared to $136,000 in the prior period.  The change relates primarily to a decrease inthe level of mortgage loans held for sale. Net cash used by investing activities was $18.9 million compared to$15.5 million in the prior period.  Thenet change was largely due to an increase in the amount of cash being investedin securities and new loans.  Fundsprovided by financing activities were $25.9 million for the period ended September 30,2004 compared to $13.8 million for the prior period.  The primary reason was increased growth indeposits, borrowed funds and proceeds from the sale of the Company’s commonstock.  Borrowed funds increased as aresult of a daily sweep from a large depository account.  All collected balances in excess of athreshold amount are swept into an overnight repurchase agreement.

 

**CAPITALRESOURCES**

 

Theassessment of capital adequacy depends on a number of factors such as assetquality, liquidity, earnings performance, changing competitive conditions,economic forces and growth and expansion activities.  The Bank seeks to maintain a capital base tosupport its growth and expansion activities, to provide stability to currentoperations and to promote public confidence.

 

The Bank’s capital position exceeds regulatoryminimums.  The primary indicators reliedon by the Office of the Comptroller of the Currency and other bank regulatorsin measuring strength of capital position are the Tier 1 Risk-Based CapitalRatio, Total Risk-Based Capital Ratio and Leverage Ratio.  Tier 1 Capital consists of common andqualifying preferred stockholders equity less goodwill.  Total Capital consists of Tier 1Capital, and a portion of the allowance for possible loan losses.  Risk-based capital ratios are calculated withreference to risk weighted assets, which consist of both on and off balancesheet risks (such as letters of credit and unused lines of credit).  The Leverage Ratio consists of Tier 1 capitaldivided by quarterly average assets.

 

Forcapital adequacy purposes, the following table shows the Bank’s regulatorycapital ratios and shareholders’ equity to total assets as of September 30,2004:

 
| ** **                                | ** ** | **Regulatory  Minimum** | ** ** | **Actual  Ratio** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-------------------|------------|
| Total risk-based capital ratio            |       | 8.0                     | %          | 20.25             | %          |
| Tier 1 risk-based capital ratio           |       | 4.0                     | %          | 19.11             | %          |
| Tier 1 leverage ratio                     |       | 4.0                     | %          | 11.74             | %          |
| Shareholders’ equity to total assets |       | None                    |       | 11.95             | %          |

 

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On April 26, 2004, the Company completed itspublic offering of 828,000 shares of common stock at a price of $10.00 pershare.  Net of underwriting discounts andcommissions, and legal, accounting, printing and other related expenses, theCompany received proceeds of approximately $7.2 million from the offering.  We are using a portion of the proceeds toenable the Bank to increase its legal lending limit and to provide the capitalnecessary, in light of the regulatory capital requirements described above, tosupport the Bank’s growth.  A portion ofthe proceeds also will be used to fund the establishment or acquisition ofadditional branches.  On July 13,2004, we filed an application with the OCC to open a full service branch inMount Holly, Burlington County, New Jersey. The Township of Mt. Holly has filed with the New Jersey Department ofEnvironmental Protection (“NJDEP”) for permission to demolish the buildingsthat are presently on the proposed site. NJDEP approval is required because the site is in a historicdistrict.  The New Jersey Historic SitesCouncil opposes the Township’s application.  The application is still pending. If approved by the NJDEP and the OCC, we anticipate that this branchwould open in the third quarter of 2005. We desire to open an additional branch by the first quarter of 2006.   We currently have no definitive plans orarrangements to establish or acquire that branch.

 

The Company is not aware of any pendingrecommendations by regulatory authorities that would have a material impact onthe Company’s capital resources, or liquidity if they were implemented, nor isthe Company under any agreements with any regulatory authorities.

 

**Off-Balance Sheet Instruments**

 

We do not have any off-balance sheet arrangements asthat term is defined in Item 303 of SEC Regulation S-B (such as guaranteecontracts, credit or liquidity support arrangements, derivative instruments orvariable interests in other entities). We are, however, a party to financial instruments with off-balance sheetrisk in the normal course of business to meet the financing needs of itscustomers and to manage its own exposure to fluctuations in interestrates.  These financial instrumentsinclude commitments to extend credit. These financial instruments involve elements of credit and interest raterisk in excess of the amount recognized in the balance sheet.  The contract or notional amounts of thesefinancial instruments reflect the extent of our involvement in particularclasses of financial instruments.

 

Our exposure to credit loss in the event ofnon-performance by the other party to the financial instrument for commitmentsto extend credit is represented by the contractual amount of thoseinstruments.  We use the same creditpolicies in making commitments and conditional obligations as we do foron-balance sheet instruments.  Unlessnoted otherwise, we do not require and are not required to pledge collateral orother security to support financial instruments with credit risk.

 

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**Item 3.****                                   Controlsand Procedures**

 

As of September 30, 2004, the Company, under thesupervision and with the participation of its management, including the ChiefExecutive Officer and the Chief Financial Officer, evaluated the effectivenessof the design and operation of the Company’s disclosure controls andprocedures.  Based on that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective.  There were no significant changes to theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation.

 

**PART II****– OTHER INFORMATION**

 

**Item 6.****           Exhibits**

 

(a)                        Exhibits

 
| **Number** |   | **Title**                                                                                                                                                                                                                                                                                                 |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                      |
| 3.1        |   | Articles of  Incorporation of 1st Colonial Bancorp, Inc. (Incorporated by reference to  Exhibit 3.1 to 1st Colonial Bancorp, Inc.’s Registration Statement No.  333-84114 on Form S-4 filed with the Securities and Exchange Commission)                                                             |
|       |   |                                                                                                                                                                                                                                                                                                      |
| 3.2        |   | Bylaws of 1st  Colonial Bancorp, Inc. (Incorporated by reference to Exhibit 3.2 to 1st  Colonial Bancorp, Inc.’s Registration Statement No. 333-84114 on Form S- 4  filed with the Securities and Exchange Commission)                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                      |
| 4.1        |   | Form of  certificate evidencing shares of 1st Colonial Bancorp, Inc. 1st Colonial  Bancorp, Inc.’s Common Stock (Incorporated by reference to Exhibit 4.1 to 1st  Colonial Bancorp, Inc.’s Registration Statement No. 333-84114 on Form S-4  filed with the Securities and Exchange Commission) |
|       |   |                                                                                                                                                                                                                                                                                                      |
| 31.1       |   | Chief Executive  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                      |
| 31.2       |   | Chief Financial  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                      |
| 32.1       |   | Certification of  the Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350,  as                                                                                                                                                                                              |

 

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|   |   | adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                |
| 32.2   |   | Certification of  the Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350,  as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                                                                                                                            | 1ST COLONIAL  BANCORP, INC. |
|-------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|
|                                                                                                                                            |                        |
|                                                                                                                                            |                        |
| Date:                    November 12,  2004 | /s/ Gerard M. Banmiller     |   |
|                                                                                                                                            | Gerard M.  Banmiller        |
|                                                                                                                                            | President and               |
|                                                                                                                                            | Chief Executive  Officer    |
|                                                                                                                                            |                        |
| Date:                    November 12,  2004 | /s/ Robert C. Faix          |   |
|                                                                                                                                            | Robert C. Faix              |
|                                                                                                                                            | Senior Vice  President and  |
|                                                                                                                                            | Chief Financial  Officer    |

 

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