**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

| **ý**                                                   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF  THE  SECURITIES EXCHANGE ACT OF 1934.**  |
|--------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
|                                                         |                                                                                                  |
| **For  the quarterly period ended September 30, 2003.** |
|                                                         |
| **OR**                                                       |
|                                                         |                                                                                                  |
| **o**                                                        | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF  THE  SECURITIES EXCHANGE ACT OF 1934.** |
|                                                         |                                                                                                  |
| **Commission  file number 333-84114**                        |
|                                                         |
|                                                         | **1st  Colonial Bancorp, Inc.**                                                                       |   |
|                                                         | (Exact name of  registrant as specified in its charter)                                               |   |
|                                                         |                                                                                                  |   |
|                                                         | **Pennsylvania**                                                                                      |   | **01-0715542** |   |
|                                                         | (State or other  jurisdiction of  incorporation or organization)                                      |   | (I.R.S. Employer  Identification No.) |   |
|                                                         |                                                                                                  |   |   |   |
|                                                         | **1040 Haddon AvenueCollingswood, NJ**                                                                |   | **08108** |   |
|                                                         | (Address of  Principal  Executive Offices)                                                            |   | (Zip Code) |   |
|                                                         |                                                                                                  |   |
|                                                         | **(856)  858-1100**                                                                                   |   |
|                                                         | (Registrant’s  telephone number, including area code)                                            |   |
|                                                              |                                                                                                       |  |  |  |  |

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements 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 10, 2003** |
|----------------------------------|--------|-----------------------------------------------------------------|
|                             |   |                                                            |
| Common Stock,  without par value |   | 1,345,733                                                       |

 

 

----

 

INDEX TO FORM10-QSB

 
| PART  I.   FINANCIAL INFORMATION |                                                                                                                                            |
|-------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                                            |   |
| Item  1.                                        | Financial  Statements                                                                                                                           |   |
|                                            |                                                                                                                                            |   |
|                                            | Consolidated  Statements of Financial Condition September 30, 2003 (Unaudited) and  December 31, 2002                                 |   |
|                                            |                                                                                                                                            |   |
|                                            | Consolidated  Statements of Income and Comprehensive Income (Unaudited) - For the Three and  Nine Months Ended September 30, 2003 and 2002 |   |
|                                            |                                                                                                                                            |   |
|                                            | Consolidated  Statements of Cash Flows –(Unaudited) For the Nine Months Ended  September 30, 2003 and 2002                            |   |
|                                            |                                                                                                                                            |   |
|                                            | 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 and Reports  on Form 8-K                                                                                                               |   |
|                                            |                                                                                                                                            |   |
| Signatures                                      |                                                                                                                                            |

 

2

----

 

PART 1 - FINANCIALINFORMATION1st COLONIAL BANCORP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OFFINANCIAL CONDITION

 

(Dollars in thousands)

 
|                                                                                                                                                                            |   | **September 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                            |   | **(unaudited)**              |    |                        |   |
| **Assets:**                                                                                                                                                                     |   |                         |    |                        |   |
| Cash  and due from banks                                                                                                                                                        |   | $                            | 5,679   |                        | $      | 6,156 |   |
| Federal  funds sold                                                                                                                                                             |   | 4,963                        |    | 6,005                       |   |
| Investments  held to maturity                                                                                                                                                   |   | 5,675                        |    | 1,220                       |   |
| Securities  available for sale (amortized cost of $30,870 at September 30, 2003 and  $29,776 at December 31, 2002)                                                    |   | 30,768                       |    | 29,934                      |   |
| Mortgage  loans available for sale                                                                                                                                              |   | 506                          |    | 63                          |   |
| Loans                                                                                                                                                                           |   | 63,696                       |    | 54,198                      |   |
| Less:  Allowance for loan losses                                                                                                                                                |   | (750                         | )       | (576                        | )      |
|                                                                                                                                                                            |   |                         |    |                        |   |
| Net  loans                                                                                                                                                                      |   | 62,946                       |    | 53,622                      |   |
| Bank  premises and equipment, net                                                                                                                                               |   | 960                          |    | 763                         |   |
| Accrued  interest receivable                                                                                                                                                    |   | 419                          |    | 341                         |   |
| Deferred  tax assets                                                                                                                                                            |   | 284                          |    | 181                         |   |
| Other  assets                                                                                                                                                                   |   | 176                          |    | 35                          |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| Total  Assets                                                                                                                                                                   |   | $                            | 112,376 |                        | $      | 98,320 |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| **Liabilities:**                                                                                                                                                                |   |                         |    |                        |   |
| Demand  deposits                                                                                                                                                                |   | $                            | 57,486  |                        | $      | 46,371 |   |
| Savings  deposits                                                                                                                                                               |   | 19,753                       |    | 19,671                      |   |
| Other  time deposits                                                                                                                                                            |   | 21,093                       |    | 16,906                      |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| Total  deposits                                                                                                                                                                 |   | 98,332                       |    | 82,948                      |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| Short-term  borrowings                                                                                                                                                          |   | 4,495                        |    | 6,033                       |   |
| Accrued  interest payable                                                                                                                                                       |   | 7                            |    | 10                          |   |
| Taxes  payable                                                                                                                                                                  |   | 40                           |    | 51                          |   |
| Other  liabilities                                                                                                                                                              |   | 103                          |    | 76                          |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| Total  liabilities                                                                                                                                                              |   | $                            | 102,977 |                        | $      | 89,118 |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| **Shareholders’  equity:**                                                                                                                                                 |   |                         |    |                        |   |
| Common  Stock (no par value) Authorized: 5,000,000 shares, issued and outstanding:  1,344,315 shares at September 30, 2003 and 1,343,580 shares at  December 31, 2002 |   |                         |    |                        |   |
| Additional  paid in capital                                                                                                                                                     |   | 9,212                        |    | 8,935                       |   |
| Retained  earnings                                                                                                                                                              |   | 248                          |    | 166                         |   |
| Accumulated  other comprehensive income(loss), net                                                                                                                              |   | (61                          | )       | 101                         |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| Total  shareholders’ equity                                                                                                                                                |   | 9,399                        |    | 9,202                       |   |
|                                                                                                                                                                            |   |                         |    |                        |   |
| Total  liabilities & shareholders’ equity                                                                                                                              |   | $                            | 112,376 |                        | $      | 98,320 |   |

 

The accompanying notesare an integral part of these statements.

 

3

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1st COLONIAL BANCORP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOME (UNAUDITED)FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

 

(Dollarsin thousands, except per share data)

 
|                                                 |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                 |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Interest  income:                                    |   |                                        |   |                                       |   |   |   |   |   |
| Interest  and fees on loans                          |   | $                                           | 960    |                                       | $      | 887 |   | $ | 2,780 |   | $ | 2,356 |   |
| Interest  on federal funds sold                      |   | 23                                          |   | 46                                         |   | 68 |   | 129 |   |
| Interest  and dividends on investments:              |   |                                        |   |                                       |   |   |   |   |   |
| Taxable                                              |   | 204                                         |   | 134                                        |   | 656 |   | 498 |   |
| Nontaxable                                           |   | 15                                          |   | 3                                          |   | 30 |   | 7 |   |
| Total  interest income                               |   | 1,202                                       |   | 1,070                                      |   | 3,534 |   | 2,990 |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Interest  expense:                                   |   |                                        |   |                                       |   |   |   |   |   |
| Interest  on demand deposits                         |   | 130                                         |   | 126                                        |   | 383 |   | 279 |   |
| Interest  on savings deposits                        |   | 27                                          |   | 53                                         |   | 108 |   | 173 |   |
| Interest  on time deposits                           |   | 128                                         |   | 122                                        |   | 410 |   | 288 |   |
| Interest  on short-term borrowings                   |   | 11                                          |   | 20                                         |   | 35 |   | 65 |   |
| Total  interest expense                              |   | 296                                         |   | 321                                        |   | 936 |   | 805 |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Net  interest income                                 |   | 906                                         |   | 749                                        |   | 2,598 |   | 2,185 |   |
| Provision  for loan losses                           |   | 60                                          |   | 55                                         |   | 180 |   | 230 |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Net  interest income after provision for loan losses |   | 846                                         |   | 694                                        |   | 2,418 |   | 1,955 |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Other  income:                                       |   |                                        |   |                                       |   |   |   |   |   |
| Service  charges on deposit accounts                 |   | 37                                          |   | 21                                         |   | 105 |   | 54 |   |
| Fees  earned on sale of mortgage loans               |   | 41                                          |   | 13                                         |   | 91 |   | 36 |   |
| Other  income, service charges and fees              |   | 13                                          |   | 7                                          |   | 38 |   | 18 |   |
| Gain  on sale of investments                         |   | —                                      |   | 23                                         |   | — |   | 24 |   |
| Total  other income                                  |   | 91                                          |   | 64                                         |   | 234 |   | 132 |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Other  expenses:                                     |   |                                        |   |                                       |   |   |   |   |   |
| Salaries,  wages and employee benefits               |   | 300                                         |   | 227                                        |   | 870 |   | 596 |   |
| Occupancy  and equipment expenses                    |   | 89                                          |   | 57                                         |   | 249 |   | 150 |   |
| Advertising  expense                                 |   | 40                                          |   | 23                                         |   | 118 |   | 48 |   |
| Data  processing expense                             |   | 74                                          |   | 52                                         |   | 205 |   | 135 |   |
| Organization  expenses                               |   | —                                      |   | 6                                          |   | — |   | 9 |   |
| Other  Operating Expenses                            |   | 206                                         |   | 190                                        |   | 605 |   | 525 |   |
| Total  other expenses                                |   | 709                                         |   | 555                                        |   | 2,047 |   | 1,463 |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Income  before income taxes                          |   | 228                                         |   | 203                                        |   | 605 |   | 624 |   |
| Income  tax expense                                  |   | 92                                          |   | 80                                         |   | 244 |   | 249 |   |
| Net  income                                          |   | $                                           | 136    |                                       | $      | 123 |   | $ | 361 |   | $ | 375 |   |
| Other  comprehensive loss                            |   | (172                                        | )      | (33                                        | )      | (162 | ) | (45 | ) |
| Total  comprehensive income (loss)                   |   | $                                           | (36    | )                                          | $      | 90 |   | $ | 199 |   | $ | 330 |   |
|                                                 |   |                                        |   |                                       |   |   |   |   |   |
| Net  income per share information:                   |   |                                        |   |                                       |   |   |   |   |   |
| Basic  earnings per share                            |   | $                                           | 0.10   |                                       | $      | 0.11 |   | $ | 0.27 |   | $ | 0.35 |   |
| Diluted  earnings per share                          |   | $                                           | 0.10   |                                       | $      | 0.11 |   | $ | 0.27 |   | $ | 0.35 |   |

 

The accompanying notesare an integral part of these statements.

 

4

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1st COLONIAL BANCORP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

 

(Dollarsin thousands)

 
|                                                                                                            |   | **For the  Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                            |   | **2003**                                           |   | **2002** |   |
|                                                                                                            |   |                                               |   |   |   |
| Net  income                                                                                                     |   | $                                                  | 361    |   | $ | 375 |   |
| Adjustments  to reconcile net income to net cash used/(provided) by operating activities:                       |   |                                               |   |   |   |
| Depreciation  and amortization                                                                                  |   | 83                                                 |   | 66 |   |
| Amortization  of premium (discount)on securities, net                                                           |   | 143                                                |   | 8 |   |
| Amortization  of deferred loan fees/cost, net                                                                   |   | 23                                                 |   | 22 |   |
| Fees  on sale of mortgage loans available for sale                                                              |   | (91                                                | )      | (36 | ) |
| Gain  on sale of securities                                                                                     |   | —                                             |   | (24 | ) |
| Provision  for loan losses                                                                                      |   | 180                                                |   | 230 |   |
| Cash  disbursed for mortgage banking activities                                                                 |   | (19,639                                            | )      | (8,338 | ) |
| Cash  received for mortgage banking activities                                                                  |   | 19,287                                             |   | 7,898 |   |
| (Increase)decrease  in accrued interest receivable                                                              |   | (78                                                | )      | 19 |   |
| (Increase)decrease  in deferred tax asset                                                                       |   | (5                                                 | )      | 15 |   |
| Increase  in other assets                                                                                       |   | (141                                               | )      | (74 | ) |
| Decrease  in accrued interest payable                                                                           |   | (3                                                 | )      | (24 | ) |
| Decrease  in income taxes payable                                                                               |   | (11                                                | )      | (84 | ) |
| Increase(decrease)in  other liabilities                                                                         |   | 27                                                 |   | (1 | ) |
| Total  Adjustments                                                                                              |   | (225                                               | )      | (323 | ) |
| Net  cash provided by operating activities                                                                      |   | 136                                                |   | 52 |   |
|                                                                                                            |   |                                               |   |   |   |
| Cash  flows used in investing activities:                                                                       |   |                                               |   |   |   |
| Proceeds  from maturity and sale of securities available-for-sale                                               |   | 24,001                                             |   | 16,419 |   |
| Proceeds  from maturity of securities held to maturity                                                          |   | 613                                                |   | 931 |   |
| Purchases  of securities available-for-sale                                                                     |   | (29,278                                            | )      | (15,540 | ) |
| Purchases  of securities held to maturity                                                                       |   | (5,068                                             | )      | (614 | ) |
| Repayment  of principal of securities available-for-sale                                                        |   | 4,040                                              |   | 614 |   |
| Increase  in loans receivable, net                                                                              |   | (9,527                                             | )      | (15,742 | ) |
| Capital  expenditures                                                                                           |   | (280                                               | )      | (255 | ) |
| Net  cash used in investing activities                                                                          |   | (15,499                                            | )      | (14,187 | ) |
|                                                                                                            |   |                                               |   |   |   |
| Cash  flows provided/(used) in financing activities:                                                            |   |                                               |   |   |   |
| Net  increase in deposits                                                                                       |   | 15,384                                             |   | 112 |   |
| Net  decrease in short-term borrowings                                                                          |   | (1,538                                             | )      | (676 | ) |
| Issuance  of common stock                                                                                       |   | —                                             |   | 3 |   |
| Exercise  of warrants                                                                                           |   | 7                                                  |   | — |   |
| Expenses  for issuance of common stock                                                                          |   | (9                                                 | )      | — |   |
| Net  cash provided/(used) in financing activities                                                               |   | 13,844                                             |   | (561 | ) |
| Net  decrease in cash and cash equivalents                                                                      |   | (1,519                                             | )      | (14,696 | ) |
| Cash  and cash equivalents as of beginning of period                                                            |   | 12,161                                             |   | 23,930 |   |
| Cash  and cash equivalents as of September 30,                                                             |   | $                                                  | 10,642 |   | $ | 9,234 |   |
|                                                                                                            |   |                                               |   |   |   |
| Supplemental  disclosure of cash flow information:                                                              |   |                                               |   |   |   |
| Cash  paid during the period for:                                                                               |   |                                               |   |   |   |
| Interest                                                                                                        |   | $                                                  | 933    |   | $ | 829 |   |
| Income  taxes                                                                                                   |   | 258                                                |   | 346 |   |
| Noncash  items:                                                                                                 |   |                                               |   |   |   |
| Change  in unrealized gains for securities available-for-sale, net of taxes of ($98)  for 2003 and $38 for 2002 |   | (162                                               | )      | (45 | ) |
| Transferred  from retained earnings to additional paid in capital as a result of the 5%  stock dividend         |   | 279                                                |   |   |   |

 

The accompanying notesare an integral part of these statements.

 

5

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NOTES TO FINANCIALSTATEMENTS

 

**Note 1.       General**

 

1st Colonial Bancorp,Inc. (the “Company”) was formed on February 26, 2002 pursuant to thefiling of Articles of Incorporation with the Commonwealth of Pennsylvania.  Prior to June 30, 2002, the Company didnot have any material assets or liabilities. On June 30, 2002, the Company acquired 1st Colonial National Bank(the “Bank”) pursuant to the merger of the Bank with and into Interim 1stColonial National Bank (“Interim”), a wholly-owned subsidiary of theCompany.  The acquisition was part ofthe reorganization of the Bank from a stand-alone national bank to a bankholding company structure.  Thereorganization was approved by the Office of the Comptroller of the Currencyand by the Federal Reserve Bank of Philadelphia on June 6, 2002.

 

In the reorganization,each existing shareholder of the Bank received an equal number of shares of theCompany’s common stock in exchange for his or her Bank common stock.  The shares of the Company’s common stockissued in the reorganization were registered under the Securities Act of 1933,as amended, pursuant to the Company’s Registration Statement No. 333-84114filed with the SEC.

 

The reorganization wasaccounted for in a manner similar to a pooling of interests.  The Bank’s business and operations wereunchanged by the reorganization and merger. All of the directors of the Company are directors of the Bank.

 

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

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiary, 1st Colonial National Bank. Any material intercompany balances and transactions have been eliminatedin consolidation.

 

In the opinion ofmanagement, the accompanying unaudited financial statements contain adjustmentsconsisting only of normal recurring adjustments, necessary to present fairlythe consolidated financial position of the Company as of September 30,2003 and December 31, 2002 and the consolidated results of operations forthe three and nine month periods ended September 30, 2003 and 2002.  The accounting policies and reportingpractices of the Company are in accordance with accounting principles generallyaccepted in the United States of America and have been followed on a consistentbasis.

 

The accompanyingfinancial statements have been prepared in accordance with instructions forForm 10-QSB and accordingly do not include all of the detailed schedules,information and notes necessary for a fair presentation of financial condition,results of operations and cash flows in accordance with accounting principlesgenerally accepted in the United States of America.

 

6

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The results of operationsfor the three and nine months ended September 30, 2003 are not necessarilyindicative of the results to be expected for the full year.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America 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 the financialstatements and the reported amounts of income and expenses during the reportingperiod. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to significant change in the near-term relate to the determinationof the allowance for loan losses and the valuation of the deferred tax assets.

 

a.       At September 30, 2003, the Companyhas two stock-based compensation plans, which are described more fully in note3.  The Company accounts for those plansunder the recognition and measurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provision of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 

7

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|                         |   | **Three  Months Ended**      |   |
|------------------------------|--------|------------------------------|--------|
|                         |   | **September 30,  2003** |   | **September 30,  2002** |   |
|                         |   | **As  reported**             |   | **Compensation  expense** |   | **Pro forma** |   | **As  reported** |   | **Compensation  expense** |   | **Pro forma** |   |
|                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Net  income                  |   | $                            | 136    |   | 32 |   | 104 |   | 123 |   | 8 |   | 115 |   |
| Basic  earnings per share    |   | 0.10                         |   | 0.02 |   | 0.08 |   | 0.11 |   | — |   | 0.11 |   |
| Dilutive  earnings per share |   | 0.10                         |   | 0.03 |   | 0.07 |   | 0.11 |   | — |   | 0.11 |   |
|                              |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |

 

 
|                         |   | **Nine  Months Ended**       |   |
|------------------------------|--------|------------------------------|--------|
|                         |   | **September 30,  2003** |   | **September 30,  2002** |   |
|                         |   | **As  reported**             |   | **Compensation  expense** |   | **Pro forma** |   | **As  reported** |   | **Compensation  expense** |   | **Pro forma** |   |
|                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Net  income                  |   | $                            | 361    |   | 102 |   | 259 |   | 375 |   | 29 |   | 346 |   |
| Basic  earnings per share    |   | 0.27                         |   | 0.08 |   | 0.19 |   | 0.35 |   | 0.03 |   | 0.32 |   |
| Dilutive  earnings per share |   | 0.27                         |   | 0.08 |   | 0.19 |   | 0.35 |   | 0.03 |   | 0.32 |   |
|                              |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 3.       Earnings Per Share**

 

Basic earnings per commonshare is calculated on the basis of the weighted average number of commonshares outstanding.  Diluted earningsper common share includes dilutive common stock equivalents as computed underthe treasury stock method using average common stock prices for the respectiveperiod.  All calculations have beenadjusted to account for the 5% stock dividend paid on April 15, 2003.  Options and warrants to purchase 434,607 and142,343 shares of common stock were outstanding at September 30, 2003 and2002, respectively, and to the extent dilutive, were included in thecomputation of earnings per diluted common share.

 

8

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The following is areconciliation of the numerators and denominators of the basic and dilutedearnings per common share calculations.

 

(Dollars are inthousands, except per share data)

 
|                                                                                                 |   | **Three  months  ended  September 30,** |   | **Nine  months  ended  September 30,** |   |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                 |   | **2003**                                     |   | **2002**                                    |   | **2003** |   | **2002** |   |
| Numerator:                                                                                           |   |                                         |   |                                        |   |   |   |   |   |
| Net  Income                                                                                          |   | $                                            | 136    |                                        | $      | 123 |   | $ | 361 |   | $ | 375 |   |
|                                                                                                 |   |                                         |   |                                        |   |   |   |   |   |
| Denominator  for basic earnings per share- weighted average shares                                   |   | 1,344                                        |   | 1,076                                       |   | 1,344 |   | 1,076 |   |
|                                                                                                 |   |                                         |   |                                        |   |   |   |   |   |
| Effect  of dilutive securities(1):                                                                   |   |                                         |   |                                        |   |   |   |   |   |
| Director  and employee stock options                                                                 |   | 10                                           |   | 3                                           |   | 7 |   | 5 |   |
| Warrants                                                                                             |   | 26                                           |   | 0                                           |   | 11 |   | 0 |   |
|                                                                                                 |   |                                         |   |                                        |   |   |   |   |   |
| Denominator  for diluted earnings per share- adjusted weighted average shares and assumed  exercised |   | 1,380                                        |   | 1,079                                       |   | 1,362 |   | 1,081 |   |
|                                                                                                 |   |                                         |   |                                        |   |   |   |   |   |
| Basic  earnings per share                                                                            |   | $                                            | 0.10   |                                        | $      | 0.11 |   | $ | 0.27 |   | $ | 0.35 |   |
| Diluted  earnings per share                                                                          |   | $                                            | 0.10   |                                        | $      | 0.11 |   | $ | 0.27 |   | $ | 0.35 |   |

 

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(1)   For thenine months ended September 30, 2003, 92,400 warrants and 10,501

options are anti-dilutive and are not included in theabove calculations.

 

Of the following warrantsand options, those that were issued prior to June 30, 2002 were issued bythe Bank with respect to Bank common stock. Pursuant to the Agreement and Plan of Reorganization and Merger dated asof March 5, 2002 among the Company, the Bank and Interim, as ofJune 30, 2002 these outstanding warrants and stock options became warrantsand stock options to purchase the common stock of the Company.

 

Warrants were issued tothe Bank’s underwriter in connection with its initial public offering of commonstock in June 2000.  AtSeptember 30, 2003, these warrants entitled the holders to purchase92,400 shares of common stock at a purchase price of $10.04 pershare.  These warrants are exercisableuntil June 29, 2006.

 

On June 29, 2000,the Bank issued stock options to the Bank’s employees entitling them topurchase a total of 16,403 shares of Bank common stock.  These options will vest and becomeexercisable in five equal annual installments commencing on the firstanniversary of the date of grant and continuing on each successive anniversaryof such date.  These options areexercisable at $6.93 per share for a period of ten years after the grantdate.  At September 30, 2003, allof these options were still outstanding.

 

9

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On June 29, 2000,the Bank also issued stock options to the Bank’s directors entitling them topurchase a total of 4,981 shares of Bank common stock.  These options are exercisable at $6.93 pershare for a period of ten years after the date of the grant.  These options have fully vested.  Of these options, at September 30,2003, options to purchase 4,395 shares of the Company’s common stock were stilloutstanding.

 

In April 2001,options to purchase a total of 6,930 shares of Bank common stock were grantedto the Bank’s directors at an exercise price of $8.66 per share.  These options are fully vested and expireten years from the date of the grant.  Ofthese options, as of September 30, 2003, options to purchase 6,069 sharesof the Company’s common stock were still outstanding.

 

In June 2001,options to purchase a total of 4,109 shares of Bank common stock were grantedto certain Bank employees at an exercise price of $8.66 per share, of which 20%become vested on each anniversary of the grant date.  These options expire ten years from the date of the grant.  At September 30, 2003, all of theseoptions were still outstanding.

 

On February 20,2002, options to purchase a total of 10,501 shares of common stock were grantedto certain Bank employees at an exercise price of $9.76 per share, of which 20%become vested on each anniversary of the grant date.  These options expire ten years from the date of the grant.  At September 30, 2003, all of theseoptions were still outstanding.

 

On June 12, 2002,options to purchase a total of 8,466 shares of common stock were granted to theBank’s directors at an exercise price of $9.12 per share.  These options are fully vested and expireten years from the date of the grant. At September 30, 2003, all of these options were still outstanding.

 

Warrants were issued topurchasers of the Company’s common stock in an offering that closed onDecember 16, 2002.  Warrants wereissued for 267,119 shares of the Company’s common stock at a price of $9.14 pershare.  All of these warrants areexercisable and expire three years from issue date.  During the nine months ended September 30, 2003, warrantsfor 735 shares were exercised.  AtSeptember 30, 2003, of the warrants issued on December 16, 2002,warrants for 266,384 were still outstanding.

 

On January 15, 2003,options to purchase a total of 10,500 shares of common stock were granted tocertain Bank employees at an exercise price of $8.21 per share, of which 20%become vested on each anniversary of the grant date.  These options expire ten years from the date of the grant.  At September 30, 2003, all of theseoptions were still outstanding.

 

On January 15, 2003,options to purchase a total of 7,880 shares of common stock were granted to theBank’s directors at an exercise price of $8.21 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, 2003, allof these options were still outstanding.

 

 

10

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On April 22, 2003,options to purchase a total of 7,500 shares of common stock were granted to theBank’s directors at an exercise price of $9.15 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, 2003, allof these options were still outstanding.

 

**Note 4.       Allowance for Loan Losses**

 

The allowance for loanlosses is established through a provision for loan losses charged tooperations.  The allowance is maintainedat a level that management believes will be adequate to absorb estimated losseson existing loans based on the collectibility of the loans and prior lossexperience.  Management uses significantestimates to determine the allowance for loan losses.  Management’s evaluations consider such factors as concentrationsof credit risk, changes in the nature and volume of the portfolio, overallportfolio quality, review of specific problem loans, current economic conditionsand trends that may affect the borrowers’ ability to pay, and prior lossexperience within various categories of the portfolio.  All loans greater than $100,000 and allclassified loans are analyzed individually. While management believes the allowance for loan losses is currentlyappropriate, future additions to the allowance may be necessary based onchanges in general economic conditions and/or the condition of specificborrowers.

 

In addition, regulatoryauthorities, as an integral part of their examinations, periodically review theallowance for loan losses.  They mayrequire additions to the allowance based upon their judgments about informationavailable to them at the time of examination.

 

In addition to managementreview, an external service provides a detailed loan review analysis.  In the course of a year, all new loans inexcess of $100,000 and all classified loans are reviewed and rated.  In addition, other smaller loans arereviewed on a random basis.  At eachquarterly review cycle, all classified loans are assigned a specific reserveallocation based on the guidelines established in the Bank’s credit policywhich was approved by the Board of Directors.

 

The balance of any ratedloan is deducted from the remaining general portfolio classification.  The general category is currently segregatedby commercial real estate, commercial and industrial loans, home equity loansand other consumer loans.  Each categoryof loan is then assigned loss factors based on a review of the followingareas:  (i) historical losses (due tolimited loss experience, we use the loss experience of peer banks as reportedin the Uniform Bank Performance Report); (ii) policies and procedures;(iii) economic conditions; (iv) nature and volume; (v) management;(vi) oversight; (vii) concentrations; and (viii) externalfactors.  The sum of the assigned lossfactors is then applied to the outstanding balance of the respective category.

 

11

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The Bank has no creditexposure to foreign countries or foreign borrowers or highly leveragestransactions.

 

Loans charged off willrepresent the Bank’s recognition of losses previously provided for in theoverall allowance for loan losses through the provisions charged to operationsin the respective periods.

 

**Note 5.   Litigation**

 

At September 30,2003, the Company was neither engaged in any existing nor aware of any pendingmaterial legal proceedings.  From timeto time, the Company is a party to legal proceedings within the normal courseof business wherein it enforces its security interest in loans made by it, andother matters of a similar nature.

 

**Note 6.   RecentAccounting Pronouncements**

 

**Accounting for Stock-BasedCompensation**

 

In December 2002,FASB issued SFAS No. 148, Accounting for Stock-Based Compensation–Transition and Disclosure- an amendment of FASB Statement No. 123. SFASNo. 148 amends FASB Statement No. 123, Accounting for Stock-BasedCompensation, to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  SFAS No. 148 amendsthe disclosure requirements of Statement 123 to require prominent disclosures in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.The provisions of SFAS No. 148 are effective for fiscal years ending afterDecember 15, 2002.  Adoption ofSFAS No. 148 did not impact the Bank’s earnings, financial condition, orequity.  However, the Company did modifyits disclosures related to the method of accounting for stock-based employeecompensation in accordance with SFAS No. 148.

 

**Grantor’s Accounting and DisclosureRequirements for**

**Guarantees**

 

During 2002, FASBInterpretation No. 45, Guarantor’s Accounting and Disclosure Requirementsfor Guarantees Including Indirect Guarantees of Indebtedness of Others, wasissued.  FASB Interpretation No. 45requires a guarantor to include disclosure of certain obligations, and ifapplicable, at the inception of the guarantee, recognize a liability for thefair value of other certain obligations undertaken in issuing a guarantee.  The recognition requirement is effective forguarantees issued or modified after December 31, 2002.  Adoption of FASB Interpretation No. 45did not have an impact on the Company’s earnings, financial condition, orequity.

 

12

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**Consolidation of Variable InterestEntities**

 

During 2002, FASB InterpretationNo. 46, Consolidation of Variable Interest Entities, was issued.  FASB Interpretation No. 46 clarifiesthe application of Accounting Research Bulletin No. 51 and appliesimmediately to any variable interest entities created after January 31,2003 and to variable interest entities in which an interest is obtained afterthat date.  Adoption of FASBInterpretation No. 46 did not have an impact on the Company’s earnings,financial condition, or equity.

 

**Derivative Instruments and HedgingActivities**

 

In April 2003, theFASB issued Statement No. 149, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities. This Statement amends and clarifies financial accounting and reportingfor derivative instruments, including certain derivative instruments embeddedin other contracts (collectively referred to as derivatives) and for hedgingactivities under FASB Statement No. 133, *Accounting**for Derivative Instruments and HedgingActivities.* With some exceptions, this Statement is effective for contractsentered into or modified after June 30, 2003.  The adoption of this Statement did not have an impact on theCompany’s earnings, financial condition, or equity. 

 

**Financial Instruments with Debt andEquity**

**Characteristics**

 

In May 2003, theFASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity. *This Statement establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity.  Itrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances).  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterJune 15, 2003, except for mandatorily redeemable financial instruments ofnonpublic entities.  The adoption ofthis Statement did not have an impact on the Company’s earnings, financialcondition, or equity. 

 

13

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**Item 2.          MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**GENERAL**

 

The Company was formed inFebruary 2002 and had no material assets until its acquisition of the Bankon June 30, 2002.  See Note 1 tothe Financial Statements for a description of this acquisition and the relatedtransactions.  Therefore, prior toJune 30, 2002 it had no results of operations. Further, as of this filing,the only material asset of the Company is the common stock of the Bank.Accordingly, the following discussion and analysis, for periods prior to theacquisition, relates to the financial condition and results of operations ofthe Bank, and should be read in conjunction with the financial statements andrelated notes appearing on the preceding pages as well as in the Company’sAnnual Report on Form 10-KSB for the fiscal year ended December 31, 2002filed with Securities and Exchange Commission. Unaudited results of operations for the three and nine months endedSeptember 30, 2003 are compared to the unaudited results of operations forthe comparable periods ended September 30, 2002.  Such information is based upon the historical financial informationavailable as of the dates indicated. Results of operations for the three and nine months endedSeptember 30, 2003 are not necessarily indicative of results to beattained for any other period.

 

Statements regarding theCompany’s expectations as to financial results and other aspects of itsbusiness set forth in this Form 10-QSB or otherwise made in writing or orallyby the Company may constitute forward looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  Although the Company believes that its expectations are based onreasonable assumptions within the bounds of its knowledge of its business andoperations, there can be no assurance that actual results will not differmaterially from its expectations. Factors that might cause or contribute to such differences include, butare not limited to, the Bank’s ability to establish and grow additionalbranches, the uncertainty of future profitability, changing economic conditionsand monetary policies, uncertainty of interest rates, risks inherent in bankingtransactions, competition, extent of government regulations, and delay in orfailure in obtaining regulatory approvals.

 

The Company is a bankholding company, and its only subsidiary is the Bank. The Bank conducts communitybanking activities by accepting deposits from the public and investing theproceeds in loans and investment securities.

 

14

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The Bank’s lendingproducts include commercial loans and lines of credit, consumer and home equityloans, and multi-family residential and non-residential real estate loans.  In order to manage its liquidity andinterest rate risk, the Bank maintains an investment portfolio consisting ofmunicipal, 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.  The Bank’s earnings are largely dependentupon its net interest income (the difference between what it earns on its loansand investments and what it pays on its deposits and borrowings).  In addition to net interest income, theBank’s net income is impacted by its loan loss provision, non-interest income(mostly deposit fees and income from sale of loans held for sale) andnon-interest expense (such as salaries and benefits, professional fees,occupancy cost and data processing expenses).

 

On December 18,2002, the Company’s Board of Directors voted to declare a five percent stockdividend to the Company’s shareholders. The dividend was distributed on April 15, 2003 to the holders ofrecord of all issued and outstanding shares of Company common stock as of April 1,2003.  The total number of shares issuedpursuant to the 5% stock dividend was 64,047 shares.  The total number of shares outstanding immediately after thepayment of this dividend was 1,343,790 shares.

 

On December 20,2002, the Company completed its public offering of units of common stock andwarrants.  In the offering, the Companysold 254,399 units at an offering price of $8.50 per unit.  Each unit consisted of one share of commonstock and a warrant to purchase an additional share of common stock during thethree year period ending December 20, 2005 at a price of $9.60 pershare.  As a result of the 5% stockdividend discussed above, there are currently warrants outstanding to purchase266,909 shares of the Company’s common stock at a price of $9.14 per share. 1stColonial raised net proceeds of $1.93 million in the offering.  These proceeds were used to fund, amongother things, the continued growth of the Bank, including the establishment ofits Westville, New Jersey branch in January 2003.

 

The Bank’s main office islocated at 1040 Haddon Avenue, Collingswood, New Jersey.  On January 16, 2003, the Bank opened abranch office at 321 Broadway, Westville, New Jersey.

 

At September 30,2003, the Bank had 22 full-time and 3 part-time employees.

 

**CRITICAL ACCOUNTING MATTERS**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of income and expenses 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.

 

15

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See note 4 to thefinancial statements in Item 1 above for a description of the Bank’s policieswith respect to the allowance for loan losses.

 

Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases, as well as operating losscarryforwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  A valuation allowance is established againstdeferred tax assets when, in the judgment of management, it is more likely thannot that such deferred tax assets will not become available.

 

The realizability ofdeferred tax assets is dependent upon various factors, including the generationof future taxable income, the existence of taxes paid and recoverable, thereversal of deferred tax liabilities, and tax planning strategies.  Based upon these and other factors,management determined that it is more likely than not that the Bank will realizethe benefits of these deferred tax assets.

 

**FINANCIAL CONDITION**

 

The Company’s assetstotaled $112.4 million at September 30, 2003, as compared to $98.3million at December 31, 2002, an increase of $14.1 million or 14.3%. Thisincrease was caused principally by an increase in the Bank’s deposits of $15.4million offset by a $1.5 million reduction in short-term borrowings.  The Bank’s assets at September 30,2003, consisted primarily of cash and cash equivalents, including federal fundssold, which totaled $10.6 million, investment securities, which totaled $36.4million and loans, including loans available for sale, which totaled $64.2million.  The Bank’s premises andequipment totaled $960,000 at September 30, 2003, consisting primarily ofleasehold improvements at the Collingswood branch and land and improvements forthe Westville branch.  The Bank’s assetsat December 31, 2002 consisted primarily of cash and cash equivalents,including federal funds sold, which totaled $12.2 million, investment securitieswhich totaled $31.2 million, and loans which totaled $54.3 million.

 

During the first ninemonths of 2003, the Bank continued to concentrate its efforts in building itsloan portfolio.  During the period,total loans, including loans available for sale, increased by $9.8 million, or 18.3%.

 

16

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Deposits totaled $98.3million at September 30, 2003, as compared to $82.9 million atDecember 31, 2002, an increase of $15.4 million or 18.6%.  This is attributable to the opening of theBank’s new Westville branch in January 2003 and increased municipaldeposits.  Non-interest bearing demanddeposits totaled $23.1 million and interest-bearing demand deposits totaled$34.4 million at September 30, 2003, as compared to $16.6 million and$29.8 million, respectively, at December 31, 2002.  This increase in demand deposits was theresult of the growth mentioned above. Savings deposits totaled $19.8 million and certificates of deposittotaled $21.1 million at September 30, 2003, as compared to $19.7 and$16.9 million, respectively, at December 31, 2002.

 

**RESULTS OF OPERATIONS**

 

Three Months EndedSeptember 30, 2003 Compared to Three Months Ended September 30, 2002.  Net income for the three months endedSeptember 30, 2003 was $136,000 as compared to $123,000 for the threemonths ended September 30, 2002. This increase was largely due to a $157,000 increase in net interest andnon-interest income discussed below, partially offset by increases innon-interest expenses.

 

Interest income increasedby $132,000 to $1.2 million, primarily due to a $30.5 million increase inaverage earning assets, including the growth in the Bank’s loan portfoliodiscussed above.  Interest and fees onloans for the quarter increased by $73,000 for the three months endedSeptember 30, 2003, due to an increase in average loans and loansavailable for sale outstanding of $11.5 million or 22.5% from the priorperiod.  Interest on federal funds solddecreased by $23,000 due to a decrease of $2.1 million in average balances anda decrease in the average yield. Interest and dividends on investments increased by $82,000 for theperiod due to an increase of $21.2 million in average outstandingbalances.  The increase was moderated byan overall decline in market interest rates.

 

Total interest expensedecreased $25,000 from the prior period due principally to lower rates paid ondeposit accounts.  The Bank’s netinterest margin was 3.39% for the quarter ended September 30, 2003 ascompared to 3.93% during the quarter ended September 30, 2002.

 

The growth in the loanportfolio from the quarter ended September 30, 2003 was slightly higherthan the growth in the quarter ended September 30, 2002.  As a result, the provision for loan lossesincreased to $60,000 for the three months ended September 30, 2003compared to $55,000 for the prior period.

 

Non-interest income,primarily service charges on deposit accounts, other fees and fees from thesale of mortgages and investments held for sale, increased $27,000 to $91,000for the quarter ended September 30, 2003 principally due to increases inservice charges on deposit accounts of $16,000, an increase of $28,000 in feesfrom the sale of mortgages held for sale offset by a $23,000 decrease in gainson sale of investments.

 

17

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Non-interest expenseincreased to $709,000 for the three months ended September 30, 2003compared to $555,000 for the prior period. Most of this increase related to growth-related increases in salary andbenefits, occupancy and equipment expense, data processing costs and postageand courier fees.  Approximately $53,000of the Bank’s third quarter 2003 expenses were related to the new Westvilleoffice.

 

The Bank recorded incometax expense for the three months ended September 30, 2003 of $92,000compared to $80,000 in the prior period. The increase in income tax expense is due to higher pre-tax book incomefor the three-months ended September 30, 2003 versus the prior period.  The effective rate for the three-monthsended September 30, 2003 and 2002 was 40.4% and 39.4%, respectively.

 

Nine Months EndedSeptember 30, 2003 Compared to Nine Months Ended September 30, 2002.  Net income for the nine months endedSeptember 30, 2003 was $361,000 as compared to $375,000 for the ninemonths ended September 30, 2002. This decrease was largely due to a $584,000 increase in non-interestexpenses described below, which was only partially offset by increases in netinterest income and other income.

 

Interest income increasedby $544,000 to $3.5 million, primarily due to a $28.2 million increase inaverage earning assets.  Interest andfees on loans increased by $424,000 for the nine months endedSeptember 30, 2003, due to an increase in average loans and loansavailable for sale outstanding of $12.9 million or 28.2% from the priorperiod.  Interest on federal funds solddecreased by $61,000 due to a decrease of $2.1 million in average balances andlower yields caused by market rate declines.  Interest and dividends on investments increased by $181,000 for theperiod due to an increase of $17.4 million in average outstandingbalances.  The increase was moderated byan overall decline in market interest rates.

 

Total interest expenseincreased $131,000 from the prior period, due principally to a $24.0 millionincrease in average interest bearing liabilities.  The increase in interest expense was ameliorated by the lowerrates paid on deposit accounts.  TheBank’s net interest margin was 3.52% for the nine months endedSeptember 30, 2003 as compared to 4.15% during the nine months endedSeptember 30, 2002.

 

The growth in the loanportfolio from the nine months ended September 30, 2003 was slower thanthe growth for the nine months ended September 30, 2002.  As a result, the provision for loan lossesdecreased to $180,000 for the nine months ended September 30, 2003compared to $230,000 for the prior period.

 

Non-interest income,primarily service charges on deposit accounts, other fees and fees on sale ofmortgages and investments held for sale, increased $102,000 to $234,000 for thenine months ended September 30, 2003, principally due to increases inservice charges on deposit accounts of $51,000, an increase of $55,000 in feesearned on sale of mortgages, an increase of $20,000 in other fees offset by adecrease of $24,000 in its gain on sale of investments.

 

18

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Non-interest expenseincreased to $2.0 million for the nine months ended September 30, 2003compared to $1.5 million for the prior period. Most of this increase related to growth-related increases in salary andbenefits, occupancy and equipment expense, data processing costs and postageand courier fees.  Approximately$176,000 of this increase in expenses was related to the new Westville office.

 

The Bank recorded incometax expense for the nine months ended September 30, 2003 of $244,000compared to $249,000 in the prior period. The decrease in income tax expense is due to lower pre-tax book incomefor the nine months ended September 30, 2003 versus the prior period.  The effective rate for the nine months endedSeptember 30, 2003 and 2002 was 40.3% and 39.9%, respectively.

 

19

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**OTHERCOMPREHENSIVE INCOME**

 

The Bank records allinvestments in accordance to SFAS No.115. All investments held as available for sale are carried at market valuewith the tax effected gains or losses recorded in the equity section ofthe balance sheet as “Accumulated other comprehensive income(loss), net.”  Most of the Bank’s available for salesecurities are fixed rate investments. As the level of interest rates has increased in the third quarter 2003,the market value of the portfolio has declined.  Accordingly, the decline in market value has been recorded as anafter tax other comprehensive loss of $172,000 and $162,000 for the threemonths and nine months ended September 30, 2003, respectively.  This resulted in a comprehensive loss of$36,000 and comprehensive income of $199,000 for these respective periods.

 

**LIQUIDITY**

 

Liquidity represents theability to meet present and future financial obligations through either thesale or maturity of existing assets or the acquisition of additional fundsthrough deposits and borrowings.  Liquidassets include cash, federal funds sold, securities classified as available forsale, and loans maturing within one year. As a result of the Bank’s management of liquid assets, and the abilityto generate liquidity through deposits and short-term customer repos,management believes that the Bank maintains overall liquidity sufficient tosatisfy its deposit requirements and meet its customers’ credit needs.  In addition, the Bank maintains a $1.8million secured line of credit and a $4.0 million unsecured line of credit withcertain commercial banks.  As ofSeptember 30, 2003, there were no outstanding balances on these lines ofcredit.

 

At September 30,2003, cash, securities classified as available for sale, and federal funds soldwere 36.8% of total assets.  Assetliquidity is also provided by managing loans and the maturity of investmentsecurities.  To the extent possible,loans are funded with deposits or other funding with coinciding maturity orrepricing dates.

 

Net cash provided byoperating activities for the nine months ended September 30, 2003 was$136,000 as compared to $52,000 in the prior period.  The change relates primarily to the higher levels of premiumamortization on securities available for sale. Net cash used in investing activities was $15.5 million compared to$14.2 million in the prior period.  Thenet change was due to proceeds from maturing and called investments beingreinvested in securities and being used to fund loan growth.  Funds provided by financing activities were$13.8 million for the period ended September 30, 2003 compared to fundsused by financing activities of $561,000 for the prior period.  The primary reason was an anticipateddecline in 2002 in deposit balances that had built up during the quarter endedDecember 31, 2001 compared to growth in deposits in the currentperiod.  The deposit growth was somewhatoffset by a decline in short-term borrowings.

 

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**CAPITAL RESOURCES**

 

The assessment of capitaladequacy depends on a number of factors such as asset quality, liquidity,earnings performance, changing competitive conditions, economic forces andgrowth and expansion activities.  TheBank seeks to maintain a capital base to support its growth and expansionactivities, to provide stability to current operations and to promote publicconfidence.

 

The Bank’s capitalposition exceeds regulatory minimums. The primary indicators relied on by the Office of the Comptroller of theCurrency and other bank regulators in measuring strength of capital positionare the Tier 1 Risk-Based Capital Ratio, Total Risk-Based Capital Ratioand Leverage Ratio.  Tier 1 Capitalconsists of common and qualifying 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 calculatedwith reference to risk weighted assets, which consist of both on and offbalance sheet risks (such as letters of credit and unused lines of credit).

 

The Bank manages capitalratios to exceed regulatory minimums. The Bank’s Tier 1 Risk-Based Capital Ratio was 13.9% atSeptember 30, 2003.  The Bank’sTotal Risk-Based Capital Ratio was 15.0% at September 30, 2003.  These ratios are in excess of the mandatedminimum requirements of 4.00% and 8.00%, respectively.  The Leverage Ratio consists of Tier 1capital divided by quarterly average assets. At September 30, 2003, the Bank’s Leverage Ratio was 8.5%, whichexceeded the required minimum leverage ratio of 4.00%.  Management anticipates these ratios todecline as capital is leveraged in support of deposit and asset growth.  As a new bank, the Bank was required tomaintain a minimum leverage ratio of 8.0% for the first three years of operation.    As of July 1, 2003, this restrictionwas lifted.  The Bank’s requiredleverage ratio is currently 4.0%.

 

The following table showsthe Bank’s regulatory capital ratios and shareholders’ equity to total assetsas of September 30, 2003:

 
|                                       |   | **September 30,  2003** |   |
|--------------------------------------------|--------|------------------------------|--------|
|                                       |   | **Regulatory  Minimum**      |   | **Actual  Ratio** |   |
|                                       |   |                         |   |   |   |
| Tier  1 risk-based capital ratio           |   | 4.0                          | %      | 13.9 | % |
| Total  risk-based capital ratio            |   | 8.0                          | %      | 15.0 | % |
| Tier  1 leverage ratio                     |   | 4.0                          | %      | 8.5 | % |
| Shareholders’  equity to total assets |   | None                         |   | 8.4 | % |
|                                            |        |                              |        |  |  |  |  |

 

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**Item 3.    Controls and Procedures**

 

(a)        Evaluation of Disclosure Controls andProcedures.  An evaluation wasperformed, under the supervision and with the participation of 1stColonial Bancorp’s management, including the principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof 1st Colonial Bancorp’s disclosure controls and procedurespursuant to Rule 15d-15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”).  Based onthat evaluation, 1st Colonial Bancorp’s principal executive officerand principal financial officer concluded that 1st Colonial’sdisclosure controls and procedures were effective as of September 30,2003.

 

(b)        Changes in Internal Controls.  There has been no change in 1stColonial Bancorp’s internal control over financial reporting during the quarterended September 30, 2003, that has materially affected, or is reasonablylikely to materially affect, 1st Colonial Bancorp’s internal controlover financial reporting.

 

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**PART II– OTHER INFORMATION**

 

**Item 6.    Exhibits and Reports on Form8-K.**

 

(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 Quarterly Report on Form 10–QSB  for the Quarter ended June 30, 2003 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       |   | Certification of the  Chief Executive Officer of the Small Business Issuer pursuant to Rule  13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                 |

 

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| 31.2   |   | Certification of the  Chief Financial Officer of the Small Business Issuer pursuant to Rule  13a-14(a) or Rule 15d-14(a).                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
| 32.1   |   | Certification of the  Chief Executive Officer of the Small Business Issuer pursuant to 18 U.S.C.  Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|   |   |                                                                                                                                                                                       |
| 32.2   |   | Certification of the  Chief Financial Officer of the Small Business Issuer pursuant to 18 U.S.C.  Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|   |   |                                                                                                                                                                                       |
| (b)    |   | Reports on Form 8-K                                                                                                                                                                        |
|   |   |                                                                                                                                                                                       |
|   |   | A Current Report on  Form 8-Km dated August 1, 2003, was filed by 1st Colonial  Bancorp, Inc. on August 6, 2003 reporting matters under Items 7 and 12.                          |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                                                 | 1ST COLONIAL BANCORP,  INC.                                        |
|------------------------------------------------------|--------------------------------------------------------------------|
|                                                 |                                                               |
|                                                 |                                                               |
| Date:    November 13,  2003 | /s/  Gerard M. Banmiller                                           |   |
|                                                 | Gerard M. Banmiller  President and  Chief Executive Officer        |
|                                                 |                                                               |
| Date:    November 13,  2003 | /s/  Robert C. Faix                                                |   |
|                                                 | Robert C. Faix  Senior Vice President and  Chief Financial Officer |

 

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