**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 June 30, 2004.** |
|                                                    |                                                                                                 |
| **OR**                                                  |
|                                                    |                                                                                                 |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF  THE SECURITIES EXCHANGE ACT OF 1934.** |

 

**Commissionfile 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                                           |   | (Zip Code)                            |
| Executive  Offices)                                              |   |                                  |
|                                                             |   |                                  |
| **(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 August 13, 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 June 30, 2004 (Unaudited) and  December 31, 2003 |   |
|                                |                        |   |   |
|                                |                        | Consolidated  Statements of Income and Comprehensive Income (Loss) (Unaudited) - For the  Three and Six Months Ended June 30, 2004 and 2003 |   |
|                                |                        |   |   |
|                                |                        | Consolidated  Statements of Cash Flows – (Unaudited) For the Six Months Ended June 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 4.                     | Submission of Matters to Vote of Security  Holders |   |
|                                |                        |   |   |
|                                | Item 6.                     | Exhibits and Reports on Form 8-K |   |
|                                |                        |   |
|                                | Signatures                  |   |
|                                |                        |   |
|                                | CEO and CFO  Certifications |   |

 

2

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PART 1 - FINANCIALINFORMATION

1st COLONIALBANCORP, INC. AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

 

(Dollars in thousands)

 
|                                                                                                                                          |   | **June 30,  2004** |    | **December 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                                                                          |   | **(unaudited)**         |    |                        |   |
| **Assets:**                                                                                                                                   |   |                    |    |                        |   |
| Cash  and due from banks                                                                                                                      |   | $                       | 2,801   |                        | $      | 6,281 |   |
| Federal  funds sold                                                                                                                           |   | 3,635                   |    | 9,735                       |   |
| Interest  bearing deposits                                                                                                                    |   | —                  |    | 500                         |   |
| Investments  held to maturity                                                                                                                 |   | 7,873                   |    | 5,808                       |   |
| Securities  available for sale (amortized cost of $35,113 at June 30, 2004 and  $28,107 at December 31, 2003)                       |   | 34,541                  |    | 27,985                      |   |
| Mortgages  loans available for sale                                                                                                           |   | 552                     |    | 281                         |   |
| Loans                                                                                                                                         |   | 73,985                  |    | 66,550                      |   |
| Less:  Allowance for loan losses                                                                                                              |   | (892                    | )       | (768                        | )      |
| Net  loans                                                                                                                                    |   | 73,093                  |    | 65,782                      |   |
| Bank  premises and equipment, net                                                                                                             |   | 995                     |    | 935                         |   |
| Accrued  interest receivable                                                                                                                  |   | 394                     |    | 373                         |   |
| Deferred  tax assets                                                                                                                          |   | 491                     |    | 301                         |   |
| Other  assets                                                                                                                                 |   | 179                     |    | 91                          |   |
| Total  Assets                                                                                                                                 |   | $                       | 124,554 |                        | $      | 118,072 |   |
| **Liabilities:**                                                                                                                              |   |                    |    |                        |   |
| Demand  deposits                                                                                                                              |   | $                       | 54,478  |                        | $      | 57,717 |   |
| Savings  deposits                                                                                                                             |   | 21,140                  |    | 20,374                      |   |
| Other  time deposits                                                                                                                          |   | 27,532                  |    | 26,232                      |   |
| Total  deposits                                                                                                                               |   | 103,150                 |    | 104,323                     |   |
|                                                                                                                                          |   |                    |    |                        |   |
| Short-term  borrowings                                                                                                                        |   | 4,525                   |    | 4,087                       |   |
| Accrued  interest payable                                                                                                                     |   | 7                       |    | 8                           |   |
| Taxes  payable                                                                                                                                |   | 3                       |    | 48                          |   |
| Other  liabilities                                                                                                                            |   | 74                      |    | 55                          |   |
| Total  liabilities                                                                                                                            |   | $                       | 107,759 |                        | $      | 108,521 |   |
| **Shareholders’  equity:**                                                                                                               |   |                    |    |                        |   |
| Common  stock (no par value)                                                                                                                  |   |                    |    |                        |   |
| Authorized:  5,000,000 shares, issued and outstanding: 2,251,142 shares at June 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                                                                                                                   |   | 17,015                  |    | 9,238                       |   |
| Retained  earnings                                                                                                                            |   | 124                     |    | 386                         |   |
| Accumulated  other comprehensive income, net                                                                                                  |   | (344                    | )       | (73                         | )      |
| Total  shareholders’ equity                                                                                                              |   | 16,795                  |    | 9,551                       |   |
| Total  liabilities & shareholders’ equity                                                                                            |   | $                       | 124,554 |                        | $      | 118,072 |   |

 

The accompanying notesare an integral part of these statements.

 

3

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1st COLONIALBANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF INCOMEAND COMPREHENSIVE INCOME(LOSS) (UNAUDITED)

FOR THE THREE ANDSIX MONTHS ENDED JUNE 30, 2004 AND 2003

 

(Dollars in thousands,except per share data)

 
|                                                 |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                 |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Interest  income:                                    |   |                                   |   |                                 |   |   |   |   |   |
| Interest  and fees on loans                          |   | 1,032                                  |   | $                                    | 921    |   | $ | 2,028 |   | $ | 1,820 |   |
| Interest  on federal funds sold                      |   | 21                                     |   | 32                                   |   | 42 |   | 45 |   |
| Interest  and dividends on investments:              |   |                                   |   |                                 |   |   |   |   |   |
| Taxable                                              |   | 195                                    |   | 207                                  |   | 391 |   | 452 |   |
| Nontaxable                                           |   | 21                                     |   | 10                                   |   | 38 |   | 15 |   |
| Total  interest income                               |   | 1,269                                  |   | 1,170                                |   | 2,499 |   | 2,332 |   |
|                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Interest  expense:                                   |   |                                   |   |                                 |   |   |   |   |   |
| Interest  on demand deposits                         |   | 127                                    |   | 133                                  |   | 266 |   | 253 |   |
| Interest  on savings deposits                        |   | 19                                     |   | 38                                   |   | 38 |   | 81 |   |
| Interest  on time deposits                           |   | 166                                    |   | 142                                  |   | 322 |   | 282 |   |
| Interest  on short-term borrowings                   |   | 4                                      |   | 12                                   |   | 9 |   | 24 |   |
| Total  interest expense                              |   | 316                                    |   | 325                                  |   | 635 |   | 640 |   |
| Net  interest income                                 |   | 953                                    |   | 845                                  |   | 1,864 |   | 1,692 |   |
| Provision  for loan losses                           |   | 68                                     |   | 60                                   |   | 125 |   | 120 |   |
| Net  interest income after provision for loan losses |   | 885                                    |   | 785                                  |   | 1,739 |   | 1,572 |   |
|                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Other  income:                                       |   |                                   |   |                                 |   |   |   |   |   |
| Service  charges on deposit accounts                 |   | 36                                     |   | 35                                   |   | 72 |   | 68 |   |
| Gain  on sale of mortgage loans                      |   | 24                                     |   | 30                                   |   | 33 |   | 50 |   |
| Other  income, service charges and fees              |   | 22                                     |   | 17                                   |   | 36 |   | 25 |   |
| Total  other income                                  |   | 82                                     |   | 82                                   |   | 141 |   | 143 |   |
|                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Other  expenses:                                     |   |                                   |   |                                 |   |   |   |   |   |
| Salaries,  wages and employee benefits               |   | 319                                    |   | 291                                  |   | 632 |   | 570 |   |
| Occupancy  and equipment expenses                    |   | 95                                     |   | 78                                   |   | 187 |   | 160 |   |
| Advertising  expense                                 |   | 26                                     |   | 44                                   |   | 37 |   | 78 |   |
| Data  processing expense                             |   | 83                                     |   | 69                                   |   | 158 |   | 131 |   |
| Professional  Fees                                   |   | 60                                     |   | 49                                   |   | 128 |   | 114 |   |
| Other  Operating Expenses                            |   | 181                                    |   | 150                                  |   | 352 |   | 285 |   |
| Total  other expenses                                |   | 764                                    |   | 681                                  |   | 1,494 |   | 1,338 |   |
|                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Income  before income taxes                          |   | 203                                    |   | 186                                  |   | 386 |   | 377 |   |
| Income  tax expense                                  |   | 80                                     |   | 75                                   |   | 153 |   | 152 |   |
| Net  income                                          |   | $                                      | 123    |                                 | $      | 111 |   | $ | 233 |   | $ | 225 |   |
| Other  comprehensive income(loss)                    |   | (397                                   | )      | 53                                   |   | (271 | ) | 14 |   |
| Total  comprehensive income(loss)                    |   | $                                      | (274   | )                                    | $      | 164 |   | $ | (38 | ) | $ | 239 |   |
|                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Net  income per share information:                   |   |                                   |   |                                 |   |   |   |   |   |
| Basic  earnings per share                            |   | $                                      | 0.06   |                                 | $      | 0.08 |   | $ | 0.14 |   | $ | 0.16 |   |
| Diluted  earnings per share                          |   | $                                      | 0.06   |                                 | $      | 0.08 |   | $ | 0.13 |   | $ | 0.16 |   |

 

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  Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                          |   | **2004**                                     |   | **2003** |   |
| Net  income                                                                                                   |   | $                                            | 233    |   | $ | 225 |   |
| Adjustments  to reconcile net income to net cash provided/(used) by operating activities:                     |   |                                         |   |   |   |
| Depreciation                                                                                                  |   | 69                                           |   | 52 |   |
| Amortization  of premium (discount) on securities, net                                                        |   | 77                                           |   | 90 |   |
| Amortization  of deferred loan fees/cost, net                                                                 |   | 12                                           |   | 23 |   |
| Deferred  taxes                                                                                               |   | (9                                           | )      | (2 | ) |
| Gains  on sale of mortgage loans available for sale                                                           |   | (33                                          | )      | (50 | ) |
| Loss  on retirement of fixed assets                                                                           |   | 2                                            |   | — |   |
| Provision  for loan losses                                                                                    |   | 125                                          |   | 120 |   |
| Cash  disbursed for mortgage banking activities                                                               |   | (7,259                                       | )      | (11,327 | ) |
| Cash  received for mortgage banking activities                                                                |   | 7,021                                        |   | 10,477 |   |
| Increase  in accrued interest receivable                                                                      |   | (21                                          | )      | (10 | ) |
| Increase  in other assets                                                                                     |   | (88                                          | )      | (88 | ) |
| (Decrease)  increase in accrued interest payable                                                              |   | (1                                           | )      | 2 |   |
| Decrease  in income taxes payable                                                                             |   | (45                                          | )      | (23 | ) |
| Increase  in other liabilities                                                                                |   | 19                                           |   | 25 |   |
| Total  Adjustments                                                                                            |   | (131                                         | )      | (711 | ) |
| Net  cash provided/(used) by operating activities                                                             |   | 102                                          |   | (486 | ) |
|                                                                                                          |   |                                         |   |   |   |
| Cash  flows used in investing activities:                                                                     |   |                                         |   |   |   |
| Proceeds  from maturity and sale of securities available-for-sale                                             |   | 7,200                                        |   | 21,801 |   |
| Proceeds  from maturity of securities held to maturity                                                        |   | 3,924                                        |   | 95 |   |
| Purchases  of securities available-for-sale                                                                   |   | (16,021                                      | )      | (21,259 | ) |
| Purchases  of securities held to maturity                                                                     |   | (5,989                                       | )      | (3,966 | ) |
| Repayment  of principal of securities available-for-sale                                                      |   | 1,737                                        |   | 2,288 |   |
| Increase  in loans receivable, net                                                                            |   | (7,448                                       | )      | (4,304 | ) |
| Capital  expenditures                                                                                         |   | (131                                         | )      | (250 | ) |
| Net  cash used in investing activities                                                                        |   | (16,728                                      | )      | (5,595 | ) |
|                                                                                                          |   |                                         |   |   |   |
| Cash  flows from financing activities:                                                                        |   |                                         |   |   |   |
| Net  (decrease) increase in deposits                                                                          |   | (1,173                                       | )      | 12,529 |   |
| Net  increase (decrease) in short-term borrowings                                                             |   | 438                                          |   | (2,960 | ) |
| Exercise of  warrants                                                                                         |   | 74                                           |   | 2 |   |
| Net  proceeds from sale of common stock                                                                       |   | 7,207                                        |   | (9 | ) |
|                                                                                                          |   |                                         |   |   |   |
| Net  cash provided by financing activities                                                                    |   | 6,546                                        |   | 9,562 |   |
| Net  (decrease) increase in cash and cash equivalents                                                         |   | (10,080                                      | )      | 3,481 |   |
| Cash  and cash equivalents as of beginning of period                                                          |   | 16,516                                       |   | 12,161 |   |
| Cash  and cash equivalents as of June 30,                                                                |   | $                                            | 6,436  |   | $ | 15,642 |   |
|                                                                                                          |   |                                         |   |   |   |
| Supplemental  disclosure of cash flow information:                                                            |   |                                         |   |   |   |
| Cash  paid during the period for:                                                                             |   |                                         |   |   |   |
| Interest                                                                                                      |   | $                                            | 635    |   | $ | 638 |   |
| Income  taxes                                                                                                 |   | 206                                          |   | 213 |   |
| Noncash  items:                                                                                               |   |                                         |   |   |   |
| Change  in unrealized gains for securities available-for-sale, net of taxes of $179  for 2004 and $9 for 2003 |   | 271                                          |   | 14 |   |
| Transferred  from retained earnings to additional Paid in capital as a result of the 5%  stock dividend       |   | 496                                          |   | 280 |   |

 

The accompanying notes are an integral part of thesestatements.

 

5

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NOTES TO FINANCIAL STATEMENTS

 

**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 1st ColonialNational Bank (“Interim”), a wholly-owned subsidiary of the Company.  The acquisition was part of thereorganization of the Bank from a stand-alone national bank to a bank holdingcompany structure.

 

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 reorganizationwas accounted for in a manner similar to a pooling of interests.  The Bank’s business and operations wereunchanged by the reorganization and merger.

 

**Note 2.  Summary ofSignificant 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 June 30, 2004 andDecember 31, 2003 and the consolidated results of operations for the threeand six month periods ended June 30, 2004 and 2003.  The accounting policies and reportingpractices of the Company are in accordance with U.S. generally acceptedaccounting principles and have been followed on a consistent basis.

 

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 U.S. generally acceptedaccounting principles.

 

The results of operationsfor the three and six months ended June 30, 2004 are not necessarilyindicative of the results to be expected for the full year.

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofincome and expenses during the reporting period. Actual results could differfrom those estimates.  Materialestimates that are particularly susceptible to significant change in thenear-term relate to the determination of the allowance for loan losses and thevaluation of the deferred tax assets.

 

**Note 3.  Earnings PerShare**

 

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, 2004.  Options and warrants to purchase 502,159 and456,889 shares of common stock were outstanding at June 30, 2004 and 2003,respectively, and to the extent dilutive, were included in the computation ofearnings per diluted common share.

 

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

 

6

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(Dollars are inthousands, except per share data)

 
|                                                                                       |   | **Three  months  ended  June 30,** |   | **Six months  ended  June 30,** |       |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|------------|
|                                                                                       |   | **2004**                                |   | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                                                                 |   |                                    |   |                                 |       |   |   |   |   |
| Net  Income                                                                                |   | $                                       | 123    |                                 | $          | 111 |   | $ | 233 |   | $ | 225 |   |
|                                                                                       |   |                                    |   |                                 |       |   |   |   |   |
| Denominator  for basic earnings per share-weighted average shares                          |   | 2,022                                   |   | 1,411                                |       | 1,720 |   | 1,411 |   |
| Effect  of dilutive securities(1):                                                         |   |                                    |   |                                 |       |   |   |   |   |
| Director  and employee stock options                                                       |   | 14                                      |   | 22                                   |       | 16 |   | 14 |   |
| Warrants                                                                                   |   | 37                                      |   | —                               |       | 50 |   | — |   |
|                                                                                       |   |                                    |   |                                 |       |   |   |   |   |
| Denominator  for diluted earnings per share- weighted average shares and assumed exercised |   | 2,073                                   |   | 1,433                                |       | 1,786 |   | 1,425 |   |
|                                                                                       |   |                                    |   |                                 |       |   |   |   |   |
| Basic  earnings per share                                                                  |   | $                                       | 0.06   |                                 | $          | 0.08 |   | $ | 0.14 |   | $ | 0.16 |   |
| Diluted  earnings per share                                                                |   | $                                       | 0.06   |                                 | $          | 0.08 |   | $ | 0.13 |   | $ | 0.16 |   |

 

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(1)                For the three andsix months ended June 30, 2004, 48,300 options are anti-dilutive and arenot included in the above calculations.

 

For the three and sixmonths ended June 30, 2003, 97,023 warrants and 11,028 options areanti-dilutive and are not included in the above calculations.

 

Warrants were issued tothe Bank’s underwriter in connection with its initial public offering of commonstock in June 2000.  Total warrantsoutstanding at June 30, 2004 entitled the holders to purchase 97,024 sharesof 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 options to the Bank’s employees entitling them topurchase a total of 17,224 shares of Bank common stock.  Eighty percent of these options have vestedand are exercisable, and the remainder will vest and become exercisable onJune 29, 2005.  These options areexercisable at $6.60 per share for a period of ten years after the grant date.  At June 30, 2004, all of these optionswere still outstanding.

 

On June 29, 2000,the Bank also issued stock options to the Bank’s directors entitling them topurchase a total of 5,230 shares of Bank common stock.  These options are fully vested andexercisable at $6.60 per share for a period of ten years after the date of thegrant.   Of these options,. atJune 30, 2004, options to purchase 4,619 shares were still outstanding.

 

In April 2001,options to purchase a total of 7,277 shares of Bank common stock were grantedto the Bank’s directors at an exercise price of $8.25 per share.  These options are fully vested and expireten years from the date of the grant. Of these options, at June 30, 2004,options to purchase 6,384 shares were still outstanding.

 

7

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In June 2001,options to purchase a total of 4,315 shares of Bank common stock were grantedto certain Bank employees at an exercise price of $8.25 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 June 30, 2004, all of these optionswere still outstanding.

 

On February 20,2002, options to purchase a total of 11,030 shares of Bank common stock weregranted to certain Bank employees at an exercise price of $9.30 per share, ofwhich 20% become vested on each anniversary of the grant date.  These options expire ten years from the dateof the grant.  At June 30, 2004,10,753 of these options were still outstanding.

 

On June 12, 2002,options to purchase a total of 8,895 shares of Bank common stock were grantedto the Bank’s directors at an exercise price of $8.69 per share.  These options are fully vested and expireten years from the date of the grant. At June 30, 2004, all of these options were still outstanding.

 

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

 

Warrants were issued topurchasers of the Company’s common stock in an offering that closed onDecember 16, 2002.  Warrants wereissued for 280,475 shares of the Company’s common stock at a price of $8.71 pershare.  These warrants are immediatelyexercisable and expire three years from issue date.  At June 30, 2004, 268,458 of these warrants were stilloutstanding.

 

On January 15, 2003,options to purchase a total of 11,028 shares of Company common stock weregranted to certain Bank employees at an exercise price of $7.82 per share, ofwhich 20% become vested on each anniversary of the grant date.  These options expire ten years from the dateof the grant.  At June 30, 2004,all of 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 expireten years from the date of the grant. At June 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 expireten years from the date of the grant. At June 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 June 30, 2004, all ofthese options were still outstanding.

 

8

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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 the grant.  At June 30, 2004, all of these optionswere 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 eleven months from the date ofthe rand and expire ten years from the date of the grant.  At June 30, 2004, all of these optionswere outstanding.

 

**Note 4.  Allowance forLoan Losses**

 

 The Bank determines the provision for loanlosses through 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 individually.  While management believes the allowance for loanlosses is currently appropriate, future additions to the allowance may benecessary based on changes in general economic conditions and/or the conditionof specific borrowers.  The allowance isreviewed quarterly by the Board of Directors and senior management of theBank.  In addition, various regulatoryagencies, as an integral part of their examination process, periodically reviewthe allowance 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 managementreview, an external service provides a detailed loan review analysis.  In the course of a year, all loans in excessof $100,000 are reviewed and rated.  Inaddition, other smaller loans are reviewed on a random basis.  At each quarterly review cycle, allclassified loans are assigned a specific reserve allocation based on theguidelines established in the Bank’s credit policy which was approved by theBoard of Directors.  These could rangefrom 2.5%-10% on special mention loans; 10%-25% on substandard loans; 50%-75%on loans rated doubtful and 100% on any loan rated loss.

 

The balance of any ratedloan is deducted from the remaining 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 limited loss experience, weuse the loss experience of peer banks as reported in the Uniform BankPerformance Report); (ii) policies and procedures; (iii) economicconditions; (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.

 

9

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**Note 5.  Litigation**

 

We are periodicallyparties to or otherwise involved in legal proceedings arising in the normalcourse of business, such as claims to enforce liens, claims involving themaking and servicing of real property loans, and other issues incident to ourbusiness.  We do not believe that thereis any pending or threatened proceeding against us which, if determinedadversely, would have a material effect on our business or financial position.

 

**Note 6.  Stock Options**

 

At June 30, 2004, theCompany has two stock-based compensation plans, which are described more fullyin note 3.  The Company accounts forthose plans under 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 the dateof grant.  The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provision of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
|                         |   | **Three  Months Ended** |   |
|------------------------------|--------|-------------------------|--------|
|                         |   | **June 30,  2004** |   | **June 30,  2003** |   |
|                         |   | **As  reported**        |   | **Compensation  expense** | ** ** | **Pro forma** | ** ** | **As  reported** | ** ** | **Compensation  expense** | ** ** | **Pro forma** | ** ** |
|                         |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  income                  |   | $                       | 123    |   | 87 |   | 36 |   | 111 |   | 29 |   | 82 |   |
| Basic  earnings per share    |   | 0.06                    |   | 0.04 |   | 0.02 |   | 0.08 |   | 0.02 |   | 0.06 |   |
| Dilutive  earnings per share |   | 0.06                    |   | 0.04 |   | 0.02 |   | 0.08 |   | 0.02 |   | 0.06 |   |

 
|                         |   | **Six Months  Ended**   |   |
|------------------------------|--------|-------------------------|--------|
|                         |   | **June 30,  2004** |   | **June 30,  2003** |   |
|                         |   | **As  reported**        |   | **Compensation  expense** |   | **Pro forma** |   | **As  reported** |   | **Compensation  expense** |   | **Pro forma** |   |
|                         |   |                    |   |   |   |   |   |   |   |   |   |   |   |
| Net  income                  |   | $                       | 233    |   | 155 |   | 78 |   | 225 |   | 52 |   | 173 |   |
| Basic  earnings per share    |   | 0.14                    |   | 0.09 |   | 0.05 |   | 0.16 |   | 0.04 |   | 0.12 |   |
| Dilutive  earnings per share |   | 0.13                    |   | 0.09 |   | 0.04 |   | 0.16 |   | 0.04 |   | 0.12 |   |
|                              |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |

 

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**Note 7.****          Common Stock Offering**

 

On April 26, 2004,the Company completed its offering of common stock.  In the offering, the Company sold, through Ryan Beck & Co.,Inc. as underwriter, 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.  RecentAccounting Pronouncements**

 

In December 2003,the American Institute of Certified Public Accountants Accounting StandardsExecutive Committee (AcSEC) issued Statement of Position (SOP) 03-3, Accountingfor Certain Loans or Debt Securities Acquired in a Transfer.  SOP 03-3 is effective for loans acquired infiscal years beginning after December 15,2004, with early adoptionencouraged.  A certain transitionprovision applies for certain aspects of loans currently with the scope ofPractice Bulletin 6, Amortization of Discounts on Certain Acquired Loans.  SOP 03-3 addresses accounting fordifferences between contractual cash flows and cash flows expected to becollected from an investor’s initial investment in loans or debt securities(loans) acquired in a transfer if those differences are attributable, at leastin part, to credit quality.  It includesloans acquired in business combinations and applies to all nongovernmentalentities, including not-for-profit organizations.  SOP 03-3 does not apply to loans originated by the entity.  The Company will adopt this statement forany pools of loans purchased after December 31, 2004.

 

**Note9.  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 balancesheet, such items, along with net income, are components of comprehensiveincome. The components of other comprehensive income (loss) and related taxeffects were as follows.

 

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|                                                                |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                |   | **(In  thousands)**                    |   |
|                                                                |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Unrealized  holding gains (losses) on available for sale securities |   | (662                                   | )      | 88                                   |   | (450 | ) | 23 |   |
| Reclassification  adjustment for gains realized in income           |   |                                   |   |                                 |   |   |   |   |   |
| Net  unrealized gain (losses)                                       |   | (662                                   | )      | 88                                   |   | (450 | ) | 23 |   |
| Income  tax effect                                                  |   | 265                                    |   | (35                                  | )      | 179 |   | (9 | ) |
| Other  comprehensive income (loss)                                  |   | (397                                   | )      | 53                                   |   | (271 | ) | 14 |   |

 

12

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

 

**GENERAL**

 

The following presentsmanagement’s discussion and analysis of our financial condition and results of operationsand should be read in conjunction with the financial statements and relatednotes included in the Company’s Form 10-KSB filed with the Securities andExchange commission on March 23, 2004. This Form 10-QSB contains forward-looking statements.* *You can find many of thesestatements 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-lookingstatements, implicitly and explicitly, include the assumptions underlying thestatements and other information with respect to our beliefs, plans,objectives, goals, expectations, anticipations, estimates, intentions,financial condition, results of operations, future performance and business,including our:

 

•                  plansfor the use of the net proceeds of our underwritten public offering of828,000 shares of common stock, which was completed on April 26,2004;

 

•                  expectationsfor continued acceptance and success in the banking and business communities inour market area;

 

•                  expectationsas to the amount, mix, yield and other characteristics of the deposits andloans we expect to acquire and make; and

 

•                  expectationsand estimates with respect to our revenues, expenses, earnings, return onequity, return on assets, efficiency ratio, asset quality and other financialdata and capital and performance ratios.

 

Although we believe thatthe expectations reflected in our forward-looking statements are reasonable,these statements involve risks and uncertainties that are subject to changebased on various important factors (some of which are beyond our control).  The following factors, among others, couldcause our financial performance to differ materially from our goals, plans,objectives, intentions, expectations, and other forward-looking statements:

 

•                  thestrength of the United States economy in general and the strength of theregional and local economies in which we conduct operations;

 

•                  theeffects of, and changes in, trade, monetary and fiscal policies and laws,including interest rate policies of the Board of Governors of the FederalReserve System;

 

•                  inflation,interest rate, market and monetary fluctuations;

 

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•                  ourability to raise the capital necessary on a timely basis to support ourcontinued asset growth and geographic expansion;

 

•                  ourability to maintain and continue to obtain the desired customers and employees;

 

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

 

•                  thewillingness of prospective customers to substitute our products and servicesfor the bank products and services they currently use, and the impact ofcompetition from banks, thrifts and others in our market;

 

•                  changesin the timing and structure of our growth and related transactions and otherchanged facts and circumstances resulting from the passage of time;

 

•                  theimpact of changes in financial services policies, laws and regulations,including laws, regulations and policies concerning taxes, banking, securitiesand insurance, and the application thereof by regulatory bodies;

 

•                  technologicalchanges;

 

•                  changein consumer spending and savings habits; and

 

•                  regulatoryor judicial proceedings.

 

If one or more of thefactors affecting our forward-looking information and statements provesincorrect, then our actual results, performance or achievements could differmaterially from those expressed in, or implied by, forward-looking informationand statements contained 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 updateour forward-looking information and statements, whether written or oral, toreflect change.  All forward-lookingstatements attributable to us are expressly qualified by these cautionarystatements.

 

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**Overview**

** **

Effective June 30,2002, the Bank became a wholly owned subsidiary of the Company, which has nomaterial operations other than ownership of the Bank.  Therefore, the financial statements of the Company prior toJune 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 onApril 15, 2003 to shareholders of record as of April 1, 2003 and the5% stock dividend paid on April 15, 2004 to shareholders of record as ofApril 1, 2004.

 

The Bank conductscommunity banking activities by accepting deposits from the public andinvesting the proceeds in loans and investment securities.  The Bank’s lending products includecommercial loans and lines of credit, consumer and home equity loans, andmulti-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.

 

Our earnings are largelydependent upon net interest income (the difference between what we earn on ourloans and investments and what we pay on deposits and borrowings).  In addition to net interest income, our netincome is impacted by our loan loss provision, other income (mostly depositfees and income from sale of loans held for sale) and other expense (such assalaries and benefits, professional fees, occupancy cost and data processingexpenses).

 

The Bank’s main office islocated at 1040 Haddon Avenue, Collingswood, New Jersey.    At June 30, 2004, the Bank had 24full-time and 4 part-time employees.

 

**CRITICAL ACCOUNTING MATTERS**

 

The preparation offinancial statements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofincome and expenses during the reporting period.  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.

 

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 assets

 

15

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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 tax assetsand liabilities of a change in tax rates is recognized in income in the periodthat includes the enactment date.  Avaluation allowance is established against deferred tax assets when, in thejudgment of management, it is more likely than not that such deferred taxassets will not become available.  Therealizability of deferred tax assets is dependent upon various factors,including the generation of future taxable income, the existence of taxes paidand recoverable, the reversal of deferred tax liabilities, and tax planningstrategies.

 

**FINANCIAL CONDITION**

 

The Company’s assetstotaled $124.6 million at June 30, 2004, as compared to $118.1million at December 31, 2003, an increase of $6.5 million or 5.5%. Thisincrease resulted from the sale of 828,000 shares of the Company’s common stockthat was completed on April 26, 2004. The Company realized net proceeds of approximately $7.2 million fromthis sale.  The increase in assetscaused by these proceeds was partially offset, however, by a $762,000 decreasein the Company’s total liabilities at June 30, 2004, fromDecember 31, 2003, due primarily to a $1.2 million decrease indeposits.  The Bank’s assets atJune 30, 2004, consisted primarily of cash and cash equivalents, includingfederal funds sold and interest bearing deposits, which totaled $6.4 million,investment securities, which totaled $42.4 million and loans, including loansavailable for sale, which totaled $73.6 million.  The Bank’s premises and equipment totaled $995,000 atJune 30, 2004, consisting primarily of leasehold improvements at theCollingswood main office and land and improvements for the Westvillebranch.  The Bank’s assets atDecember 31, 2003 consisted primarily of cash and cash equivalents,including federal funds sold and interest bearing deposits, which totaled $16.5million, investment securities which totaled $33.8 million, and loans,including loans available for sale, which totaled $66.1 million.

 

During the first sixmonths of 2004, we continued to concentrate our efforts in building our loanportfolio.  Total loans, including loansavailable for sale, increased during such period by $7.6 million, or11.5%.  Deposits totaled $103.2 millionat June 30, 2004, as compared to $104.3 million at December 31, 2003,a decrease of $1.2 million or 1.1%. Non-interest bearing demand deposits totaled $25.5 million andinterest-bearing demand deposits totaled $29.0 million at June 30, 2004,as compared to $20.4 million and $37.3 million, respectively, atDecember 31, 2003.  A $5.1 millionincrease in demand accounts was offset by a seasonal decrease of $6.0 millionin municipal deposits and a $2.8 million decrease in labor union deposits.  Other interest bearing demand depositsincreased $513,000.  Savings depositstotaled $21.1 million and certificates of deposit totaled $27.5 million atJune 30, 2004, as compared to $20.4 and $26.2 million, respectively, atDecember 31, 2003.

 

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**RESULTS OF OPERATIONS**

 

Three months endedJune 30, 2004 compared to the three months ended June 30, 2003.

 

*General.*  Net income increased10.8% to $123,000 for the three months ended June 30, 2004, as compared tonet income of $111,000 for the period ended June 30, 2003.  This increase was due to a $108,000 increasein net interest income, partially offset by a $83,000 increase in otherexpense.  Other income was unchangedfrom the prior period.  The provisionfor loan losses increased by $8,000 to $68,000 for the three months endedJune 30, 2004 compared to the comparable period in 2003.  Due to higher operating income, income taxexpense increased by $5,000.

 

Basic and dilutedearnings per share were $0.06 for the three months ended June 30, 2004compared to $0.08 for the three months ended June 30, 2003.  This decrease was due primarily to the saleof 828,000 shares that was completed on April 26, 2004.  Basic and diluted earnings per share foreach period were equal because the outstanding options and warrants during thethree months ended June 30, 2004 and 2003 had a minimal dilutive effectduring both periods.

 

*Net Interest Income*.  Interest income increased by $99,000 to$1.3 million, primarily due to an increase in interest and fees on loansof $111,000 for the three months ended June 30, 2004.  Average loans and loans available for saleoutstanding increased by $14.1 million or 24.5% from the prior period,which more than offset the decline in the average yield on the loanportfolio.  The average yield on ourloan portfolio declined from 6.44% for the three month period endedJune 30, 2003 to 5.81% for the current three month period due to thedeclining interest rate environment. Interest on federal funds sold and interest bearing deposits decreasedby $11,000 due to a decrease of $397,000 in average balances.  While the average balance of the investmentportfolio increased $6.6 million from the prior period, interest and dividendson investments decreased by $1,000 due to the overall decline in marketrates.  The average tax-equivalent yieldon investment securities declined to 2.38% in 2004 from 2.93% in 2003.

 

Total interest expensedecreased $9,000 from the prior period, due principally to an overall declinein market interest rates.  An$8.8 million increase in average interest bearing liabilities wasameliorated by the lower rates paid on deposit accounts and short-termborrowings, as the cost of interest-bearing liabilities declined from 1.71% in2003 to 1.50% in 2004.  Our net interestmargin was 3.26% for the three months ended June 30, 2004 as compared to3.47% for the prior period ended June 30, 2003, as our interest-earningassets repriced downward to a greater degree than our interest-bearingliabilities.

 

*Provision for Loan Losses*.  The provision for loan losses increased to$68,000 for three months ended June 30, 2004 compared to $60,000 for theprior period.  Factors such as changesin 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.  The allowance for loan losses was $892,000 at June 30, 2004,or 1.21% of total outstanding loans, compared to $768,000 or 1.15% of totaloutstanding loans at December 31, 2003.

 

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*Total Other Income*.  Other income, primarily service charges ondeposit accounts and gains on sale of mortgages held for sale, remained constantat $82,000 for the three months ended June 30, 2004.  Fees from deposit account holders for thethree months ended June 30, 2004 were approximately $36,000 compared to$35,000 in the prior period.  For thethree months ended June 30, 2004, we recorded fees on the sale ofresidential mortgage loans held for sale of $24,000 compared to $30,000 in theprior period.  This was primarily due todecreased refinancing activity due to higher interest rates during the currentthree month period.  In general, we sellall newly originated fixed-rate residential mortgage loans into the secondarymarket on a servicing released basis. The increase in other income, service charges and fees of $5,000 to$22,000 in 2004 from $17,000 in 2003, was primarily due to increased businessvolume.

 

*Total Other Expense*.  Total other expenses for the three monthsended June 30, 2004 increased $83,000 or 12.2% to $764,000 compared to$681,000 in the prior period.  Most ofthe increases were due to growth related factors:

 

•                  Employeerelated expenses were $319,000 for the period compared to $291,000 for thethree months ended June 30, 2003, reflecting additions to our staff aswell as normal compensation increases.

 

•                  Occupancyand equipment expenses increased $17,000 to $95,000 for the three months endedJune 30, 2004, compared to $78,000 in the prior period.  Additional equipment for new staff, normalequipment upgrades and increased maintenance costs accounted for theseincreases.

 

•                  Dueto increased business volume, data processing expenses increased 20.3% to$83,000 for the three months ended June 30, 2004 compared to $69,000 forthe prior period.

 

•                  Professionalservices, including audit, loan review, and legal expenses increased $11,000 to$60,000 during the three months ended June 30, 2004 compared to $49,000for the comparable prior period.  Thisincrease was primarily related to our growth.

 

•                  Otheroperating expenses included postage, ATM charges, telephone expenses, businessdevelopment costs and other miscellaneous expenses.  Due to growth and increased activity, other operating expensesincreased $31,000 or 20.7% to $181,000 for the three months ended June 30,2004, compared to $150,000 for the three months ended June 30, 2003.

 

The increases above werepartially offset by a decrease in advertising expenses of $18,000 for the threemonths ended June 30, 2004 to $26,000 compared to $44,000 in the priorperiod.  The prior period containedactivity relating to our Westville branch opening and other marketing campaignsdesigned to increase community awareness of our presence, products andcapabilities.

 

*Income Taxes*.  Our recorded income tax expense for thethree months ended June 30, 2004 was $80,000 compared to $75,000 in theprior period.  The increase in incometax expense

 

18

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is due to higher pre-taxincome for the three months ended June 30, 2004 as compared to the priorperiod.  The effective rates for thethree months ended June 30, 2004 and 2003 were 39.4% and 40.3%, respectively.

 

Six months endedJune 30, 2004 compared to the six months ended June 30, 2003.

 

*General.******* **Netincome increased 3.6% to $233,000 for the six months ended June 30, 2004,as compared to net income of $225,000 for the period ended June 30,2003.  This increase was due to a$172,000 increase in net interest income, partially offset by a $156,000increase in other expense.  Other incomedecreased $2,000 to $141,000 for the six months ended June 30, 2004 comparedto $143,000 in the prior period.  The provisionfor loan losses increased by $5,000 to $125,000 for the six months endedJune 30, 2004 compared to the comparable period in 2003.  Due to higher operating income, income taxexpense increased by $1,000.

 

Basic earnings per sharewere $0.14 for the six months ended June 30, 2004 compared to $0.16 forthe six months ended June 30, 2003. Diluted earnings per share declined to$0.13 for the six months ended June 30, 2004 compared to $0.16 per sharefor the prior period. These decreases were due primarily to the sale of 828,000shares of common stock that was completed on April 26, 2004.  Basic and diluted earnings per share for thesix months ended June 30, 2003 were equal because the outstanding optionsand warrants had a minimal dilutive effect on basic earnings per share.  In 2004, more options and warrants werein-the-money causing a greater dilutive effect.

 

*Net Interest Income*.  Interest income increased by $167,000 to$2.5 million, primarily due to an increase in interest and fees on loansof $208,000 for the six months ended June 30, 2004.  Average loans and loans available for saleoutstanding increased by $13.0 million or 23.0% from the prior period,which more than offset the decline in the average yield on the loanportfolio.  The average yield on ourloan portfolio declined from 6.50% for the six month period ended June 30,2003 to 5.88% for the current six month period due to the declining interestrate environment.  Interest on federalfunds sold and interest bearing deposits decreased by $3,000 for the six monthsended June 30, 2004 compared to the comparable prior period.  An increase of $1.7 million in averagebalances was more that offset by a 0.20% decline in average yield to 1.01% inthe current period.  While the averagebalance of the investment portfolio increased $4.3 million from the priorperiod, interest and dividends on investments decreased by $38,000 due to theoverall decline in market rates.  Theaverage tax-equivalent yield on investment securities declined to 2.53% in 2004from 3.11% in 2003.

 

Total interest expensedecreased $5,000 from the prior period, due principally to an overall declinein market interest rates.  A$10.7 million increase in average interest bearing liabilities wasameliorated by the lower rates paid on deposit accounts and short-termborrowings, as the cost of interest-bearing liabilities declined from 1.75% in2003 to 1.51% in 2004.  Our net interestmargin was 3.32% for the six months ended June 30, 2004 as compared to3.93% for the prior period ended June 30, 2003, as our interest-earningassets repriced downward to a greater degree than our interest-bearingliabilities.

 

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*Provision for Loan Losses*.  The provision for loan losses increased to$125,000 for six months ended June 30, 2004 compared to $120,000 for theprior period.  Factors such as changesin 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.

 

*Total Other Income*.  Other income, primarily service charges ondeposit accounts and gains on sale of mortgages held for sale, declined $2,000or 1.4% to $141,000 for the six months ended June 30, 2004 compared to thesix months ended June 30, 2003. Fees from deposit account holders for the six months ended June 30,2004 were approximately $72,000 compared to $68,000 in the prior period.  For the six months ended June 30, 2004,we recorded fees on the sale of residential mortgage loans held for sale of$33,000 compared to $50,000 in the prior period.  This was primarily due to decreased refinancing activity due tohigher 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 $11,000 in 2004 to $36,000 from $25,000 in2003, was primarily due to an increase in business volume.

 

*Total Other Expense*.  Total other expenses for the six monthsended June 30, 2004 increased $156,000 or 11.7% to $1.5 million comparedto $1.3 million in the prior period. Most of the increases were due to growth related factors:

 

•                  Employeerelated expenses were $632,000 for the period compared to $570,000 for the sixmonths ended June 30, 2003, reflecting additions to our staff as well asnormal compensation increases.

 

•                  Occupancyand equipment expenses increased $27,000 to $187,000 for the six months endedJune 30, 2004, compared to $160,000 in the prior period.  Additional equipment for new staff, normalequipment upgrades and increased maintenance costs accounted for theseincreases.

 

•                  Dueto increased business volume, data processing expenses increased 20.6% to$158,000 for the six months ended June 30, 2004 compared to $131,000 forthe prior period.

 

•                  Professionalservices, including audit, loan review, and legal expenses increased $14,000 to$128,000 during the six months ended June 30, 2004 compared to $114,000for the comparable prior period.  Thisincrease was primarily related to our growth.

 

•                  Otheroperating expenses included postage, ATM charges, telephone expenses, businessdevelopment costs and other miscellaneous expenses.  Due to growth and increased activity, other operating expensesincreased $67,000 or 23.5% to $352,000 for the six months ended June 30,2004, compared to $285,000 for the six months ended June 30, 2003.

 

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The increases above werepartially offset by a decrease in advertising expenses of $41,000 for the sixmonths ended June 30, 2004 to $37,000 compared to $78,000 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.

 

*Income Taxes*.  Our recorded income tax expense for the six months endedJune 30, 2004 was $153,000 compared to $152,000 in the prior period.  The increase in income tax expense is due tohigher pre-tax income for the six months ended June 30, 2004 as comparedto the prior period partially offset by a lower tax rate.  The effective rates for the six months endedJune 30, 2004 and 2003 were 39.6% and 40.3%, respectively.

 

**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 $2.4secured line of credit and a $4.0 million unsecured line of credit withcommercial banks.

 

At June 30, 2004,cash, securities classified as available for sale, interest bearing deposits,and federal funds sold were 32.9% of total assets.  Asset liquidity is also provided by managing loans and thematurity of investment securities.  Tothe extent possible, loans are funded with deposits or other funding withcoinciding maturity or repricing dates.

 

Net cash provided byoperating activities for the six months ended June 30, 2004 was $102,000as compared to cash used by operating activities of $486,000 in the priorperiod.  The change relates primarily toa decrease in the level of mortgage loans held for sale.  Net cash used by investing activities was$16.7 million compared to $5.6 million in the prior period.  The net change was largely due to an increasein the amount of cash being invested in securities and new loans.  Funds provided by financing activities were$6.5 million for the period ended June 30, 2004 compared to $9.6 millionfor the prior period.  The primaryreason was slower deposit growth offset by proceeds by the sale of commonstock, an increase in other borrowed funds and proceeds from warrantconversions.  Borrowed funds increasedas a result of a daily sweep from a large depository account.  All collected balances in excess of a thresholdamount are swept into an overnight repurchase agreement.

 

**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.  The Bankseeks to maintain a capital base to support its growth and expansionactivities, to provide stability to current operations and to promote publicconfidence.

 

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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 lessgoodwill.  Total Capital consists ofTier 1 Capital, and a portion of the allowance for possible loanlosses.  Risk-based capital ratios arecalculated with reference to risk weighted assets, which consist of both on andoff balance sheet risks (such as letters of credit and unused lines ofcredit).  The Leverage Ratio consists ofTier 1 capital divided by quarterly average assets.

 

The following table showsthe Bank’s regulatory capital ratios and shareholders’ equity to total assetsas of June 30, 2004:

 
|                                       |   | **Regulatory  Minimum** |   | **Actual  Ratio** |   |
|--------------------------------------------|--------|-------------------------|--------|-------------------|--------|
| Total  risk-based capital ratio            |   | 8.0                     | %      | 20.97             | %      |
| Tier  1 risk-based capital ratio           |   | 4.0                     | %      | 19.85             | %      |
|                                       |   |                    |   |              |   |
| Tier  1 leverage ratio                     |   | 4.0                     | %      | 12.75             | %      |
| Shareholders’  equity to total assets |   | None                    |   | 13.48             | %      |

 

On April 26, 2004,the Company completed its public offering of 828,000 shares of common stock ata price of $10.00 per share.  Net ofunderwriting discounts and commissions, and legal, accounting, printing andother related expenses, the Company received proceeds of approximately$7.2 million from the offering.  Wewill use a portion of the proceeds to enable the Bank to increase its legallending limit and to provide the capital necessary, in light of the regulatorycapital requirements described above, to support the Bank’s growth.  A portion of the proceeds also will be usedto fund the establishment or acquisition of additional branches.  On July 13, 2004, we filed anapplication with the OCC to open a full service branch in Mount Holly,Burlington County, New Jersey.  Ifapproved, we anticipate that this branch will open in the second quarter of2005.  We desire to open an additionalbranch by the first quarter of 2006.  We currently have no definitive plans or arrangements to establish oracquire that branch.

 

TheCompany is not aware of any pending recommendations by regulatory authoritiesthat would have a material impact on the Company’s capital resources, orliquidity if they were implemented, nor is the Company under any agreementswith any regulatory authorities.

 

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**Off-Balance Sheet Instruments**

 

We do not have anyoff-balance sheet arrangements as that term is defined in Item 303 of SECRegulation S-B (such as guarantee contracts, credit or liquidity supportarrangements, derivative instruments or variable interests in otherentities).  We are, however, a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers and to manage its ownexposure to fluctuations in interest rates. These financial instruments include commitments to extend credit.  These financial instruments involve elementsof credit and interest rate risk in excess of the amount recognized in thebalance sheet.  The contract or notionalamounts of these financial instruments reflect the extent of our involvement inparticular classes of financial instruments.

 

Our exposure to creditloss in the event of non-performance by the other party to the financialinstrument for commitments to extend credit is represented by the contractualamount of those instruments.  We use thesame credit policies in making commitments and conditional obligations as we dofor on-balance sheet instruments. Unless noted otherwise, we do not require and are not required to pledgecollateral or other security to support financial instruments with credit risk.

 

**Amount Of Commitment Expiration Per Period**(In thousands)

 
| **Other Commercial  Commitments  At June 30, 2004** |   | **Total  Amounts Committed** |   | **Less  Than 1  Year** |   | **1-3  Years** |   | **4-5  Years** |   | **After 5  Years** |   |
|----------------------------------------------------------|--------|------------------------------|--------|------------------------|--------|----------------|--------|----------------|--------|--------------------|--------|
|                                                     |   |                         |   |                   |   |           |   |           |   |               |   |
| Commitments  to extend credit                            |   |                         |   |                   |   |           |   |           |   |               |   |
| Lines  of Credit                                         |   | 3,198                        |   | 2,852                  |   | 50             |   |           |   | 296                |   |
| Unfunded  residential mortgages                          |   | 5,047                        |   | 1,107                  |   | —         |   | —         |   | 3,940              |   |
| Total  commercial commitments                            |   | 8,245                        |   | 3,959                  |   | 50             |   | —         |   | 4,236              |   |

 

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

 

As of June 30, 2004,the Company, under the supervision and with the participation of its management,including the Chief Executive Officer and the Chief Financial Officer,evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective.  There were nosignificant changes to the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date of theirevaluation.

 

**PART II – OTHER INFORMATION**

 

**Item 4****.  Submission of Matters to a Vote of SecurityHolders**

 

1st Colonial Bancorp,Inc.’s annual meeting of the shareholders was held on May 19, 2004.  The results of the items voted on are listedbelow.

 
| **Issue** |   | **Description**                              |   | **For**   |   | **Withheld** |   |
|-----------|--------|----------------------------------------------|--------|-----------|--------|--------------|--------|
|      |   |                                         |   |      |   |         |   |
| 1.        |   | Election of Directors  for a three-year term |   |      |   |         |   |
|      |   |                                         |   |      |   |         |   |
|      |   | Linda M. Rohrer                              |   | 1,042,204 |   | 374          |   |
|      |   | Harrison Melstein                            |   | 1,038,594 |   | 3,984        |   |
|      |   | Stanley H. Molotsky                          |   | 1,042,204 |   | 374          |   |

 
| **Issue** |   | **Description**                                                                                                                                       |   | **For**   |   | **Against** |   | **Abstain** |   |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-------------|--------|-------------|--------|
|      |   |                                                                                                                                                  |   |      |   |        |   |        |   |
| 2.        |   | Proposal to ratify the  appointment of KPMG LLP as the independent auditors of 1st  Colonial Bancorp, Inc. for the year ending December 31, 2004 |   | 1,036,333 |   | 116         |   | 6,129       |   |

 

As the results of Issue 1above indicate, Ms. Rohrer and Messrs. Melstein and Molotsky were elected asdirectors of 1st Colonial Bancorp at the 2004 annual meeting.  The other directors whose terms of office asdirectors continued after the meeting were Gerard M. Banmiller, Mary R.Burke, Thomas A. Clark III, Letitia G. Colombi, Gerald J. DeFelicis,John J. Donnelly IV, Eduardo F. Enriquez, and Michael C. Haydinger.

 

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**Item 6****.****                              Exhibitsand Reports on Form 8-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 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 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 |
|       |   |      |   |
| (b)        |   |      | Reports on Form 8-K |
|       |   |      |   |
|       |   |      | A Current Report on  Form 8-K dated July 30, 2004, was filed by 1st Colonial Bancorp,  Inc. on August 3, 2004, reporting matters under Items 7 (Financial  Statements and Exhibits) and 12 (Results of Operations and Financial  Condition).  No financial statements  were filed with such report. |

 

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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:   August 13, 2004 | /s/  Gerard M. Banmiller |   |
|                                   | Gerard M. Banmiller           |
|                                   | President and                 |
|                                   | Chief Executive Officer       |
|                                   |                          |
| Date:   August 13, 2004 | /s/  Robert C. Faix      |   |
|                                   | Robert C. Faix                |
|                                   | Senior Vice President  and    |
|                                   | Chief Financial Officer       |

 

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