**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

** **

**FORM 10-KSB**

 
| **(Mark One)**                                  |
|-------------------------------------------------|
|                                            |   |
| **ý**                                      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                            |   |
| **For the fiscal year ended December 31, 2004** |
|                                            |   |
| **o**                                           | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                      to**

 

**Commission File Number:  333-84114**

 

**1stColonial Bancorp, Inc.**

Exact name of smallbusiness issuer as specified in its charter)

 
| **United  States**                      | ** ** | **01-0715542**      |
|-----------------------------------------|------------|---------------------|
| (State or other  jurisdiction of        |       | (I.R.S. Employer    |
| incorporation or  organization)         |       | Identification No.) |
|                                    |       |                |
| **1040  Haddon Avenue**                 |       |                |
| **Collingswood,  New Jersey**           | ** ** | **08108**           |
| Address of principal  executive offices |       | (Zip Code)          |

 

Issuer’s telephone number: **(856) 858-1100**

 

Securities registeredpursuant to Section 12(b) of the Exchange Act:  **None.**

 

Securities registeredpursuant to Section 12(g) of the Exchange Act:  **None.**

 

Check whether the issuer (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes o     No ý.

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. ý

 

The issuer’s revenues for its most recent fiscal yearwere $5,706,000.

 

The aggregate market value of issued and outstandingvoting and non-voting equity securities held by non-affiliates of the issuerbased upon a price of $10.80 per share, the average of the bid and asked pricesof the Registrant’s common stock on March 29, 2005, is $19,870,844.  For purposes of this calculation, alldirectors and executive officers of the issuer, and their associates, have beenconsidered affiliates.

 

The number of shares of Common Stock outstanding onMarch 1, 2005 was 2,251,642.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

**None.**

 

Transitional Small Business Disclosure Format (CheckOne):  Yes o;No ý

 

 

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**PART I**

 

**ITEM 1.****  Description of Business**

 

**General**

 

1st Colonial Bancorp, Inc. is a Pennsylvania businesscorporation and bank holding company registered under the Bank Holding CompanyAct of 1956.  1st Colonial was incorporatedon February 26, 2002 for the purpose of acquiring 1st Colonial NationalBank (referred to in this report as the Bank), thereby enabling the Bank tooperate within a holding company structure. On June 30, 2002, 1st Colonial acquired 100% of theoutstanding shares of the Bank.

 

The principal activities of 1st Colonial are owning and supervising the Bank.  The Bank is a community-oriented,full-service commercial bank providing commercial and consumer financialservices to businesses and individuals in Camden County, New Jersey andsurrounding areas.  We believe that wewill continue to gain market share in our geographic market.  We compete with the many existing and largerfinancial institutions in our geographic market by emphasizing personalizedservice, responsive decision making and an overall commitment to excellence.

 

The Bank offers commercial and consumer loans of alltypes, including real estate loans, residential mortgage loans, home equityloans and lines of credit, auto loans and other credit products.  The Bank’s deposit services include businessand individual demand and time deposit accounts, NOW accounts, money marketaccounts, Individual Retirement Accounts and holiday accounts.  Our strategy for deposit acquisition anddevelopment has been to attract and retain core deposits, and we traditionallyhave not priced our deposits to attract short-term relationships.  We do not accept brokered deposits.  The Bank is not authorized to offer trustservices and does not presently offer the sale of investment products such asmutual funds to its customers.

 

We provide a number of convenience-oriented servicesand products to our customers, including direct payroll and social securitydeposit services, bank-by-mail services, letters of credit, access to anational automated teller machine network, safe deposit boxes, night depositoryfacilities, notary services, courier services and travelers checks.  We also offer telephone banking services thatenable our customers to obtain

 

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account information, effectuatetransfers between accounts, order new checks and make stop paymentrequests.  In addition, we began offeringInternet-banking services to our customers in the third quarter of 2004, usinga third-party service provider.

 

We have outsourced virtually all of our dataprocessing operations to a third-party service provider with respect to depositaccounts, checking accounts, loan accounts and othermatters, as well as ATM processing services. We also use third parties to provide certain credit card processingservices and escrow deposit processing services.

 

As of December 31, 2004, we employed23 full-time and four part-time employees.

 

**BusinessStrategy**

 

Our mission is to become the leading community bank inour market area by meeting the credit needs of local businesses and residents,providing relationship banking and customer service that is superior to thelarger banks in our market area, and offering products and services responsiveto local needs.  We intend to increaseour market share and presence by opening additional branch offices atconvenient and strategic locations and through growth at our existing offices.

 

We target small and mid-sized businesses as well asprofessional practices such as lawyers, medical doctors and accountants in ourmarket area.  In addition, we have hadsuccess marketing our deposit account services to local government entitiessuch as municipalities, school districts and public authorities.  This success is largely due to the experienceand reputation of our management in serving municipal and local governmententities in our marketplace.  Thesedeposit relationships are typically operating accounts and longer-term certificatesof deposit, which we believe are a stable source of funding for us.

 

We actively pursue business relationships with ourtargeted clientele through diligent calling efforts and by capitalizing on ourknowledge of the market and pre-existing business relationships.  Our goal is to establish deposit and lendingrelationships that are based on service, will result in long-standingrelationships and will lead to referrals from our satisfied customers.

 

As an added convenience for our government andbusiness customers, we began offering courier pick-up and delivery 

 

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services to these customers in2003.  We also are planning to add up totwo full-service branches by the end of 2006.

 

An important element of our strategy is to capitalizeon the prior experience of our management team in our market, as well as theirpre-existing business relationships. Prior to organizing the Bank, our president, Gerard M. Banmiller,helped organize Community National Bank of New Jersey located in Camden County,New Jersey, and served as its president from 1987 until its sale in 1998.  James E. Strangfeld, the Bank’sexecutive vice president, directed various business and consumer bankingoperations for the southern New Jersey divisions of two large regional banksfrom 1986 to 2000.  Many of the Bank’scustomers, including governmental entities and local businesses, were customersof Mr. Banmiller and Mr. Strangfeld in their prior positions.  It is a fundamental belief of management thathaving knowledge of our local markets facilitates a bank’s deposit gatheringcapabilities and its ability to make sound credit decisions.  This extensive knowledge of our local marketshas allowed us to develop and implement a highly focused and disciplinedapproach to deposit and lending relationships with the customers in our marketarea.

 

**CorporateHistory**

 

Reorganization

 

1st Colonial was formed on February 26,2002.  On June 30, 2002, we acquired1st Colonial National Bank pursuant to its merger with and into Interim1st Colonial National Bank, our wholly owned subsidiary that we formed forthe sole purpose of acquiring 1st Colonial National Bank.  The acquisition was part of thereorganization of 1st Colonial National Bank from a stand-alone nationalbank to a bank holding company structure.

 

In the reorganization, each existing shareholder ofthe Bank received an equal number of shares of 1st Colonial common stockin exchange for his or her Bank common stock. A total of 1,129,607 shares of 1st Colonial common stock wereissued in the reorganization in exchange for an equal number of shares of thecommon stock of the Bank.

 

2002 Stock Offering

 

On September 20, 2002, 1st Colonialcommenced a public offering of 600,000 units for an offering price of$8.50 per unit.  Each unit consisted ofone share of common stock and one warrant to purchase one share of common stockat an exercise price of $9.60 per share. This offering was completed on

 

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December 16, 2002.  In theoffering, 1st Colonial sold 254,399 units.  After giving effect to the 5% stock dividendspaid by 1st Colonial in April 2003 and April 2004, 1st Colonialissued in this offering 280,475 shares of common stock and warrants toacquire 280,475 shares of common stock at an exercise price of $8.71 pershare.  The offering raised $2,160,000before offering expenses of $230,000.

 

2004 Stock Offering

 

On April 26, 2004, 1st Colonial completed its publicoffering of 828,000 shares of common stock at a price of $10.00 per share. Theoffering was underwritten on a firm-commitment basis by Ryan Beck & Co.,Inc. Net of underwriting discounts and commissions and other expenses, 1stColonial received proceeds of approximately $7.2 million from the offering.

 

**LoanPortfolio**

 

The Bank is an active lender with a loan portfoliothat includes commercial mortgages, commercial loans, consumer installmentloans and home equity loans.  AtDecember 31, 2004, we had loans of $76.4 million (net of a $971,000allowance for loan losses and including $111,000 in net deferred costs),representing 56.2% of total assets, compared to $65.8 million atDecember 31, 2003.

 

**Lending Policy**

 

The Bank’s lending policies and procedures establishthe basic guidelines governing its lending operations.  Generally, the guidelines address the type ofloans we seek, target markets, underwriting and collateral requirements, terms,interest rate and yield consideration and compliance with laws andregulations.  The policies are reviewedand approved by the Board of the Bank. The Bank supplements its own supervision of the loan underwriting andapproval process with quarterly loan audits by independent, outsideprofessionals experienced in loan review work. Substantially all new loans in excess of $200,000, as well as a representativesample of the portfolio, are reviewed on a quarterly basis by this independentloan review firm.

 

The Board maintains a loan committee consisting of atleast four “outside” directors.  Outsidedirectors are directors who are not officers of the Bank.  Our senior lending officerand other loan officers present loans to the loan committee for consideration,but are not voting members of the committee.  The

 

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loan committee is authorized toconsider and approve all loan requests in excess of the lending authoritydelegated to the loan officers.  Creditreview and analysis on each loan is prepared by the individual loan officersfor presentation to the loan committee. Loan approval requires a majority of the voting members present.

 

The Bank requires at least two authorized signaturesfor any loan in excess of $100,000.  Theauthorized approval level required is a function of the aggregate amount ofcredit exposure to the borrower and any related entity.  The senior lending officer, thepresident/chief executive officer, or the vice president, loan department, may approve loans up to $100,000.  Other loan officers may approve loans up toan individual lending authority approved by the Board of Directors.

 

The president/chief executive officer and the seniorlending officer, or the senior lending officer and the vice president, loandepartment may approve loans up to an amount not to exceed $500,000.  All loans in excess of $500,000 up to$1,000,000 are presented to the loan committee for approval, and all loans inexcess of $1,000,000 are presented to the board of directors for approval.

 

**Commercialand Commercial Real Estate Loans**

 

Our lending activity is concentrated primarily incommercial and commercial real estate loans. At December 31, 2004, commercial and commercial real estate loansequaled $51.0 million, or 66.0%, of the loan portfolio.  The commercial and commercial real estateloan portfolio is comprised of $16.2 million of commercial and industrialloans, as well as $34.8 million of loans secured by commercial and multi-familyreal estate.  These commercial realestate loans have an average loan to value ratio under 80%.  Other than loans to operators ofnonresidential buildings, which amount to $11.3 million or 14.6% of totalloans, there is no material concentration in the commercial and commercial realestate loan portfolio within any business or industry segment.  Our strategy is to make commercial andcommercial real estate loans based on our analysis of a borrower’s ability torepay the loan out of its operating cash flows. With few exceptions, we also obtain real estate or other collateral fora commercial or commercial real estate loan, and typically require repaymentguarantees by principals of a borrower. Most of our commercial and commercial real estate loans are made to adiverse group of businesses of small and medium size.  The Bank has five land loans totaling$703,000 as of December 31, 2004.

 

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**Residential Real Estate/Consumer Loans**

 

Residential real estate and consumer loans togetherequaled $22.8 million, or 29.5% of the loan portfolio at December 31,2004.  The residential real estateportfolio consists primarily of home equity loans.  The consumer loan portfolio consistsprimarily of automobile and personal loans. Approximately 83.8% of the residential real estate/consumer portfolio atDecember 31, 2004 is home equity loans. The average loan to value ratio of these loans is approximately80%.  Substantially all residential firstmortgage loans originated by us are sold in the secondary market on a servicingreleased basis.

 

**Construction Loans**

 

Construction loans equaled $3.4 million, or 4.5%of the loan portfolio at December 31, 2004.  This portfolio consists of loans tocontractors for the purpose of constructing or renovating single-family homesand loans to business owners for the purpose renovating existing facilities.  All of these loans mature within oneyear.  The average loan to value ratio ofthese loans is approximately 80%.  TheBank limits its lending to single-facility projects, and does not finance anytract developments.

 

The following table summarizes the Bank’s loanportfolio by type of loan on the dates indicated.

 
| ** **                       | ** ** | **At December 31,**        | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                       | ** ** | **Amount**                 | ** ** | **Percent  of  Total** | ** ** | **Amount** | ** ** | **Percent  of  Total** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| Type of Loan:                    |       |                       |       |   |   |   |   |   |   |
| Commercial                       |       | $                          | 16,191     |   | 20.95 | % | $ | 16,953 |   | 25.52 | % |
| Real estate -  commercial        |       | 34,850                     |       | 45.10 | % | 27,227 |   | 40.99 | % |
| Real estate -  residential       |       | 20,010                     |       | 25.89 | % | 16,512 |   | 24.86 | % |
| Construction                     |       | 3,446                      |       | 4.46 | % | 2,884 |   | 4.34 | % |
| Consumer                         |       | 2,782                      |       | 3.60 | % | 2,853 |   | 4.29 | % |
|                             |       |                       |       |   |   |   |   |   |   |
| Total gross  loans               |       | 77,279                     |       | 100.00 | % | 66,429 |   | 100.00 | % |
|                             |       |                       |       |   |   |   |   |   |   |
| Less allowance  for loan losses  |       | (971                       | )          |   |   | (768 | ) |   |   |
|                             |       |                       |       |   |   |   |   |   |   |
| Plus deferred  loan costs (fees) |       | 111                        |       |   |   | 121 |   |   |   |
|                             |       |                       |       |   |   |   |   |   |   |
| Loans, net                       |       | $                          | 76,419     |   |   |   | $ | 65,782 |   |   |   |

 

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The following table sets forth the estimated maturityof the Bank’s loan portfolio at December 31, 2004.  The table does not include prepayments orscheduled principal repayments.

 

### **Maturity Distribution**

 
| ** **                | ** ** | **Within  One Year**       | ** ** | **One-Five  Years** | ** ** | **Over Five  Years** | ** ** | **Total** | ** ** |
|---------------------------|------------|----------------------------|------------|---------------------|------------|----------------------|------------|-----------|------------|
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                |       | $                          | 8,750      |                | $          | 6,978                |       | $         | 463        |   | $ | 16,191 |   |
| Construction              |       | 2,701                      |       | 745                 |       | —               |       | 3,446     |       |
| Real estate  mortgage (1) |       | 3,635                      |       | 33,812              |       | 17,413               |       | 54,860    |       |
| Consumer                  |       | 102                        |       | 2,063               |       | 617                  |       | 2,782     |       |
|                      |       |                       |       |                |       |                 |       |      |       |
| Total                     |       | $                          | 15,188     |                | $          | 43,598               |       | $         | 18,493     |   | $ | 77,279 |   |

 

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(1)                    Includesall mortgage and home equity loans.

 

The following table sets forth the dollar amount ofall loans due after December 31, 2004 which have predetermined interestrates and which have floating or adjustable rates.

 
| ** **                      | ** ** | **Fixed Rates**            | ** ** | **Floating or  Adjustable Rates** | ** ** | **Total** | ** ** |
|---------------------------------|------------|----------------------------|------------|-----------------------------------|------------|-----------|------------|
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
|                            |       |                       |       |                              |       |      |       |
| Commercial                      |       | $                          | 8,583      |                              | $          | 7,608     |       | $ | 16,191 |   |
| Construction                    |       | 1,165                      |       | 2,281                             |       | 3,446     |       |
| Real Estate–  mortgage (1) |       | 42,148                     |       | 12,712                            |       | 54,860    |       |
| Consumer                        |       | 2,723                      |       | 59                                |       | 2,782     |       |
|                            |       |                       |       |                              |       |      |       |
| Total                           |       | $                          | 54,619     |                              | $          | 22,660    |       | $ | 77,279 |   |

 

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(1)                    Includesall mortgage and home equity loans.

 

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Loans held for sale are residential mortgage loansthat are subject to purchase commitments from third-party investors such as mortgagecompanies.  Funds for these sales havenot yet been received from the investors. The Bank usually receives funds within one week of the loan closing.  The Bank receives interest income from theinvestor from the date the loan closes to the date funds are received from theinvestor.  At December 31, 2004,there were $240,000 in loans held for sale compared to$281,000 at December 31, 2003. Interest earned from loans held for sale totaled $15,000 for 2004compared to $23,000 for 2003, and is included in interest on loans.

 

**RiskElements**

 

Risk elements in the loan portfolio include loans pastdue, non-accrual loans, other real estate owned and a concentration of loans toone type of borrower.  We closely monitorthe loan portfolio to reduce the risk of delinquent and problem credits.  Strict underwritingcriteria, which include loan to value and debt to income ratios, are followed,which also helps reduce credit risk in the loan portfolio.  The loan review function is performed by anoutside entity that evaluates loan quality, including adherence to underwritingcriteria.  This outside entity reportsdirectly to the Audit Committee of the Board of Directors.  The OCC, as the Bank’s primary regulator,also reviews the loan portfolio as part of its review process.  The Bank’s lending activity extends toindividuals and small and medium sized businesses located primarily within thegreater Cherry Hill, New Jersey area. Consistent with its focus on providing community-based financial services,the Bank does not attempt to diversify its loan portfolio geographically bymaking significant amounts of loans to borrowers outside its market area.  For a description of the Bank’s market area,see “Business—Market Area.”

 

**AssetQuality**

 

The Bank manages asset quality and controls creditrisk through diversification of the loan portfolio and the application ofpolicies designed to foster sound underwriting and loan monitoringpractices.  The Bank’s senior officersare charged with monitoring asset quality, establishing credit policies andprocedures subject to approval by the Board of Directors, seeking theconsistent application of these policies and procedures across the Bank andadjusting policies as appropriate for changes in market conditions.

 

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Non-performing assets include non-performing loans andforeclosed real estate held for sale. Non-performing loans consist of loans where the principal, interest, orboth, is 90 or more days past due and loans that have been placed on non-accrual.  Income recognition of interest isdiscontinued when, in the opinion of management, the collectibility of suchinterest becomes doubtful.  A loan isgenerally classified as non-accrual when principal or interest has been indefault for a period of 90 days or more or because of adeterioration in the financial condition of the borrower such thatpayment in full of principal or interest is not expected.  Loans past due 90 days or more and stillaccruing interest are loans that are generally well secured and in process ofcollection.  When loans are placed on non-accrual,accrued income from the current period will be reversed from currentearnings.  Consumer loans are to becharged off when principal or interest is 120 or more days delinquent or willbe placed on non-accrual if the collateral is insufficient to recover theprincipal.  At December 31, 2004, theBank had one non-performing loan in the amount of $24,000.  As of December 31, 2004, for purposes ofaccounting and reporting in accordance with SFAS 15, the Bank had nosignificant troubled debt restructuring. As of December 31, 2004, for purposes of accounting and reportingin accordance with SFAS 114, the Bank had no “impaired” loans.

 

**Allowancefor Loan Losses**

 

The Bank determines the provision for loan lossesthrough a quarterly analysis of the allowance for loan losses.  Factors such as changes in the nature andvolume of the portfolio, overall portfolio quality, concentrations of credit risk,review of specific problem loans, current economic conditions and trends thatmay affect the ability of borrowers to pay, and prior loss experience withinthe various categories of the portfolio are considered when reviewing the risksin the portfolio.  Substantially, allloans greater than $200,000 and all classified loans are analyzedindividually.  While management believesthe allowance for loan losses is currently appropriate, future additions to theallowance may be necessary based on changes in general economic conditionsand/or the condition of specific borrowers. The allowance is reviewed quarterly by the Board of Directors and seniormanagement of the Bank.  In addition,various regulatory agencies, as an integral part of their examination process,periodically review the allowance for loan losses.  Such agencies may require the Bank torecognize additions to the allowance based on their judgments about informationavailable to them at the time of their examination.

 

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In addition to management review, an external serviceprovides a detailed loan review analysis. In the course of a year, substantially, all loans in excess of $200,000are reviewed and rated.  In addition,other smaller loans are reviewed on a random basis.

 

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

 

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

 

The Bank has no credit exposure to foreign countriesor foreign borrowers or highly leveraged transactions.

 

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The following table sets forth the year-end balancesof and changes in the allowance for loan losses, as well as certain relatedratios, as of December 31, 2004 and 2003:

 
| ** **                                      | ** ** | **December 31,**           | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
|                                            |       |                       |       |   |   |
| Allowance for  loan losses, beginning of period |       | $                          | 768        |   | $ | 576 |   |
|                                            |       |                       |       |   |   |
| Loans  charged-off:                             |       |                       |       |   |   |
| Consumer                                        |       | (39                        | )          | (40 | ) |
|                                            |       |                       |       |   |   |
| Recoveries:                                     |       |                       |       |   |   |
| Consumer                                        |       | 24                         |       | 7 |   |
|                                            |       |                       |       |   |   |
| Net charge-offs                                 |       | (15                        | )          | (33 | ) |
| Provision  charged to operations                |       | 218                        |       | 225 |   |
|                                            |       |                       |       |   |   |
| Balance, end of  year                           |       | $                          | 971        |   | $ | 768 |   |
|                                            |       |                       |       |   |   |
| Average loans,  net of deferred costs(1)        |       | $                          | 72,344     |   | $ | 60,183 |   |
| Total loans,  net, at year end                  |       | $                          | 77,390     |   | $ | 66,550 |   |
|                                            |       |                       |       |   |   |
| Ratios:                                         |       |                       |       |   |   |
| Net charge-offs  to:                            |       |                       |       |   |   |
| Average loans,  net of deferred costs           |       | 0.02                       | %          | 0.05 | % |
|                                            |       |                       |       |   |   |
| Allowance as a  percentage of total gross loans |       | 1.25                       | %          | 1.15 | % |

 

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(1)                    Includesaverage balance of loans held for sale of $183 in 2004 and $382 in 2003.  Interest income on loans held for sale was$15 in 2004 and $23 in 2003.

 

Loans charged off will represent the Bank’srecognition of losses previously provided for in the overall allowance for loanlosses through the provisions charged to operations in the respective periods.

 

The following schedule sets forth the allocation ofthe

 

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allowance for possible loanlosses among various categories.  Theallocation is based upon the historical experience of the Bank, the historicalexperience of the Bank’s management while at other institutions and management’sreview of the specific amount or specific loan category in which future lossesmay ultimately occur.  However, theentire allowance for possible loan losses is available to absorb future loanlosses in any category.  The Bank isunable to accurately predict in what category future charge offs and recoveriesmay actually occur.

 

**Allocationof Allowance for Possible Loan Losses**

** **
| ** **                      | ** ** | **December 31,**           | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **Amount**                 | ** ** | **Percent*** | ** ** | **Amount** | ** ** | **Percent*** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
|                            |       |                       |       |   |   |   |   |   |   |
| Commercial                      |       | $                          | 316        |   | 20.95 | % | $ | 275 |   | 25.52 | % |
| Real estate –  commercial  |       | 366                        |       | 45.10 | % | 256 |   | 40.99 | % |
| Real estate –  residential |       | 134                        |       | 25.89 | % | 102 |   | 24.86 | % |
| Construction                    |       | 38                         |       | 4.46 | % | 27 |   | 4.34 | % |
| Consumer                        |       | 117                        |       | 3.60 | % | 108 |   | 4.29 | % |
|                            |       |                       |       |   |   |   |   |   |   |
| Total                           |       | $                          | 971        |   | 100.00 | % | $ | 768 |   | 100.00 | % |

 

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*  Percentagesindicate percent of loans in each category to total loans.

 

**Securities**

 

Securities, primarily U.S. treasury and U.S.government agency securities, totaled $53.5 million or 39.4% of totalassets at December 31, 2004.  TheBank’s securities portfolio serves several purposes.  Portions are held to maturity.  The remaining portions are used to assist theBank in liquidity and asset/liability management.  Total amortized cost of securities atDecember 31, 2004 was $53.7 million or 39.5% of total assets comparedto $33.9 million or 28.7% of total assets at December 31, 2003.

 

Securities are classified as investment securitiesheld-to-maturity when management has the intent and the Bank has the ability atthe time of purchase to hold the securities to maturity.  Investment securities held-to-maturity are carriedat cost adjusted for amortization of premiums and accretion of

 

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discounts.  Securities to be held for indefinite periodsof time are classified as securities available-for-sale and are carried at fairmarket value.  Securitiesavailable-for-sale include securities that may be sold in response to changesin market interest rates, changes in the security’s prepayment risk, increasesin loan demand, general liquidity needs and other similar factors.  The Bank’s recent purchases of investmentsecurities have been U.S. government and agency securities with short- tomedium-term maturities and adjustable rate mortgage backed securities.

 

Securities available-for-sale are reflected at fairvalue with unrealized gains and losses, net of tax, if any, being included inthe Bank’s accumulated other comprehensive income account.  The fair value of the securitiesavailable-for-sale, as of December 31, 2004 was $36.7 million, whichresulted in a tax adjusted unrealized loss on such securities included inaccumulated other comprehensive loss, a component of shareholders’ equity, of$119,000.  The fair value atDecember 31, 2003 was $28.0 million, which resulted in a tax-adjustedunrealized loss on such securities included in accumulated other comprehensiveloss, of $73,000 as of December 31, 2003.

 

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The following tables summarize the composition of ourinvestment securities portfolio at December 31, 2004 and 2003.

 

**Securities Portfolio**

** **
| ** **                  | ** ** | **At December 31, 2004**   | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Held to Maturity**       | ** ** | **Available for Sale** | ** ** |
| ** **                  | ** ** | **Amortized  Cost**        | ** ** | **Estimated  Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                  | ** ** | **(Dollars In Thousands)** | ** ** |
| Municipal  securities       |       | $                          | 16,860     |   | $ | 16,854 |   | $ | — |   | $ | — |   |
| U.S. government  securities |       | —                     |       | — |   | 22,131 |   | 21,927 |   |
| Mortgage-backed  securities |       | —                     |       | — |   | 14,266 |   | 14,273 |   |
| Equity  securities          |       | —                     |       | — |   | 486 |   | 486 |   |
| Total                       |       | $                          | 16,860     |   | $ | 16,854 |   | $ | 36,883 |   | $ | 36,686 |   |

 
| ** **                  | ** ** | **At December 31, 2003**   | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Held to Maturity**       | ** ** | **Available for Sale** | ** ** |
| ** **                  | ** ** | **Amortized  Cost**        | ** ** | **Estimated  Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
| ** **                  | ** ** | **(Dollars In Thousands)** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |
| Municipal  securities       |       | $                          | 5,808      |   | $ | 5,796 |   | $ | — |   | $ | — |   |
| U.S. government  securities |       | —                     |       | — |   | 18,536 |   | 18,479 |   |
| Mortgage-backed  securities |       | —                     |       | — |   | 9,265 |   | 9,200 |   |
| Equity  securities          |       | —                     |       | — |   | 306 |   | 306 |   |
| Total                       |       | $                          | 5,808      |   | $ | 5,796 |   | $ | 28,107 |   | $ | 27,985 |   |

 

14

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The amortized cost and weighted average yield of theBank’s investment securities and securities available-for-sale atDecember 31, 2004, by contractual maturity, are reflected in the followingtable.  Actual maturities will differfrom contractual maturities because certain borrowers may have the right tocall or prepay obligations with or without call or prepayment penalties.

 
| **At December 31, 2004**                  | ** ** | **Due 1 Year  or less**    | ** ** | **Due  1-5  years** | ** ** | **Due in  5-10  years** | ** ** | **Due  after  10 years** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|---------------------|------------|-------------------------|------------|--------------------------|------------|-----------|------------|
| ** **                                | ** ** | **(Dollars In Thousands)** | ** ** |
| Investments  securities held to maturity: |       |                       |       |                |       |                    |       |                     |       |      |       |
| Municipal  Securities:                    |       |                       |       |                |       |                    |       |                     |       |      |       |
| Amortized cost                            |       | $                          | 16,860     |                | $          | —                  |       | $                        | —     |      | $          | — |   | $ | 16,860 |   |
| Weighted average  yield (1)               |       | 2.30                       | %          | —              |       | —                  |       | —                   |       | 2.30      | %          |
|                                      |       |                       |       |                |       |                    |       |                     |       |      |       |
| Total amortized  cost                     |       | $                          | 16,860     |                | $          | —                  |       | $                        | —     |      | $          | — |   | $ | 16,860 |   |
| Weighted average  yield                   |       | 2.30                       | %          | —              |       | —                  |       | —                   |       | 2.30      | %          |
|                                      |       |                       |       |                |       |                    |       |                     |       |      |       |
| US government  agency securities:         |       |                       |       |                |       |                    |       |                     |       |      |       |
| Amortized cost                            |       | $                          | 2,000      |                | $          | 20,131                  |       | $                        | —     |      | $          | — |   | $ | 22,131 |   |
| Weighted average  yield                   |       | 2.10                       | %          | 2.62                | %          | —                  |       | —                   |       | 2.57      | %          |
| Mortgage backed  securities:              |       |                       |       |                |       |                    |       |                     |       |      |       |
| Amortized cost                            |       | $                          | 750        |                | $          | 4,613                   |       | $                        | 3,835      |      | $          | 5,068 |   | $ | 14,266 |   |
| Weighted average  yield                   |       | 3.92                       | %          | 3.69                | %          | 3.84                    | %          | 3.12                     | %          | 3.54      | %          |
| Equity  securities:                       |       |                       |       |                |       |                    |       |                     |       |      |       |
| Amortized cost                            |       | $                          | —     |                | $          | —                  |       | $                        | —     |      | $          | 486 |   | $ | 486 |   |
| Weighted average  yield                   |       | —                     |       | —              |       | —                  |       | 5.65                     | %          | 5.65      | %          |
|                                      |       |                       |       |                |       |                    |       |                     |       |      |       |
| Total amortized  cost                     |       | $                          | 2,750      |                | $          | 24,744                  |       | $                        | 3,835      |      | $          | 5,554 |   | $ | 36,883 |   |
| Total fair value                          |       | $                          | 2,737      |                | $          | 24,555                  |       | $                        | 3,837      |      | $          | 5,557 |   | $ | 36,686 |   |
| Weighted average  yield                   |       | 2.60                       | %          | 2.82                | %          | 3.84                    | %          | 3.34                     | %          | 2.99      | %          |

 

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(1)                    Yieldson tax-exempt securities were adjusted to a tax - equivalent basis using a 34%rate.

 

15

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**Deposits**

 

The Bank’s predominant source of funds is depositoryaccounts.  The Bank’s deposit base iscomprised of demand deposits, savings and money market accounts and other timedeposits.

 

The following table sets forth the distribution ofaverage deposits by major category and the average rate paid in each year asapplicable.

 

**Distribution of Average Deposits**

** **
| ** **                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **(Dollars in thousands)**   | ** ** |
| ** **                            | ** ** | **2004**                     | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **Average  Balance**         | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** |
|                                  |       |                         |       |   |   |   |   |   |   |
| Non-interest  bearing demand deposits |       | $                            | 24,541     |   | 0.00 | % | $ | 18,320 |   | 0.00 | % |
| Interest bearing  demand deposits     |       | 33,742                       |       | 1.62 | % | 31,344 |   | 0.69 | % |
| Money market  deposits                |       | 16,647                       |       | 0.60 | % | 15,109 |   | 0.64 | % |
| Savings deposits                      |       | 6,253                        |       | 0.30 | % | 5,293 |   | 0.59 | % |
| Time deposits                         |       | 30,306                       |       | 2.25 | % | 20,296 |   | 2.68 | % |
|                                  |       |                         |       |   |   |   |   |   |   |
| Total/weighted  average rate          |       | $                            | 111,489    |   | 1.21 | % | $ | 90,362 |   | 1.33 | % |

 

The following table is a summary of time deposits of$100,000 or more (all of which are certificates of deposit) by remainingmaturities as of December 31, 2004:

 

**Maturities of Time Deposits of$100,000 and Over**

** **
| ** **            | ** ** | **Amount**                 | ** ** | **Percent** | ** ** |
|-----------------------|------------|----------------------------|------------|-------------|------------|
| ** **            | ** ** | **(Dollars In Thousands)** | ** ** |
|                  |       |                       |       |        |       |
| Three months or  less |       | $                          | 10,612     |        | 54.26      | % |
| Three to six  months  |       | 3,816                      |       | 19.51       | %          |
| Six to twelve  months |       | 3,525                      |       | 18.03       | %          |
| Over twelve  months   |       | 1,604                      |       | 8.20        | %          |
| Total                 |       | $                          | 19,557     |        | 100.00     | % |

 

Total deposits at December 31, 2004 were$111.2 million compared to total deposits of $104.3 million atDecember 31, 2003.  Certificates ofdeposit totaled $29.5 million and $26.2 million at December 31,2004 and December 31, 2003, respectively.

 

16

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As new deposits are generated from the Bank’s existingbranch as well as any future branches, the Bank expects to use these funds, tothe extent that they grow faster than loan growth, for investment securitiesand other earning assets.  Managementexpects to manage the growth of deposits in any new branches as it does in itscurrent operations, by interest rate management and marketing.

 

The Bank’s strategy for deposit acquisition anddevelopment has been to attract and retain core deposits, and the Bank has notpriced its deposits to attract short-term relationships.  In addition, we have had success marketingour deposit account services to local government entities such asmunicipalities, school districts and public authorities.  This success is largely due to the experienceand reputation of our management in handling local government entity business,which has led to referrals and additional relationships.  These deposits are typically operatingaccounts and longer term certificates of deposit, so they are a stable sourceof funding for us.

 

**Short-TermBorrowings**

 

The Bank has no funding dependence on short-termborrowings.  Typically the short-termborrowings are in the form of securities sold under repurchase agreements andare an accommodation for significant depositor relationships that have excesslarge investable balances for short periods. The majority of these repurchase agreements mature within 90 days.

 

The following table summarizes short-term borrowingand weighted average interest rates paid:

 
| ** **                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in Thousands)**  | ** ** |
|                                                                         |       |                        |       |   |   |
| Average daily  amount of short-term borrowings outstanding during the period |       | $                           | 4,086      |   | $ | 5,284 |   |
| Weighted average  interest rate on average daily short-term borrowings       |       | 0.61                        | %          | 0.78 | % |
| Maximum  outstanding short-term borrowings outstanding at any month-end      |       | $                           | 7,146      |   | $ | 8,296 |   |
| Short-term  borrowings outstanding at period end                             |       | $                           | 7,146      |   | $ | 4,087 |   |
| Weighted average  interest rate on short-term borrowings at period end       |       | 1.43                        | %          | 0.49 | % |

 

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**MarketArea**

 

We are located in the southwestern part of New Jersey,approximately five miles east of the City of Philadelphia, Pennsylvania, whichis the fifth largest city in the United States. Our market area consists of the greater Cherry Hill, New Jersey area andthe Borough of Westville, New Jersey. Our target market includes the towns of Collingswood, Cherry Hill,Haddonfield and Westville.

 

**Competition**

 

The banking business in our market area, as well asthe balance of New Jersey and the Philadelphia area, is highly competitive withrespect to both loans and deposits and is dominated by a number of majorregional and super-regional banks and non-depository institutions which havemany offices.  Many ofthese institutions, particularly the larger banking firms that have enhancedtheir local presence through mergers in recent years, have substantiallygreater resources and offer a wider array of services than we do.  In addition, many of these institutions arepermitted to make larger loans than we can. In addition, the present bank regulatory environment has undergonesignificant change.  This change affectsthe banking industry and competition between banks and non-bank financialinstitutions.  There have beensignificant regulatory, statutory and case law changes in the bank merger andacquisition area, in the products and services banks can offer, and in the non-bankingactivities in which bank holding companies can engage.  We face competition for loans and depositsfrom institutions such as credit unions, mortgage brokers, mortgage bankingcompanies, mutual funds, money market funds, investment bankers, insurancecompanies and others.  These non-bankfinancial institutions have the power to acquire and own banks that couldcompete with us.  See “Supervisionand Regulation.”

 

We compete with these institutions primarily on thebasis of service, quality and hours of operation.  We believe that the local presence of oursenior management and Board of Directors, and their collective familiarity withour market area, affords us an advantage in service, quality and understandingthe needs of our customer base.

 

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# **SUPERVISION AND REGULATION**

#  

**General**

 

We are registered as a bank holding company and aresubject to supervision and regulation by the Board of Governors of the FederalReserve System under the Bank Holding Act of 1956, as amended.  As a bank holding company, our activities andthose of the Bank are limited to the business of banking and activities closelyrelated or incidental to banking.  Bankholding companies are required to file periodic reports with and are subject toexamination by the Federal Reserve Board.

 

The Federal Reserve Board has issued regulations underthe Bank Holding Company Act that require a bank holding company to serve as asource of financial and managerial strength to its subsidiary banks.  As a result, the Federal Reserve Board,pursuant to such regulations, may require us to stand ready to use our resourcesto provide adequate capital funds to the Bank during periods of financialstress or adversity.

 

The Bank Holding Company Act prohibits us fromacquiring direct or indirect control of more than 5% of the outstanding sharesof any class of voting stock, or substantially all of the assets of, any bank,or from merging or consolidating with another bank holding company, withoutprior approval of the Federal Reserve Board. Additionally, the Bank Holding Company Act prohibits us from engaging inor from acquiring ownership or control of more than 5% of the outstandingshares of any class of voting stock of any company engaged in a non-bankingbusiness, unless such business is determined by the Federal Reserve Board to beso closely related to banking as to be a proper incident thereto.  The types of businesses that are permissiblefor bank holding companies to own have been expanded by recent federallegislation; see discussion of Gramm-Leach-Bliley Act below.

 

The Bank is a national bank chartered under the NationalBank Act, and is subject to regulation, supervision and examination by the OCCand, in certain respects, by the Federal Reserve Board and the Federal DepositInsurance Corporation (the “FDIC”).  TheFDIC, through the Bank Insurance Fund, insures all deposits held by the Bank upto a maximum of $100,000 for any one customer.

 

The OCC, which has primary supervisory authority overthe Bank, regularly examines banks in such areas as reserves, loans,investments, management practices, and other aspects of

 

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operations.  These examinations are designed for theprotection of the Bank’s depositors rather than the Bank’s shareholders.  The Bank must furnish annual and quarterlyCall Reports to the OCC, which has the authority under the FinancialInstitutions Supervisory Act to prevent a national bank from engaging in anunsafe or unsound practice in conducting its business.

 

The various laws and regulations administered by theOCC affect corporate practices, such as the payment of dividends, incurrence ofdebt and acquisition of other financial institutions and companies, and affectbusiness practices, such as the payment of interest on deposits, the chargingof interest on loans, the types of business conducted and the location ofoffices.

 

**Sarbanes-OxleyAct**

 

On July 30, 2002, the Sarbanes-Oxley Act, or SOX,was enacted.  SOX is not a banking law,but generally applies to all companies, both U.S. and non-U.S., that file orare required to file periodic reports with the Securities and ExchangeCommission (the SEC), under the Securities Exchange Act of 1934 (the ExchangeAct).  The stated goals of SOX are toincrease corporate responsibility, to provide for enhanced penalties foraccounting and auditing improprieties at publicly traded companies and toprotect investors by improving the accuracy and reliability of corporatedisclosures pursuant to the securities laws. SOX is the most far-reaching U.S. securitieslegislation enacted in some time.

 

SOX includes very specific additional disclosurerequirements and new corporate governance rules, requires the SEC andsecurities exchanges to adopt extensive additional disclosure, corporategovernance and other related rules and mandates further studies of specifiedissues by the SEC and the Comptroller General. SOX represents significant federal involvement in matters traditionallyleft to state regulatory systems, such as the regulation of the accountingprofession, and to state corporate law, such as the relationship between aboard of directors and management and between a board of directors and itscommittees.  SOX addresses, among othermatters:

 

•                  auditcommittees;

 

•                  certification  offinancial statements by the chief executive officer and the chief financialofficer;

 

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•                  the forfeiture of bonusesor other incentive-based compensation and profits from the sale of an issuer’ssecurities by directors and senior officers in the 12-month period followinginitial publication of any financial statements that later require restatement;

 

•                  a prohibition on insidertrading during pension plan blackout periods;

 

•                  disclosure of off-balancesheet transactions;

 

•                  a prohibition onpersonal loans to directors and officers;

 

•                  expedited filingrequirements for Form 4 statements of changes of beneficial ownership of securities required to be filed byofficers, directors and 10% shareholders;

 

•                  disclosure of whetheror not a company has adopted a code of ethics;

 

•                  “real time” filing of periodic reports;

 

•                  auditor  independence;and

 

•                  various  increasedcriminal penalties for violations of securities laws.

 

The SEC has been delegated the task of enacting rulesto implement various provisions with respect to, among other matters, disclosurein periodic filings pursuant to the Exchange Act.  To date, the SEC has implemented most of theprovisions of SOX, and continues to monitor and modify its rules, reports, andreleases, as needed.

 

Because we had less than 300 shareholders on January 1,2005, we are not subject to the provisions of SOX.  However, to the extent that we voluntarilyfile annual, quarterly and current reports on Forms 10-KSB, 10-QSB and 8-K, weare required to comply with the requirements of those forms, many of which havebeen changed or added due to SOX.  Inaddition, in the event we have 300 or more shareholders of record at thebeginning of any year, we would become subject to the provisions of SOX.

 

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**USAPATRIOT Act**

 

In October 2001, the President signed into law the USAPATRIOT Act.  This Act was in directresponse to the terrorist attacks on September 11, 2001, and strengthensthe anti-money laundering provisions of the Bank Secrecy Act.  Most of the new provisions added by this Actapply to accounts at or held by foreign banks, or accounts of or transactionswith foreign entities.  The bank does nothave a significant foreign business and does not expect this Act to materiallyaffect its operations.  This Act does, however,require the banking regulators to consider a bank’s record of compliance underthe Bank Secrecy Act in acting on any application filed by a bank.  As the Bank is subject to the provisions ofthe Bank Secrecy Act (i.e., reporting of cash transactions in excess of$10,000), the bank’s record of compliance in this area will be an additionalfactor in any applications filed by it in the future.  To the Bank’s knowledge, its record ofcompliance in this area is satisfactory and its processes and procedures toinsure compliance with this Act are satisfactory.

 

**Gramm-Leach-BlileyAct**

 

In November 1999 the Gramm-Leach-Bliley Act (the “GLBAct”) became law.  The GLB Act madesignificant changes in U.S. banking law, principally by repealing the 1933Glass-Steagall Act.  Under the GLB Act,banks and other financial companies, such as securities firms and insurancecompanies, are now able to combine and be commonly owned.  The GLB Act also permits bank holdingcompanies and banks to engage in a broader range of financially relatedactivities than was available to them before the passage of the GLB Act,including insurance and securities underwriting, merchant banking and realestate development and investment.  TheGLB Act, however, does not authorize banks or their affiliates to engage incommercial activities that are not financial in nature, such as manufacturing.

 

The GLB Act creates a new category of bank holdingcompany called a “financial holding company.” In order to avail itself of the expanded financial activities permittedunder the GLB Act, a bank holding company must notify the Federal Reserve thatit elects to be a financial holding company. A bank holding company can make this election if it, and all its bank subsidiaries,are well capitalized, well managed, and have at least a satisfactory CommunityReinvestment Act rating, each in accordance with the definitions prescribed bythe Federal Reserve and the regulators of the company’s subsidiary banks.  Once a bank holding company makes such anelection, and provided

 

22

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that the Federal Reserve does not object to such election, thefinancial holding company may engage in financial activities (i.e., securitiesunderwriting, insurance underwriting, and certain other activities that arefinancial in nature as to be determined by the Federal Reserve) by simplygiving a notice to the Federal Reserve within thirty days after beginning suchbusiness or acquiring a company engaged in such business.  This makes the regulatory approval process toengage in financial activities much more streamlined than it was under priorlaw.  We have no present intention ofelecting to become a financial holding company.

 

The GLB Act also permits certain financial activitiesto be undertaken by a subsidiary of a national bank.  Generally, for financial activities that areconducted as a principal, such as a securities underwriter or dealer holding aninventory, a national bank must be one of the 100 largest national banks in theUnited States and have debt that is rated investment grade.  However, smaller national banks may own asecurities broker or an insurance agency, or certain other financial agencyentities under the GLB Act.  Under priorlaw, national banks could only own an insurance agency if it was located in atown of fewer than 5,000 residents, or under certain otherconditions.  Under the GLB Act, there isno longer any restriction on where the insurance agency subsidiary of a nationalbank is located or does business.

 

The GLB Act also contains a number of provisions thataffect the operations of all financial institutions.  One of the provisions relates to thefinancial privacy of consumers, authorizing the federal banking regulators toadopt rules that would limit the ability of banks and other financial entitiesto disclose non-public information about consumers to entities that are notaffiliates.  Under these rules, banksmust establish a disclosure policy for non-public customer information,disclose the policy to their customers, and give their customers theopportunity to object to non-public information being disclosed to a thirdparty.

 

**CapitalRequirements**

 

Under federal regulations, the Bank must maintain aminimum ratio of qualified total capital to risk-weighted assets of 8.0%.  Risk-weighted assets are determined bymultiplying the various categories of assets by the appropriate risk-weighingfactor (ranging from 0% to 100%) under applicable regulations.  Certain off-balance sheet items, such asstandby letters of credit, are included in assets for these purposes at a “credit

 

23

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equivalent” value, determined bymultiplying the off-balance sheet item by a credit conversion factorestablished by applicable regulations. At least half of the total capital must be comprised of common equity,retained earnings and a limited amount of permanent preferred stock, lessgoodwill (“Tier 1 capital”).  Theremainder (“Tier 2 capital”) may consist of a limited amount of subordinateddebt, other preferred stock, certain other instruments and a limited amount ofloan and lease loss reserves.  The sum ofTier 1 capital and Tier 2 capital is “total risk-based capital.”  Federal regulations also require a minimumratio of Tier 1 capital to risk-weighted assets of 4.0%.

 

In addition, federal regulations have established aminimum leverage ratio (Tier 1 capital to quarterly average assets lessgoodwill) of 3.0% for banks and bank holding companies that meet certainspecified criteria, including that they have the highest regulatoryrating.  All other banks and bank holdingcompanies are required to maintain a leverage ratio of 3.0% plus an additionalamount of at least 100 to 200 basis points.  The regulations also provide that banking organizationsexperiencing internal growth or making acquisitions will be expected tomaintain strong capital positions substantially above the minimum supervisorylevels, without significant reliance on intangible assets.

 

Banking regulators continue to indicate their desireto raise banking organization capital requirements beyond their currentlevels.  However, management is unable topredict whether higher capital ratios will be imposed and, if so, at whatlevels and on what schedule.

 

Any national bank not in compliance with applicablecapital requirements may be subject to certain growth restrictions, issuance ofa capital directive by the appropriate federal regulator, and various otherpossible enforcement actions by the appropriate federal regulators, including acease and desist order, civil monetary penalties, andthe establishment of restrictions on operations.  In addition, the institution could be subjectto appointment of a receiver or conservator or a forced merger into anotherinstitution.

 

**Limitson Dividends**

 

The amount of dividends that may be paid by the Bankdepends upon the Bank’s earnings and capital position, and is limited byfederal law, regulations and policies.

 

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As a national bank subject to the regulations of theOCC, the Bank must obtain approval for any dividend if the total of alldividends declared in any calendar year would exceed the total of its netprofits, as defined by applicable regulations, for that year, combined with itsretained net profits for the preceding two years, less any required transfersto surplus.  In addition, the Bank maynot pay a dividend in an amount greater than its undivided profits then on handafter deducting its losses and bad debts. For this purpose, bad debts are generally defined to include theprincipal amount of loans which are in arrears with respect to interest by sixmonths or more unless such loans are fully secured and in the process ofcollection.  Moreover, for purposes ofthis limitation, the Bank is not permitted to add the balance in its allowancefor loan loss account to its undivided profits then on hand; however, it maynet the sum of its bad debts as so defined against the balance in its allowancefor loan loss account and deduct from undivided profits only bad debts as sodefined in excess of that amount.

 

In addition, the OCC is authorized to determine undercertain circumstances relating to the financial condition of a national bankthat the payment of dividends would be an unsafe or unsound practice and toprohibit payment thereof.  The payment ofdividends that deplete a bank’s capital base could be deemed to constitute suchan unsafe or unsound practice.

 

**Loans ToOne Borrower Limitation**

 

Under applicable OCC regulations, a national bank’stotal outstanding loans and extensions of credit to one borrower may not exceed15 percent of the bank’s capital and surplus, plus an additional10 percent of the bank’s capital and surplus if the amount that exceedsthe bank’s 15 percent general limit is fully secured by readily marketablecollateral, which is defined to include certain financial instruments andbullion.  To qualify for the additional10 percent limit, the bank must perfect a security interest in the collateralunder applicable law and the collateral must have a current market value at alltimes of at least 100 percent of the amount of the loan or extension ofcredit that exceeds the bank’s 15 percent general limit.  At December 31, 2004, the Bank’s loans toone borrower limitation was $2.6 million.

 

**CommunityReinvestment**

 

Under the Community Reinvestment Act (“CRA”), a bankhas a continuing and affirmative obligation consistent with its safe and soundoperation to help meet the credit needs of its entire

 

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community, including low- and moderate-income neighborhoods.  The CRA does not establish specific lendingrequirements or programs for financial institutions nor does it limit aninstitution’s discretion to develop types of products and services that itbelieves are best suited to its particular community, consistent with theCRA.  The CRA requires the OCC, inconnection with its examination of national banks, to assess the institution’srecord of meeting the credit needs of its community and to take such recordinto account in its evaluation of certain applications by suchinstitution.  The OCC is required toprovide a written evaluation of an institution’s CRA performance utilizing afour tiered descriptive rating system, which rating is disclosed to the public.

 

The Community Reinvestment Act was amended by the GLBAct to provide that small banks (those under $250 million in assets) thatreceived an “outstanding” on their last CRA exam will not have to undergoanother CRA exam for five years, or for four years if their last exam was “satisfactory.”  In addition, any CRA agreement entered intobetween a bank and a community group must be disclosed, with both the bank andthe group receiving any grants from the bank detailing the amount and use ofthe funding provided.

 

**PromptCorrective Action**

 

The federal banking agencies are required to take “promptcorrective action” in respect of banks that do not meet minimum capitalrequirements.  There currently are fivecapital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly under capitalized” and “critically undercapitalized.”  The Bank is “wellcapitalized.”  The following table setsforth the minimum capital ratios that a bank must satisfy in order to beconsidered well capitalized or adequately capitalized under OCC regulations:

 
| ** **                       | ** ** | **Adequately**  | ** ** | **Well**        | ** ** |
|----------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                       | ** ** | **Capitalized** | ** ** | **Capitalized** | ** ** |
|                             |       |            |       |            |       |
| Total risk-based  capital ratio  |       | 8               | %          | 10              | %          |
| Tier 1  risk-based capital ratio |       | 4               | %          | 6               | %          |
| Leverage ratio                   |       | 4               | %          | 5               | %          |

 

The FDIC’s regulations establish specific actions thatare permitted or, in certain cases required, to be taken by regulators withrespect to institutions falling within one of the three undercapitalizedcategories.  Depending on the level

 

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of the institution’s capital, the agency’s correction powers caninclude:  requiring a capital restorationplan; placing limits on asset growth and restrictions on activities; requiringthe institution to issue additional stock (including voting stock) or beacquired by another institution in a transaction supervised by the FDIC;placing restrictions on transactions with affiliates; restricting the interestrate the institution may pay on deposits; ordering a new election for theinstitution’s board of directors; requiring that certain senior executiveofficers or directors be dismissed; prohibiting the institution from acceptingdeposits from correspondent banks; prohibiting the payment of principal orinterest on subordinated debt; and, in the most severe cases, appointing areceiver for the institution.  A bankthat is undercapitalized is required to submit a capital restoration plan.  Under certain circumstances, a “wellcapitalized,” “adequately capitalized” or “undercapitalized” institution may berequired to comply with restrictions applicable to the next lowest capitalcategory.

 

**Safetyand Soundness Standards**

 

The OCC and the other federal banking agencies haveadopted “Interagency Guidelines Establishing Standards for Safety and Soundness”(“Guidelines”).  These operational andmanagerial standards address an institution’s general practices, and aredesigned to provide a framework for the federal bank regulators to determinewhether those practices are sound in principle and whether procedures are inplace to ensure that they are applied in the normal course of business.  The guidelines cover such areas as internalcontrols, loan documentation, credit underwriting, interest rate exposure,asset growth and compensation.  Banksfailing to meet these standards are required to submit compliance plans totheir appropriate federal regulators.

 

The OCC is also required to perform annual on-sitebank examinations, place limits on real estate lending by banks and impose morestringent auditing requirements.

 

**Insuranceof Accounts and Regulations by the FDIC**

 

The Bank is a member of the Bank Insurance Fund, whichis administered by the FDIC.  Depositsare insured up to the applicable limits by the FDIC and such insurance isbacked by the full faith and credit of the United States government.  As insurer, the FDIC imposes depositinsurance premiums and is authorized to conduct examination of, and to requirereporting by, FDIC-insured institutions. It also may prohibit any FDIC-

 

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insured institution from engaging in any activity the FDIC determinesby regulation or order to pose a serious risk to the Bank Insurance Fund.

 

The FDIC’s deposit insurance premiums are assessedthrough a risk-based system under which all insured depository institutions areplaced into one of nine categories and assessed insurance premiums based upontheir level of capital and supervisory evaluation.  Under the system, institutions classified aswell capitalized (i.e., a core capital ratio of at least 5%, a ratio ofTier 1 or core capital to risk-weighted assets (“Tier 1 risk-basedcapital”) of at least 6% and a risk-based capital ratio of at least 10%) andconsidered healthy pay the lowest premium, while institutions that are lessthan adequately capitalized (i.e., core or Tier 1 risk-based capitalratios of less than 4% or a total risk-based capital ratio of less than 8%) andconsidered of substantial supervisory concern pay the highest premium.  Risk classification of all insuredinstitutions is made by the FDIC for each semi-annual assessment period.

 

The FDIC is authorized to increase assessment rates,on a semi-annual basis, if it determines that the reserve ratio of the BankInsurance Fund will be less than the designated reserve ratio of 1.25% of BankInsurance Fund insured deposits.  Insetting these increased assessments, the FDIC must seek to restore the reserveratio to that designated reserve level, or such higher reserve ratio asestablished by the FDIC.

 

The current premium schedule for Bank Insurance Fundinsured institutions ranges from 0 to 27 basis points per $100 ofdeposits.  The Bank is in the category ofinstitutions that pay zero in FDIC insurance premiums.  In addition FDIC premiums, all insuredinstitutions are required to pay a Financing Corporation assessment, in orderto find the interest on bonds issued to resolve thrift failures in the 1980s.  The current annual rate for all insuredinstitutions is 1.48 basis points for each $100 in domestic deposits.  These assessments are revised quarterly andwill continue until the bonds mature in the year 2017.

 

**LegislativeProposals and Reforms**

 

Legislative and regulatory proposals regarding changesin banking, and the regulation of banks, thrifts and other financialinstitutions, are considered from time to time by the executive branch of thefederal government, Congress and various state governments.  Certain of these proposals, if adopted,

 

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could significantly change the regulation of banks and the financialservices industry.  We cannot predictwhether any of these proposals will be adopted or, if adopted, how theseproposals will affect us.

 

**Impactof Monetary Policies**

 

The profitability of the banking business depends inlarge part on the difference between the interest rate paid by us on depositsand other borrowings, and the interest rate received by us on loans extended tocustomers and securities held in our portfolio. In addition, we attempt to generate revenues by assessing fees on ourservices, to the extent the competitive market will allow such fees.

 

The earnings and growth of the Bank and of the bankingindustry as a whole is affected not only by general domestic and foreigneconomic conditions, but also by the monetary and fiscal policies of the UnitedStates and its agencies, particularly the Federal Reserve Board.  The Federal Reserve Board affects the nationaleconomy by its open market operations in United States government securities,limitations upon savings and time deposit interest rates, and adjustments tothe discount and reserve retention rates applicable to borrowings by bankswhich are members of the Federal Reserve System.  These actions of the Federal Reserve Boardinfluence the growth of bank loans, investments and deposits and affectinterest rates charged on loans and paid on deposits.  The nature and impact of any future changesin monetary policies cannot be predicted but, in any event, may have a materialeffect on the results of operations.

 

**Transactionswith Affiliates**

 

National banks must comply with Sections 23A and23B of the Federal Reserve Act (“Sections 23A and 23B”) andRegulation W under that act relative to transactions with affiliates inthe same manner and to the same extent as if the bank were a Federal Reservemember bank.  A bank holding company, itssubsidiaries and any other company under common control are considered affiliatesof the bank.  Generally, Sections 23Aand 23B and Regulation W: (i) limit the extent to which the insured association or itssubsidiaries may engage in certain covered transactions with an affiliate to anamount equal to 10% of such institution’s capital and surplus and place anaggregate limit on all such transactions with affiliates to an amount equal to20% of such capital and surplus, and (ii) require that all suchtransactions be on terms substantially the same, or at least as favorable tothe institution or subsidiary, as those provided to

 

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a non-affiliate.  The term “coveredtransaction” includes the making of loans, the purchase of assets, the issuanceof a guarantee and similar types of transactions.  Any loan or extension of credit by the bankto an affiliate must be secured by collateral in accordance withSection 23A and Regulation W. Exemptions from Section 23A or 23B may be granted only by theFederal Reserve.  The Bank has not beensignificantly affected by the rules regarding transactions with affiliates.

 

The Bank’s authority toextend credit to executive officers, directors and 10% shareholders, including1st Colonial, as well as entities controlled by such persons, is governedby Sections 22(g) and 22(h) of the Federal Reserve Act, andRegulation O thereunder.  Pursuantto these laws and regulations, any loan made by the Bank to an executiveofficer or director, or his or her affiliates, (i) was made in theordinary course of business, (ii) was made on terms and conditions substantiallythe same as those offered to unaffiliated individuals and (iii) did notinvolve more than the normal risk of repayment. The Bank has not made any loans to a 10% shareholder.  Generally, Regulation O also placesindividual and aggregate limits on the amount of loans the Bank may make tosuch persons based, in part, on the Bank’s capital position, and requirescertain board approval procedures to be followed.

 

**ITEM 2.  Description of Property**

 

Our headquarters are located at 1040 HaddonAvenue, Collingswood, New Jersey.  Theproperty, which houses the administrative headquarters and a full-servicebanking office, is leased by the Bank. The building has two stories containing approximately 3,800 total squarefeet of space.  The annual base rentalthrough 2004 was $45,000, not including taxes, utilities and insurance.  This rent has increased to $49,500 for2005.  After 2005, the rent increasesannually based on increases in the consumer price index, with a minimum annualincrease of 3%.  The initial term of thelease is through 2009, with options in favor of the Bank to renew the lease fortwo additional five-year terms.  Theproperty is well maintained and suitable to our present needs and operations.

 

Certain back office and administrative functions arelocated in office space leased by the Bank at 900 Haddon Avenue,Collingswood, New Jersey.  This leaseexpires in 2006.

 

On January 16, 2003the Bank opened a branch office at 321 Broadway, Westville, NewJersey.  The Bank purchased this facilityfrom another financial institution.  TheBank did not

 

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purchase any deposits or loans in this transaction.  In addition to the existing vault, drive-throughteller windows and night depository facility, the facility was expanded toinclude multiple customer service representative locations and a drive-upautomated teller machine.

 

**ITEM 3.****  Legal Proceedings**

 

We areperiodically parties to or otherwise involved in legal proceedings arising inthe normal course of business, such as claims to enforce liens, claimsinvolving the making and servicing of real property loans, and other issuesincident to our business.  We do notbelieve that there is any pending or threatened proceeding against us which, ifdetermined adversely, would have a material effect on our business or financialposition.

 

**ITEM 4.****  Submission ofMatters to a Vote of Security Holders**

 

None.

 

**PART II**

 

**ITEM 5.****  Marketfor Common Equity, Related Shareholder Matters and Small Business IssuerPurchases of Equity Securities**

 

Our common stock is traded on the OTC Bulletin Boardunder the symbol “FCOB.”  An activetrading market does not currently exist for our common stock.  As of March 29, 2005, the bid price for thecommon stock was $10.75, and the asked price was $10.85.

 

The following table sets forth the high and low lastsale information, as reported by the OTC Bulletin Board, as of the most recentpracticable date and for the periods indicated:

 

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# **SALE PRICE INFORMATION FOR COMMON STOCK**

 
|                              | ** ** | **High**       | ** ** | **Low** | ** ** |
|-----------------------------------|------------|----------------|------------|---------|------------|
| ** **                        |       | **2003(1)(2)** |       |
| First Quarter                     |       | $              | 9.34       |    | $          | 7.49 |   |
| Second Quarter                    |       | 10.48          |       | 8.30    |       |
| Third Quarter                     |       | 10.48          |       | 9.52    |       |
| Fourth Quarter                    |       | 10.57          |       | 9.57    |       |
|                              |       |           |       |    |       |
| ** **                        |       | **2004(1)(2)** |       |
| First Quarter                     |       | $              | 10.71      |    | $          | 9.80 |   |
| Second Quarter                    |       | 10.71          |       | 9.10    |       |
| Third Quarter                     |       | 10.25          |       | 9.00    |       |
| Fourth Quarter                    |       | 11.25          |       | 9.65    |       |
|                              |       |           |       |    |       |
| ** **                        |       | **2005(1)**    |       |
| First Quarter  (through March 29) |       | $              | 11.25      |    | $          | 10.32 |   |

 

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(1)       The quotationsreflect inter-dealer prices, without retail mark-up, mark-down or commissionand may not represent actual transactions.

 

(2)       Prices areadjusted to reflect the 5% stock dividend paid by 1st Colonial onApril 15, 2003 to shareholders of record as of April 1, 2003 and the5% stock dividend paid by 1st Colonial on April 15, 2004 toshareholders of record as of April 1, 2004.

 

As of March 1, 2005, there were optionsoutstanding to purchase 201,478 shares of common stock and warrantsoutstanding to purchase 364,981 shares of common stock.  These amounts are as adjusted to reflect the10% stock dividend paid on January 15, 2002, and the 5% stock dividend paid oneach of April 15, 2003 and April 15, 2004.

 

As of March 1, 2005, there were 283 holdersof record of our common stock.

 

Boenning & Scattergood, Inc., Janney MontgomeryScott, LLC, Monroe Securities, Inc. and Ryan Beck & Co., Inc. make amarket in our common stock.  Making amarket involves maintaining bid and ask quotations and being able, asprincipal, to effect transactions in reasonable quantities at those prices,subject to securities laws and regulatory constraints.  Additionally,

 

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the development of a liquid public market depends on the existence ofwilling buyers and sellers, the presence of which is not within ourcontrol.  An active and liquid market maynot develop for the common stock.

 

StockTrans, Inc. serves as transfer agent andregistrar for our common stock.

 

**Dividend Policy**

 

Since our inception in June 2000, we have not paid acash dividend, and we do not intend to pay cash dividends for the foreseeablefuture.  We desire to retain our netincome to support the growth of the bank. Any payment of cash dividends to our shareholders would be dependent onthe payment of a cash dividend from the bank to us.  The payment of cash dividends by the bank tous is limited under federal banking law. See “Supervision and Regulation–Limits on Dividends” and “Description ofCapital Stock–Common Stock–Dividends.”

 

On January 15, 2002,we effected a 10% stock split in the form of a stock dividend to shareholdersof record on January 2, 2002.  OnApril 15, 2003, we paid a 5% stock dividend to shareholders of record onApril 1, 2003.  On April 15,2004, we paid a 5% stock dividend to shareholders of record on April 1, 2004.  On January 19, 2005, we declared a 5% stockdividend payable on April 15, 2005 to shareholders of record on April 1,2005.  We will continually review whetherto pay additional stock dividends in the future.

 

Theselected consolidated financial data presented below is derived from, andshould be read in conjunction with, our audited financial statements for theyears ended December 31, 2004 and 2003, including the related notes, includedin this document as Item 7.** **All per share data has been restatedfor the effect of the 10% stock dividend paid on January 15, 2002 toshareholders of record as of January 2, 2002, the 5% stock dividend paid onApril 15, 2003 to shareholders of record as of April 1, 2003 and the 5% stockdividend paid on April 15, 2004 to shareholders of record as of April 1, 2004.

 

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** **

**Summary of Operations**

 
| ** **                                           | ** ** | **For the Years Ended**    | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **December 31,**           | ** ** |
| ** **                                           | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Interest income                                      |       | $                          | 5,405      |   | $ | 4,764 |   |
| Interest expense                                     |       | 1,372                      |       | 1,244 |   |
| Net interest  income                                 |       | 4,033                      |       | 3,520 |   |
| Provision for  loan losses                           |       | 218                        |       | 225 |   |
| Net interest  income after provision for loan losses |       | 3,815                      |       | 3,295 |   |
| Other income                                         |       | 301                        |       | 299 |   |
| Other expense                                        |       | 3,107                      |       | 2,759 |   |
| Income (loss)  before income taxes                   |       | 1,009                      |       | 835 |   |
| Income tax  expense (benefit)                        |       | 384                        |       | 335 |   |
| Net income  (loss)                                   |       | $                          | 625        |   | $ | 500 |   |

 

**PerShare Data**

 
| ** **                            | ** ** | **For the  Years Ended** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **December  31,**        | ** ** |
| ** **                            | ** ** | **2004**                 | ** ** | **2003** | ** ** |
| Net income  (loss)                    |       |                     |       |   |   |
| Basic                                 |       | $                        | 0.31       |   | $ | 0.35 |   |
| Diluted                               |       | 0.31                     |       | 0.35 |   |
| Book Value                            |       | $                        | 7.73       |   | $ | 6.75 |   |
| Actual period  end shares outstanding |       | 2,251,642                |       | 1,414,487 |   |

 

**BalanceSheet Data**

 
| ** **                 | ** ** | **At  December 31,**        | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| ** **                 | ** ** | **(Dollars  in thousands)** | ** ** |
| Total Assets               |       | $                           | 135,973    |   | $ | 118,072 |   |
| Investment  securities (1) |       | 53,546                      |       | 33,793 |   |
| Total loans (2)            |       | 77,630                      |       | 66,831 |   |
| Allowance for  loan losses |       | (971                        | )          | (768 | ) |
| Deposits                   |       | 111,186                     |       | 104,323 |   |
| Shareholders’  equity |       | $                           | 17,399     |   | $ | 9,551 |   |

 

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**PerformanceRatios**

 
| ** **                                         | ** ** | **For the  Years Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **December  31,**        | ** ** |
| ** **                                         | ** ** | **2004**                 | ** ** | **2003** | ** ** |
| Return on  average assets                          |       | 0.48                     | %          | 0.48 | % |
| Return on  average shareholders’ equity       |       | 4.75                     | %          | 5.39 | % |
| Net interest  spread (3)                           |       | 2.93                     | %          | 3.18 | % |
| Net interest  margin (4)                           |       | 3.32                     | %          | 3.55 | % |
| Other income as  a percentage of total revenue (5) |       | 6.95                     | %          | 7.83 | % |
| Other income as  a percentage of average assets    |       | 0.23                     | %          | 0.28 | % |
| Other expense to  average assets                   |       | 2.41                     | %          | 2.62 | % |
| Efficiency ratio  (6)                              |       | 71.69                    | %          | 72.24 | % |

 

**AssetQuality Data**

 
| ** **                                         | ** ** | **At or  for the Years Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **December  31,**              | ** ** |
| ** **                                         | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Nonperforming  loans                               |       | $                              | 24         |   | $ | — |   |
| Nonperforming  assets                              |       | —                         |       | — |   |
| Allowance for  loan losses to period-end loans (2) |       | 1.25                           | %          | 1.15 | % |
| Net loan  charge-offs to average total loans       |       | 0.02                           | %          | 0.05 | % |
|                                                    |            |                                |            |  |  |  |  |

 

**SelectedCapital Ratios (7)**

 
| ** **                       | ** ** | **At  December 31,** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Total risk-based  capital        |       | 20.28                | %          | 14.60 | % |
| Total tier 1  risk-based capital |       | 19.13                | %          | 13.52 | % |
| Leverage ratio                   |       | 11.56                | %          | 8.73 | % |
| Equity to assets  ratio (8)      |       | 12.80                | %          | 8.09 | % |

 

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(1)   Includes securities held to maturity andsecurities available for sale.

(2)   Includes mortgage loans held for sale.

(3)   Net interest spread is the difference betweenthe average yield on interest earning assets and the average cost of interestbearing liabilities.

(4)   The net interest margin is calculated bydividing net interest income by average interest earning assets.

(5)   Total revenue consists of net interest incomeand total other income.

(6)   Efficiency ratio is total other expensedivided by the sum of net interest 

 

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income and total otherincome.

(7)   The ratios in this table are the capitalratios of the bank,  The bank’s capitalratios must meet the minimum requirements of the OCC.  As long as the consolidated assets of 1st Colonialare less than $150 million, its sole business is serving as the holding companyfor the bank, and it has no publicly held debt, 1st Colonial is exempt from theconsolidated capital requirements of the Federal Reserve Board.

(8)   Equity to assets ratio is period-end totalequity to period-end total assets.

 

**ITEM 6.****          MANAGEMENT’SDISCUSSION AND ANALYSIS**

 

The following presents management’s discussion andanalysis of our financial condition and results of operations and should beread in conjunction with the financial statements and related notes included inItem 7 of this annual report.  Thisannual report 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-looking statements, implicitly andexplicitly, include the assumptions underlying the statements and otherinformation with respect to our beliefs, plans, objectives, goals, expectations,anticipations, estimates, intentions, financial condition, results ofoperations, future performance and business, including our:

 

•      expectations for continuedacceptance and success in the banking and business communities in our marketarea;

 

•      expectations as to theamount, mix, yield and other characteristics of the deposits and loans weexpect to acquire and make; and

 

•      expectations and estimateswith respect to our revenues, expenses, earnings, asset quality and otherfinancial data and capital and performance ratios.

 

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

 

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•      the strength of the UnitedStates economy in general and the strength of the regional and local economiesin which we conduct operations;

 

•      the effects of, and changesin, trade, monetary and fiscal policies and laws, including interest ratepolicies of the Board of Governors of the Federal Reserve System;

 

•      inflation, interest rate,market and monetary fluctuations;

 

•      our ability to raise thecapital necessary on a timely basis to support our continued asset growth andgeographic expansion;

 

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

 

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

 

•      the willingness ofprospective customers to substitute our products and services for the bankproducts and services they currently use, and the impact of competition frombanks, thrifts and others in our market;

 

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

 

•      the impact of changes infinancial services policies, laws and regulations, including laws, regulationsand policies concerning taxes, banking, securities and insurance, and theapplication thereof by regulatory bodies;

 

•      technological changes;

 

•      change in consumer spendingand savings habits; and

 

•      regulatory or judicialproceedings.

 

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

 

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

 

**Overview**

 

Effective June 30, 2002, the Bank became a whollyowned subsidiary of 1st Colonial, which has no material operations otherthan ownership of the Bank.  Therefore,the financial statements of 1st Colonial prior to June 30, 2002 arethe historical statements of the Bank. All per share data has been restated for the effect of the 10% stockdividend paid on January 15, 2002 to shareholders of record as ofJanuary 2, 2002, the 5% stock dividend paid on April 15, 2003 toshareholders of record as of April 1, 2003 and the 5% stock dividend paidon April 15, 2004 to shareholders of record as of April 1, 2004.

 

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

 

Our earnings are largely dependent upon net interestincome (the difference between what we earn on our loans and investments andwhat we pay on deposits and borrowings). In addition to net interest income, our net income is impacted by ourloan loss provision, other income (mostly deposit fees and income from sale ofloans held for sale) and other expense (such as salaries and benefits,professional fees, occupancy cost and data processing expenses).

 

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**CriticalAccounting Matters**

 

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

 

The allowance for loan losses is established through aprovision for loan losses charged to operations.  The allowance is maintained at a level thatmanagement believes will be adequate to absorb estimated losses on existingloans based on the collectibility of the loans and prior loss experience.  Management uses significant estimates todetermine the allowance for loan losses. Management’s evaluations consider such factors as changes in the natureand volume of the portfolio, overall portfolio quality, concentrations ofcredit risk, review of specific problem loans, current economic conditions andtrends that may affect the borrowers’ ability to pay, and prior loss experiencewithin various categories of the portfolio. Loans are charged against the allowance when they are determined to beuncollectible.

 

In addition, regulatory authorities, as an integralpart of their examinations, periodically review the allowance for loanlosses.  They may require additions tothe allowance based upon their judgments about information available to them atthe time of examination.

 

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

 

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The realizability of deferred tax assets is dependentupon various factors, including the generation of future taxable income, theexistence of taxes paid and recoverable, the reversal of deferred taxliabilities, and tax planning strategies.

 

**Comparisonof Financial Condition**

 

December 31, 2004 Versus December 31, 2003

 

Our assets totaled $136.0 million atDecember 31, 2004, as compared to $118.1 million at December 31,2003, an increase of $17.9 million or 15.2%.  Our assets at December 31, 2004, consistedprimarily of cash and cash equivalents which totaled $3.8 million,investment securities, which totaled $53.5 million and loans, includingloans held for sale, which totaled $77.6 million.  Premises and equipment totaled $949,000 atDecember 31, 2004, and consisted primarily of our Westville branch andleasehold improvements.  Our assets atDecember 31, 2003, consisted primarily of cash and cash equivalents,including federal funds sold, which totaled $16.5 million, investmentsecurities, which totaled $33.8 million and loans, including loans heldfor sale, which totaled $66.8 million. Premises and equipment totaled $935,000 at December 31, 2003, andconsisted primarily of our Westville branch and leasehold improvements.  The $17.9 million increase in totalassets was primarily due to an increase in loans of $10.8 million, anincrease in investment securities of $19.8 million, offset by a decreasein cash and short-term investments, such as Federal Funds sold and interestbearing deposits of $12.7 million. This increase in assets was funded by an increase in deposits of$6.9 million, an increase in short-term borrowings of$3.1 million.  Additional funding of$7.2 million was provided by our common stock offering that was completed inApril 2004.  The increase in loans wasdue to general growth in our loan portfolio resulting from the continuedexecution of our business plan.

 

Our deposits totaled $111.2 million atDecember 31, 2004, as compared to $104.3 million at December 31,2003, an increase of $6.9 million or 6.6%. This increase was the direct result of the establishment of new businessrelationships with municipalities and other commercial accounts.

 

Noninterest-bearing demand deposits totaled$22.1 million at December 31, 2004 an increase of 8.3% as compared tobalances of $20.4 million at December 31, 2003. Interest-bearing demand deposits totaled $34.8 million atDecember 31, 2004, a decrease

 

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of 6.7% as compared to balances of $37.3 million atDecember 31, 2003.  This increase innon-interest bearing demand deposits was the result of new relationshipsestablished with commercial accounts. The decrease in interest bearing demand deposits was the result of ashift from interest bearing demand to money market deposits and certificates ofdeposit.  Savings and money marketdeposits totaled $24.8 million and certificates of deposit totaled$29.5 million at December 31, 2004, increases of 21.6% and 12.6%,respectively, as compared to balances of $20.4 and $26.2 million,respectively, at December 31, 2003.

 

**NetInterest Income**

 

The principal source of our revenue is net interestincome.  Net interest income is thedifference between income earned on loans and securities and the interest paidon deposits and borrowed funds. Interest-earning assets are comprised primarily of loans and securities,while deposits represent the major portion of interest bearingliabilities.  Changes in the volume andmix of interest-earning assets and interest-bearing liabilities, as well astheir respective yields and rates, have a significant impact on the level ofnet interest income.  Net interest marginis calculated as net interest income divided by average earning assets andrepresents our net yield on our earning assets.

 

Interest on loans is included in interest income onthe accrual method over the terms of the loans based upon the principalbalances outstanding.  During the fiscalyears ended December 31, 2004 and 2003, average interest-earning assetswere $123.1 million and $99.9 million, respectively.  During these same periods, our net yields onaverage interest-earning assets (net interest margin) were 3.32% and 3.55%,respectively.

 

**AverageBalance, Interest Income And Expense, Average Yield And Rates**

 

The following table illustrates the average balancesof total interest-earning assets and total interest-bearing liabilities for theperiods indicated, showing the average distribution of assets, liabilities,shareholders’ equity, and the related income, expense, and correspondingweighted average yields and costs.  Theaverage balances used for the purposes of these tables and other statisticaldisclosures were calculated by using the daily average balances.  Non-accruing loans, if any, are included inthe average balances of loans.

 

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| ** **                                                                       | ** ** | **Year Ended December 31,  2004** | ** ** | **Year Ended December 31,  2003** | ** ** | **Year Ended December 31,  2002** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                       | ** ** | **Average  Balance**              | ** ** | **Interest  Income/  Expense**         | ** ** | **Average  Yield/  Rate**              | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  Rate** | ** ** |
| ** **                                                                       | ** ** | **(Dollars in Thousands)**        | ** ** |
| **Assets**                                                                       |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest earning  assets:                                                        |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds  sold                                                              |       | $                                 | 10,186     |                                   | $          | 142                                    |       | 1.39 | % | $ | 6,953 |   | $ | 78 |   | 1.12 | % | $ | 11,006 |   | $ | 176 |   | 1.60 | % |
| Investment  Securities:                                                          |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable(1)                                                                       |       | 32,199                            |       | 887                                    |       | 2.75                                   | %          | 28,945 |   | 870 |   | 3.01 | % | 14,683 |   | 647 |   | 4.41 | % |
| Tax-exempt(2)                                                                    |       | 8,412                             |       | 167                                    |       | 1.99                                   | %          | 3,826 |   | 71 |   | 1.86 | % | 604 |   | 17 |   | 2.81 | % |
| Total Securities                                                                 |       | 40,611                            |       | 1,054                                  |       | 2.60                                   | %          | 32,771 |   | 941 |   | 2.87 | % | 15,287 |   | 664 |   | 4.34 | % |
| Loans, net of  deferred fees/costs(3)                                            |       | 72,344                            |       | 4,266                                  |       | 5.90                                   | %          | 60,183 |   | 3,769 |   | 6.26 | % | 47,430 |   | 3,251 |   | 6.85 | % |
| Total interest  earning assets                                                   |       | 123,141                           |       | 5,462                                  |       | 4.44                                   | %          | 99,907 |   | 4,788 |   | 4.79 | % | 73,723 |   | 4,091 |   | 5.55 | % |
|                                                                             |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  earning assets:                                                    |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                                                         |       | 4,816                             |       |                                   |       |                                   |       | 4,258 |   |   |   |   |   | 3,017 |   |   |   |   |   |
| Other assets(4)                                                                  |       | 1,836                             |       |                                   |       |                                   |       | 1,629 |   |   |   |   |   | 1,107 |   |   |   |   |   |
| Less: allowance  for loan losses                                                 |       | (881                              | )          |                                   |       |                                   |       | (681 | ) |   |   |   |   | (472 | ) |   |   |   |   |
| Total  non-interest earning assets                                               |       | 5,771                             |       |                                   |       |                                   |       | 5,206 |   |   |   |   |   | 3,652 |   |   |   |   |   |
|                                                                             |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                                     |       | $                                 | 128,912    |                                   |       |                                   |       |   | $ | 105,113 |   |   |   |   |   | $ | 77,375 |   |   |   |   |   |
|                                                                             |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and shareholders’ equity**                                   |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities                                                    |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                        |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  demand                                                         |       | $                                 | 33,742     |                                   | $          | 547                                    |       | 1.62 | % | $ | 31,344 |   | $ | 531 |   | 1.69 | % | $ | 19,772 |   | $ | 427 |   | 2.16 | % |
| Money market                                                                     |       | 16,647                            |       | 100                                    |       | 0.60                                   | %          | 15,109 |   | 97 |   | 0.64 | % | 12,231 |   | 192 |   | 1.57 | % |
| Savings                                                                          |       | 6,253                             |       | 19                                     |       | 0.30                                   | %          | 5,293 |   | 31 |   | 0.59 | % | 3,873 |   | 38 |   | 0.98 | % |
| Time deposits                                                                    |       | 30,306                            |       | 682                                    |       | 2.25                                   | %          | 20,296 |   | 544 |   | 2.68 | % | 14,342 |   | 425 |   | 2.96 | % |
| Total interest  bearing deposits                                                 |       | 86,948                            |       | 1,348                                  |       | 1.55                                   | %          | 72,042 |   | 1,203 |   | 1.67 | % | 50,218 |   | 1,082 |   | 2.15 | % |
| Short-term  borrowings                                                           |       | 4,086                             |       | 24                                     |       | 0.59                                   | %          | 5,284 |   | 41 |   | 0.78 | % | 5,217 |   | 83 |   | 1.59 | % |
| Total interest  bearing liabilities                                              |       | 91,034                            |       | 1,372                                  |       | 1.51                                   | %          | 77,326 |   | 1,244 |   | 1.61 | % | 55,435 |   | 1,165 |   | 2.10 | % |
|                                                                             |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                                               |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposit                                                                   |       | 24,541                            |       |                                   |       |                                   |       | 18,320 |   |   |   |   |   | 14,786 |   |   |   |   |   |
| Other liabilities                                                                |       | 181                               |       |                                   |       |                                   |       | 186 |   |   |   |   |   | 237 |   |   |   |   |   |
| Total non-interest  bearing liabilities                                          |       | 24,722                            |       |                                   |       |                                   |       | 18,506 |   |   |   |   |   | 15,023 |   |   |   |   |   |
|                                                                             |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                                                                |       | 115,756                           |       |                                   |       |                                   |       | 95,832 |   |   |   |   |   | 70,458 |   |   |   |   |   |
| Shareholders’  equity                                                       |       | 13,156                            |       |                                   |       |                                   |       | 9,281 |   |   |   |   |   | 6,917 |   |   |   |   |   |
|                                                                             |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities  and shareholders’equity                                  |       | $                                 | 128,912    |                                   |       |                                   |       |   | $ | 105,113 |   |   |   |   |   | $ | 77,375 |   |   |   |   |   |
|                                                                             |       |                              |       |                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  spread                                                             |       |                              |       |                                   |       | 2.93                                   | %          |   |   |   |   | 3.18 | % |   |   |   |   | 3.45 | % |
| Net interest  income/net interest margin                                         |       |                              |       | $                                      | 4,090      |                                   | 3.32       | % |   |   | $ | 3,544 |   | 3.55 | % |   |   | $ | 2,926 |   | 3.97 | % |
| Average interest  earning assets as a percentage of interest bearing liabilities |       | 135.27                            | %          |                                   |       |                                   |       | 129.20 | % |   |   |   |   | 132.99 | % |   |   |   |   |

----

(1)       All taxable investment securities areclassified as available for sale.  Theaverage balance for taxable securities excludes the SFAS 115 valuationallowance.

 

42

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(2)       All tax-exempt investment securities areclassified as held to maturity.  Interestincome on tax-exempt investment securities is presented on a tax-equivalentbasis.  Tax exempt yields were adjustedto a tax-equivalent basis using a 34% rate.

 

(3)       Includes average balance of loans held forsale of $183 in 2004, $382 in 2003, and $156 in 2002.  Interest income on loans held for sale was$15 in 2004, $23 in 2003, and $13 in 2002.

 

(4)       Excludes the average balance of deferred taxassets related to the SFAS 115 valuation allowance on investmentsecurities available for sale.

 

**Rate/VolumeAnalysis**

 

Future net interest income will be affected by changesin both average interest rates and average volumes of interest-earning assetsand interest-bearing liabilities.  Thefollowing tables set forth certain information regarding changes in interest incomeand interest expense for the periods indicated for each category ofinterest-earning assets and interest-bearing liabilities.  Information is provided on changesattributable to (i) changes in volume (changes in average volumemultiplied by prior rate), (ii) changes in rate (changes in average ratemultiplied by prior average volume), and (iii) total change.  Changes due to the combination of rate andvolume changes (change in average volume multiplied by change in average rate)have been allocated on a consistent basis between rate and volume variancesbased on the percentage of the rate or volume variance to the sum of the twoabsolute variances.

 

43

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| ** **                                   | ** ** | **Year Ended December 31, 2004  versus  Year Ended December 31, 2003** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Increase (Decrease) Due to**                                                   | ** ** |
| ** **                                   | ** ** | **Volume**                                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)**                                                       | ** ** |
| Interest Income:                             |       |                                                                             |       |   |   |   |   |
| Federal funds  sold                          |       | $                                                                                | 42         |   | $ | 22 |   | $ | 64 |   |
| Investment  securities – taxable        |       | 92                                                                               |       | (75 | ) | 17 |   |
| Investment  securities – tax exempt (1) |       | 91                                                                               |       | 5 |   | 96 |   |
| Loans                                        |       | 727                                                                              |       | (230 | ) | 497 |   |
|                                         |       |                                                                             |       |   |   |   |   |
| Total change in  interest income             |       | 952                                                                              |       | (278 | ) | 674 |   |
|                                         |       |                                                                             |       |   |   |   |   |
| Interest  Expense:                           |       |                                                                             |       |   |   |   |   |
| Interest bearing  checking                   |       | 39                                                                               |       | (23 | ) | 16 |   |
| Money market  deposits                       |       | 10                                                                               |       | (7 | ) | 3 |   |
| Savings deposits                             |       | 5                                                                                |       | (17 | ) | (12 | ) |
| Time deposits                                |       | 236                                                                              |       | (98 | ) | 138 |   |
| Short-term  borrowings                       |       | (8                                                                               | )          | (9 | ) | (17 | ) |
|                                         |       |                                                                             |       |   |   |   |   |
| Total change in  interest expense            |       | 282                                                                              |       | (154 | ) | 128 |   |
|                                         |       |                                                                             |       |   |   |   |   |
| Total change in  net interest income         |       | $                                                                                | 670        |   | $ | (124 | ) | $ | 546 |   |

 
| ** **                                   | ** ** | **Year  Ended December 31, 2003  versus  Year Ended December 31, 2002** |       |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Increase  (Decrease) Due to**                                                   |       |
| ** **                                   | ** ** | **Volume**                                                                        | ** ** | **Rate** | ** ** | **Total** |   |
| ** **                                   |       | **(Dollars  in thousands)**                                                       |       |
| Interest Income:                             |       |                                                                              |       |   |   |   |   |
| Federal funds  sold                          |       | $                                                                                 | (54        | ) | $ | (44 | ) | $ | (98 | ) |
| Investment  securities – taxable        |       | 478                                                                               |       | (255 | ) | 223 |   |
| Investment  securities – tax exempt (1) |       | 62                                                                                |       | (8 | ) | 54 |   |
| Loans                                        |       | 817                                                                               |       | (299 | ) | 518 |   |
|                                         |       |                                                                              |       |   |   |   |   |
| Total change in  interest income             |       | $                                                                                 | 1,303      |   | $ | (606 | ) | $ | 697 |   |
|                                         |       |                                                                              |       |   |   |   |   |
| Interest  Expense:                           |       |                                                                              |       |   |   |   |   |
| Interest bearing  checking                   |       | $                                                                                 | 211        |   | $ | (107 | ) | $ | 104 |   |
| Money market  deposits                       |       | 37                                                                                |       | (132 | ) | (95 | ) |
| Savings deposits                             |       | 11                                                                                |       | (18 | ) | (7 | ) |
| Time deposits                                |       | 163                                                                               |       | (44 | ) | 119 |   |
| Short-term  borrowings                       |       | 1                                                                                 |       | (43 | ) | (42 | ) |
|                                         |       |                                                                              |       |   |   |   |   |
| Total change in  interest expense            |       | 423                                                                               |       | (344 | ) | 79 |   |
|                                         |       |                                                                              |       |   |   |   |   |
| Total change in  net interest income         |       | $                                                                                 | 880        |   | $ | (262 | ) | $ | 618 |   |

----

(1)       Tax-exemptyields were adjusted to a tax-equivalent basis using a 34% rate.

 

44

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**Comparisonof Results of Operations**

 

Year Ended December 31, 2004 Versus Year EndedDecember 31, 2003

 

*General. *Netincome increased 25.0% to $625,000 for the year ended December 31, 2004, ascompared to net income of $500,000 for the period ended December 31, 2003.  This increase was due to a $515,000 increasein net interest and total other income, coupled with a $7,000 reduction in theprovision for loan losses, which were partially offset by a $348,000 increasein total other expense and a $49,000 increase in income tax expense.

 

Basic earnings per share decreased to $0.31 for theyear ended December 31, 2004 (basic and diluted) from $0.35 (basic and diluted)for the year ended December 31, 2003. This decrease was due to the issuance of additional shares of commonstock in our public offering completed in April 2004.  The total weighted average number of sharesoutstanding for basic earnings per share increased 575,479 to 1,987,008 for theyear ended December 31, 2004 compared to 1,411,529 for the year ended December31, 2003.  The weighted average number ofshares outstanding on a diluted basis was 2,045,010 for the year ended December31, 2004 compared to 1,446,334 for the comparable period in 2003.

 

Total interest income increased 13.5% to $5.4 millionfrom $4.8 million primarily due to the growth and mix of earning assets offsetby lower interest rates.  Total otherincome increased $2,000 primarily due to an increase in other service chargesand fees of $30,000 offset by a decline in gains on sale of mortgage loans heldfor sale of $41,000.  Gains on sale ofinvestments increased $11,000 to $15,000 compared to $4,000 in 2003.  Total other expenses increased 12.6% or$348,000 to $3.1

 

45

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million from $2.8million due to growth related expenses from staffing increases, increasedregulatory compliance costs and more customer volume and activity.  Additional leased space was required foradditional operational personnel.

 

*Net Interest Income. *Interest income increasedby $641,000 to $5.4 million from $4.8 million, primarily due to an increase of$23.2 million in average earning assets. Interest and fees on loans increased $497,000 for the year endedDecember 31, 2004, due to an increase in average loans and loans available forsale outstanding of $12.2 million or 20.2% for the prior period, which morethan offset the decline in the average yield on the loan portfolio.  The average yield on our loan portfoliodeclined from 6.26% in 2003 to 5.90% in 2004 due to the continuing decline inthe long-term interest rates environment. Interest on federal funds sold increased by $64,000 due to an increaseof $3.2 million in average balances and slightly higher rates caused by changesin the Federal Reserve Bank’s target rates. Interest and dividends on investments increased $80,000 for the perioddue to an increase of $7.8 million in average outstanding balances offset by anoverall decline in yields in the beginning of 2004.  The mix of the portfolio also changed due toan increase in short-term municipal securities. The average yield on investment securities declined to 2.60% in 2004from 2.87% in 2003.

 

Total interest expense increased $128,000 from theprior period, due primarily to a $13.7 million increase in average interestbearing liabilities.  The increase inaverage balances outstanding was offset by an overall decline in rates paid ondeposits and short-term borrowings.  Theaverage rate on interest bearing liabilities was 1.51% in 2004 compared to1.61% in 2003.  Our net interest marginwas 3.32% for the year ended December 31, 2004, as compared to 3.55% for theprior period ended December 31, 2003 as our interest-earning assets priceddownward to a greater degree than our interest-bearing liabilities.

 

*Provision for Loan Losses. *The provision for loanlosses decreased to $218,000 for the year ended December 31, 2004 compared to$225,000 for the prior period. Management reviews the risks in the loan portfolio and adjusts theallowance to adequately cover risks. Factors considered include changes in the nature and volume of theportfolio, overall portfolio quality, concentrations of credit risk, review ofspecific problem loans, current economic conditions and trends that may affectthe ability of borrowers to pay, and prior loss experience within the various segmentsof the portfolio.  The

 

46

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allowance for loanlosses was $971,000 at December 31, 2004, or 1.25% of total outstandingloans.  See “Business-Allowance for LoanLosses” for more information.

 

The Bank’s loan portfolio is relatively unseasoned dueto the fact that we commenced operations in 2000.  Therefore, our historical charge-off andnon-performing loan statistics may not be indicative of future trends.

 

*Total Other Income.*  Other income, primarily service charges ondeposit accounts, gains on sale of mortgages held for sale, and other feesincreased $2,000 to $301,000 for the year ended December 31, 2004.  Fees on deposit accounts for the year endedDecember 31, 2004 were approximately $141,000 compared to $139,000 in the priorperiod.  The slight increase was duemainly to the growth in deposit accounts. For the year ended December 31, 2004, we recorded gains on the sale ofresidential mortgages held for sale of $62,000 compared to $103,000 in theprior period.  The decline was due todecreased refinancing activity due to slightly higher interest rates.  The Bank sells all newly originatedfixed-rate residential mortgage loans in the secondary market on a servicingreleased basis.  Other fees and chargesincreased 56.6% to $83,000 in 2004 from $53,000 in 2003.  This increase was primarily volumerelated.  Gains on sale of investmentsavailable for sale were $15,000 for the year ended December 31, 2004, comparedto $4,000 for the prior period.

 

*Total Other Expense. *Total other expenses forthe year ended December 31, 2004 increased 12.6% or $348,000 to $3.1 millioncompared to $2.8 million in the prior period. Most of the increase was due to growth related factors:

 

•      Employeerelated expenses were $1.3 million for the year compared to $1.2 million in theprior period reflecting normal compensation increases.

 

•      Occupancy andequipment expenses increased $58,000 or 17.3% to $393,000 for the year endedDecember 31, 2004 compared to $335,000 for the prior period.  Equipment upgrades at the end of 2003 and thebeginning of 2004 along with additional leased space account for the increase.

 

•      Advertisingexpense decreased $28,000 to $117,000 for the year ended December 31, 2004compared to $145,000 for the prior period. The prior period contained significant expenses related to our Westvillebranch opening, there we no new branch promotions in 2004.

 

47

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•      The Bank beganoffering On-line Banking in June 2004. This new product plus increased business volume caused our dataprocessing expenses to increase $25,000 to $300,000 for the year ended December31, 2004 compared to $275,000 in the prior period.

 

•      Professionalservices, including audit, loan review and legal expenses increased $38,000 to$260,000 for the year ended December 31, 2004 as compared to $222,000 for theyear ended December 31, 2003.  This wasprimarily related to growth and increased regulation.

 

•      Other operatingexpenses included postage, telephone expenses, entertainment, businessdevelopment and other miscellaneous expenses. Most of these expenses were due to growth and increased businessactivity.  Business development,entertainment and related expenses increased $26,000, software expenses andlicenses increased $17,000, and fraud losses increased $8,000.  Total other expenses increased $86,000 or14.2% to $693,000 for the year ended December 31, 2004 compared with the priorperiod.

 

*Income Taxes. *Our recorded income tax expense for the year endedDecember 31, 2004 was $384,000 compared to $335,000 in the prior period.  The increase in income tax expense is due tohigher pre-tax income for the year ended December 31, 2004 as compared to theprior period.  The Company also recordedan adjustment to the deferred tax asset. Due to increased tax exempt income, the effective rate for the yearended December 31, 2004 was 38.1% compared to 40.1% for the prior period.

 

Year Ended December 31, 2003 Versus Year EndedDecember 31, 2002

 

*General.******* **Net income increased1.0% to $500,000 for the year ended December 31, 2003, as compared to netincome of $495,000 for the period ended December 31, 2002.  This increase was due to a $697,000 increasein net interest and total other income, coupled with a $50,000 reduction in theprovision for loan losses, which were only partially offset by a $736,000increase in total other expense and a $6,000 increase in income tax expense.

 

Basic earnings per share decreased to $0.35 for theyear ended December 31, 2003 (basic and diluted) from $0.44 for the yearended December 31, 2002 ($0.43 on a fully diluted basis).  This decrease was due to the issuance ofadditional shares of common stock in our public offering of units completed in

 

48

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December 2002, which shares had only a marginal effect on the weightedaverage number of shares outstanding for 2002. In the offering, we sold 254,399 units and each unit consisted ofone share of common stock and one warrant to purchase an additional share ofcommon stock.  After giving effect to the5% stock dividend paid in April 2003 and the 5% stock dividend paid in April2004, the total number of shares of common stock issued in the unit offeringwas 280,475.

 

Total interest income increased 16.6% to$4.8 million from $4.1 million primarily due to the growth and mix ofearning assets.  Total other incomeincreased 48.0% or by $97,000 to $299,000 from $202,000, due to increaseddeposit fees, gains on sale of mortgage loans and other fees as partiallyoffset by an 83.3% decline in gains on sale of investments to $4,000 from$24,000 in the previous year.  Totalother expenses increased 36.4% or $736,000 to $2.8 million from $2.0 milliondue to growth related expenses from staffing increases, new marketinginitiatives, increased regulatory compliance costs and more customer volume andactivity, as well as increased expenses related to the opening of our newWestville office.

 

*Net Interest Income*.  Interest income increased by $679,000 to$4.8 million from $4.1 million, primarily due to a $26.2 millionincrease in average earning assets. Interest and fees on loans increased by $518,000 for the year endedDecember 31, 2003, due to an increase in average loans and loans availablefor sale outstanding of $12.8 million or 26.9% from the prior period,which more than offset the decline in the average yield on the loanportfolio.  The average yield on our loanportfolio declined from 6.85% in 2002 to 6.26% in 2003 due to the declininginterest rate environment.  Interest onfederal funds sold decreased by $98,000 due to a decrease of $4.1 millionin average balances and lower yields caused by market rate declines.  Interest and dividends on investmentsincreased by $259,000 for the period due to an increase of $17.5 millionin average outstanding balances.  Theincrease was partially offset by an overall decline in the yield on investmentsecurities caused by a decline in market interest rates.  The average yield on investment securitiesdeclined to 2.87% in 2003 from 4.34% in 2002.

 

Total interest expense increased $79,000 from theprior period, due principally to a $21.9 million increase in averageinterest bearing liabilities.  The increasein the average balance of deposits was ameliorated by the lower rates paid ondeposit accounts and short-term borrowings, as the cost of interest-bearingliabilities declined from 2.10% in 2002 to

 

49

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1.61% in 2003.  Our net interestmargin was 3.55% for the year ended December 31, 2003 as compared to 3.97%for the prior period ended December 31, 2002, as our interest-earningassets repriced downward to a greater degree than our interest-bearingliabilities.

 

*Provision for Loan Losses*.  The provision for loan losses decreased to$225,000 for year ended December 31, 2003 compared to $275,000 for theprior period.  Factors such as changes inthe nature and volume of the portfolio, overall portfolio quality, concentrationsof credit risk, review of specific problem loans, current economic conditionsand trends that may affect the ability of borrowers to pay, and prior lossexperience within the various categories of the portfolio are considered whenreviewing the risks in the portfolio. The allowance for loan losses was $768,000 at December 31, 2003, or1.15% of total outstanding loans.  See “Business–Allowancefor Loan Losses” for more information.

 

The Bank’s loan portfolio is relatively unseasoned dueto the fact that we commenced operations in 2000.  Therefore, our historical charge-off andnon-performing loan statistics may not be indicative of future trends.

 

*Total Other Income*.  Other income, primarily service charges ondeposit accounts and gains on sale of mortgages held for sale, increased$97,000 to $299,000 for the year ended December 31, 2003.  Fees from deposit account holders for theyear ended December 31, 2003 were approximately $139,000 compared to$85,000 in the prior period.  This 63.5%increase was principally due to deposit growth. For the year ended December 31, 2003, we recorded gains on the saleof residential mortgage loans held for sale of $103,000 compared to $62,000 inthe prior period.  This was primarily dueto increased refinancing activity due to lower interest rates during theyear.  In general, we sell all newlyoriginated fixed-rate residential mortgage loans into the secondary market on aservicing released basis.  The increaseof $22,000 to $53,000 in 2003 from $31,000 in 2002, in other fees and chargeswas primarily volume related.  Gains onsale of investments available for sale for the year ended December 31,2003 declined to $4,000 compared to $24,000 in the year ended December 31,2002.

 

*Total Other Expense*.  Total other expenses for the year endedDecember 31, 2003 increased $736,000 or 36.4% to $2.8 millioncompared to $2.0 million in the prior period.  Most of the increases were due to growthrelated factors:

 

50

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•      Employeerelated expenses were $1.2 million for the year compared to $842,000 forthe year ended December 31, 2002, reflecting additions to our staff aswell as normal compensation increases.

 

•      Occupancy andequipment expenses increased $117,000 to $335,000 for the year endedDecember 31, 2003, compared to $218,000 in the prior period.  The opening of our Westville branch office inJanuary 2003 accounted for $72,000 of these increases.

 

•      Advertisingexpenses increased $70,000 to $145,000 for the year ended December 31,2003 compared to $75,000 in the prior period. This was due to increased activity relating to our Westville opening andother marketing campaigns designed to increase community awareness of ourpresence, products and capabilities.

 

•      Due to increasedbusiness volume, data processing expenses increased 23.3% to $275,000 for theyear ended December 31, 2003 compared to $223,000 for the year endedDecember 31, 2002.

 

•      Professionalservices, including audit, loan review, and legal expenses increased $27,000 to$222,000 during the year ended December 31, 2003 compared to $195,000 forthe comparable prior period.  Thisincrease was primarily related to our growth.

 

•      Other operatingexpenses included postage, ATM charges, telephone expenses, business developmentcosts and other miscellaneous expenses. These expenses also included a loss of $19,000 on the replacement ofequipment during the year ended December 31, 2003.  Due to growth and increased activity, otheroperating expenses increased $137,000 or 29.2% to $607,000 for the year endedDecember 31, 2003, compared to $470,000 for the year endedDecember 31, 2002.

 

*Income Taxes*.  Our recorded income tax expense for the yearended December 31, 2003 was $335,000 compared to $329,000 in the priorperiod.  The increase in income taxexpense is due to higher pre-tax income for the year ended December 31,2003 as compared to the prior period. The effective rates for the year

 

51

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ended December 31, 2003 and 2002 were 40.1% and 39.9%,respectively.

 

**Liquidity**

 

Liquidity represents an institution’s ability to meetpresent and future financial obligations through either the sale or maturity ofexisting assets or the acquisition of additional funding through liabilitymanagement.  Liquid assets include cash,interest-bearing deposits with banks, federal funds sold, securities classifiedas available-for-sale, and loans maturing within one year.  As a result of our management of liquidassets and the ability to generate liquidity through additional deposits orborrowings, we are able to maintain overall liquidity sufficient to satisfy ourdeposit withdrawal requirements and meet our customers’ borrowing needs.

 

At December 31, 2004, cash, cash equivalents,securities classified as securities available for sale, and federal funds soldtotaled $40.5 million and were 29.8% of total assets.  However, we have pledged $35.1 million of oursecurities available for sale as collateral for uninsured municipal depositsheld by us and uninsured deposits that underlie retail repurchase agreements,which adversely impacts our liquidity position. Asset liquidity is also provided by managing loan maturities.  At December 31, 2004, approximately$26.4 million or 34.2% of loans will mature or reprice within a one-yearperiod.  To the extent possible, loansare funded with deposits or other funding with coinciding maturity or repricingdates.

 

Net cash provided by operating activities for the yearended December 31, 2004 was $1.1 million as compared $721,000 in the priorperiod.  The difference can be attributedto an increase in depreciation on new fixed assets, lower gains on mortgagesheld for sale, increases in taxes payable and other liabilities offset byincreases in accrued interest receivable and other assets.

 

Net cash used in investing activities was$31.0 million for the year ended December 31, 2004 compared with$15.8 million for the previous year. Increased investment growth was somewhat offset by slower prepayments ofmortgage backed securities from the prior year.

 

Funds provided by financing activities were $17.2million for the period ended December 31, 2004 compared to $19.5 million forthe prior period. The primary reason was that in April 2004,

 

52

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we completed a public offering of common stock underwritten by RyanBeck & Co.  1st Colonial raisednet proceeds of $7.2 million in that offering, and these proceeds wereincluded in cash provided by financing activities in fiscal year 2004.  Additional funds were provided by a $6.9million increase from deposit growth and a $3.1 million increase in short-termborrowings.

 

**CapitalResources**

 

The assessment of capital adequacy depends on a numberof factors such as asset quality, liquidity, earnings performance, changingcompetitive conditions, economic forces and growth and expansionactivities.  We seek to maintain acapital base to support our growth and expansion activities, to provide stabilityto current operations and to promote public confidence.

 

The Bank’s capital position exceeds regulatoryminimums.  The primary indicators reliedon by the OCC and other bank regulators in measuring strength of capitalposition are the Tier 1 risk-based capital ratio, total risk-based capitalratio and leverage ratio.  Tier 1capital consists of common and qualifying preferred shareholders’ equity lessgoodwill.  Total capital consists ofTier 1 capital, qualifying subordinated debt and a portion of theallowance for possible loan losses.  Risk-basedcapital ratios are calculated with reference to risk weighted assets, whichconsist of both on and off balance sheet risks (such as letters of credit,lines of credit and home equity lines). The leverage ratio consists of Tier 1 capital divided by quarterlyaverage assets.

 

We manage capital ratios to exceed regulatoryminimums.  The following table shows ourregulatory capital ratios and shareholders’ equity to total assets as ofDecember 31, 2004:

 
| ** **                              | ** ** | **At December 31, 2004** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Regulatory  Minimum**       | ** ** | **Actual  Ratio** | ** ** |
|                                    |       |                          |       |   |   |
| Total risk-based  capital ratio         |       | 8.0                           | %          | 20.28 | % |
| Tier 1  risk-based capital ratio        |       | 4.0                           | %          | 19.13 | % |
| Tier 1 leverage  ratio                  |       | 4.0                           | %          | 11.56 | % |
| Shareholders’  equity total assets |       | None                          |       | 12.80 | % |

 

On April 26, 2004, we completed our public offering of828,000 shares of common stock at a price of $10.00 per share. The offering wasunderwritten on a firm-commitment basis by Ryan Beck & Co., Inc. Net ofunderwriting discounts and commissions

 

53

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and other expenses, we received proceeds of approximately $7.2 millionfrom the offering.

 

Management anticipates these ratios to decline ascapital is leveraged in support of deposit and asset growth.  At December 31, 2004, the Bank’s totalrisk-based capital ratio was 20.28%, its Tier 1 risk-based capital ratiowas 19.13% and its leverage ratio was 11.56%.

 

**ContractualObligations**

 

We enter into contractual obligations in the normalcourse of business as a source of funds for our asset growth and our asset/liabilitymanagement, to fund acquisitions, and to meet required capital needs.  These obligations require us to make cashpayments over time as detailed in the table below (For further informationregarding our contractual obligations refer to Notes [9, 10, 15 and 16] ofour audited consolidated financial statements included in Item 7 of this AnnualReport on Form 10-KSB.

 

**PAYMENTS DUE BY PERIOD**

** **
| **Contractual Obligations  at December 31, 2004** | ** ** | **Total**                  | ** ** | **Less  Than  1 Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5 Years** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|
| ** **                                             | ** ** | **(Dollars In Thousands)** | ** ** |
|                                                   |       |                       |       |                   |       |           |       |           |       |               |       |
| Borrowings                                             |       | $                          | 7,146      |                   | $          | 7,146          |       | $              | 0          |               | $          | 0 |   | $ | 0 |   |
| Certificates of  deposit                               |       | 29,461                     |       | 24,084                 |       | 5,286          |       | 91             |       | 0                  |       |
| Operating leases                                       |       | 320                        |       | 110                    |       | 160            |       | 50             |       | 0                  |       |
| Total  contractual cash obligations                    |       | $                          | 36,927     |                   | $          | 31,340         |       | $              | 5,446      |               | $          | 141 |   | $ | 0 |   |

 

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**Off-BalanceSheet Instruments**

 

We do not have any off-balance sheet arrangements asthat term is defined in Item 303 of SEC Regulation S-B (such asguarantee contracts, credit or liquidity support arrangements, derivativeinstruments or variable interests in other entities).  We are, however, a party to financialinstruments with off-balance sheet risk in the normal course of business to meetthe financing needs of our customers and to manage our own exposure tofluctuations in interest rates.  Thesefinancial instruments include commitments to extend credit.  These financial instruments involve elementsof credit and interest rate risk in excess of the amount recognized in the balancesheet.  The contract or notional amountsof these financial instruments reflect the extent of our involvement inparticular classes of financial instruments.

 

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

 

55

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**AMOUNT OF COMMITMENT EXPIRATIONPER PERIOD**

 
| **OTHER COMMERCIAL  COMMITMENTS  At December 31, 2004** | ** ** | **TOTAL  AMOUNTS  COMMITTED** | ** ** | **LESS  THAN 1  YEAR** | ** ** | **1-3  YEARS** | ** ** | **4-5  YEARS** | ** ** | **AFTER 5  YEARS** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|
|                                                    |       |                          |       |                   |       |           |       |           |       |               |       |
| Commitments to  extend credit:                          |       |                          |       |                   |       |           |       |           |       |               |       |
| Lines of Credit                                         |       | $                             | 2,977      |                   | $          | 2,735          |       | $              | 242        |               | $          | 0 |   | $ | 0 |   |
| Unfunded  residential mortgages                         |       | 7,096                         |       | 2,007                  |       | —         |       | 0              |       | 5,089              |       |
|                                                    |       |                          |       |                   |       |           |       |           |       |               |       |
| Total commercial  commitments                           |       | $                             | 10,073     |                   | $          | 4,742          |       | $              | 242        |               | $          | 0 |   | $ | 5,089 |   |

 

For further information regarding our commitments,refer to Note [16] of our audited consolidated financial statements includedin Item 7 of this Annual Report on Form 10-KSB.

 

**InterestSensitivity**

 

An important element of both earnings performance andthe maintenance of sufficient liquidity is management of the interestsensitivity gap.  The interestsensitivity gap is the difference between interest-rate sensitive assets andinterest-rate sensitive liabilities in a specific time period.  Interest rate “gap analysis” is a common,though imperfect, measure of interest rate risk, which measures the relativedollar amounts of interest-earning assets and interest-bearing liabilitieswhich reprice within these specific time periods, either through maturity orrate adjustment.

 

A “positive gap” for a given period means that theamount of interest-earning assets maturing or otherwise repricing within thatperiod exceeds the amount of interest-bearing liabilities maturing or otherwiserepricing within the same period. Accordingly, in a declining interest rate environment, an institutionwith a “positive gap” would generally be expected, absent the effects of otherfactors, to experience a decrease in the yield on its assets greater than thedecrease in the cost of its liabilities and its net interest income should benegatively affected.  Conversely, thecost of funds for an institution with a “positive gap” would generally beexpected to increase more slowly than the yield on its assets in a risinginterest rate environment, and such institution’s net interest income generallywould be expected to be positively affected by rising interest rates.

 

56

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If we had a “negative gap” position with respect to agiven time period, it would indicate that more liabilities may reprice withinthat time period than assets, with the result that rising rates may have anegative impact on interest rate spread and therefore on earnings.

 

The gap can be managed by repricing assets orliabilities, by selling securities or loans held-for-sale, by replacing anasset or liability at maturity or by adjusting the interest rate during thelife of an asset or liability.  Matchingthe amounts of assets and liabilities repricing in the same time intervalcontributes to preserving net interest margins and minimizing the impact on netinterest income in periods of rising or falling interest rates.  We evaluate interest sensitivity risk andthen formulate guidelines regarding asset generation and pricing, fundingsources and pricing, and off-balance sheet commitments (such as letters ofcredit, lines of credit and credit card lines) in order to manage sensitivityrisk.  These guidelines are based onmanagement’s outlook regarding future interest rate movements, the state of theregional and national economy, and other financial and business risk factors.

 

The following table illustrates our interestsensitivity gap position at December 31, 2004.  It summarizes the contractual repayment termsor nearest repricing dates of our interest-earning assets and interest-bearingliabilities.  This table presents aposition that existed at one particular day (December 31, 2004) andtherefore is not necessarily indicative of our position at any other time.

 

57

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**Interest Sensitivity Analysis**

 
| ** **                                                | ** ** | **Maturing Or Repricing In:** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                | ** ** | **Within 3  Months**          | ** ** | **4-12  Months** | ** ** | **1-5  Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                | ** ** | **(Dollars In Thousands)**    | ** ** |
| Interest earning  assets:                                 |       |                          |       |   |   |   |   |   |   |   |   |
| Federal funds  sold                                       |       | $                             | 0          |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Interest bearing  deposits                                |       | 0                             |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Investment  securities held to maturity                   |       | 3,815                         |       | 13,045 |   | 0 |   | 0 |   | 16,860 |   |
| Investment  securities available-for-sale                 |       | 6,518                         |       | 10,190 |   | 18,454 |   | 1,524 |   | 36,686 |   |
| Loans and  mortgages available for sale                   |       | 24,830                        |       | 9,628 |   | 40,437 |   | 2,735 |   | 77,630 |   |
|                                                      |       |                          |       |   |   |   |   |   |   |   |   |
| Total interest  earning assets                            |       | $                             | 35,163     |   | $ | 32,863 |   | $ | 58,891 |   | $ | 4,259 |   | $ | 131,176 |   |
|                                                      |       |                          |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                            |       |                          |       |   |   |   |   |   |   |   |   |
| Deposits:                                                 |       |                          |       |   |   |   |   |   |   |   |   |
| Interest bearing  demand                                  |       | $                             | 12,412     |   | $ | 12,338 |   | $ | 7,543 |   | $ | 2,513 |   | $ | 34,806 |   |
| Money market                                              |       | 8,206                         |       | 2,694 |   | 7,184 |   | 0 |   | 18,084 |   |
| Savings                                                   |       | 978                           |       | 910 |   | 3,642 |   | 1,213 |   | 6,743 |   |
| Time deposits  $100,000 and over                          |       | 10,612                        |       | 7,341 |   | 1,604 |   | 0 |   | 19,557 |   |
| Time deposits  less than $100,000                         |       | 2,919                         |       | 3,213 |   | 3,772 |   | 0 |   | 9,904 |   |
| Other borrowed  money                                     |       | 6,509                         |       | 637 |   | 0 |   | 0 |   | 7,146 |   |
|                                                      |       |                          |       |   |   |   |   |   |   |   |   |
| Total interest  bearing liabilities                       |       | $                             | 41,636     |   | $ | 27,133 |   | $ | 23,745 |   | $ | 3,726 |   | $ | 96,240 |   |
|                                                      |       |                          |       |   |   |   |   |   |   |   |   |
| Period gap                                                |       | $                             | (6,473     | ) | $ | 5,730 |   | $ | 35,146 |   | $ | 533 |   | $ | 34,936 |   |
|                                                      |       |                          |       |   |   |   |   |   |   |   |   |
| Cumulative gap                                            |       | $                             | (6,473     | ) | $ | (743 | ) | $ | 34,403 |   | $ | 34,936 |   |   |   |
|                                                      |       |                          |       |   |   |   |   |   |   |   |   |
| Ratio of  cumulative gap to total interest earning assets |       | -4.93                         | %          | -0.57 | % | 26.23 | % | 26.63 | % |   |   |

 

While securities available-for-sale are presented inthe foregoing table according to the earlier of their stated maturities or calldates, such investments can, if necessary, be sold at any time in reaction tointerest rate changes or funding demands.

 

We manage our interest rate sensitivity gap to, amongother things, control the exposure of our net interest margin such that a200 basis point increase or decrease in market rates will impact netinterest income by no more than approximately 15% in any one year period.  At December 31, 2004, we estimate thatif interest rates increased by 200 basis points, projected net

 

58

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interest income for 2005 would decrease by 6.2% despite the fact thatwe had a positive gap.  This is due tothe fact that callable agency securities would not be called and we would notbe able to reinvest these funds into higher yielding investments.  Given the current interest rate levels, allinterest rates could not decline by 200 basis points.  We estimate that a 100 basis point decreasewould cause net interest income to decrease approximately 1.3%.  This is due to callable agency securitiesbeing called, necessitating reinvestment into lower yielding investments.

 

As noted previously, securities available for sale,while presented in the table at their stated maturities or possible call datewhichever is shorter, can be sold any time and are an active interestsensitivity gap management tool. Further, the magnitude and timing of changes to deposit rate changes canbe managed to further minimize the exposure of net interest margin.  For example, savings deposits and certaininterest-bearing demand deposits, while recorded at their first possiblerepricing opportunity, would not likely react as quickly to a market ratechange as their first recorded repricing opportunity would indicate.

 

**RecentAccounting Pronouncements**

 

See note (2)(n) to ourconsolidated financial statements set forth in Item 7 below, which isincorporated by reference herein, for a description of recent accountingpronouncements.

 

**ITEM 7 -Financial Statements**

 

Ourconsolidated statements of financial condition as of December 31, 2004 and2003, and the related consolidated statements of operations, shareholders’equity and comprehensive income, and cash flows for each of the years in thethree-year period ended December 31, 2004, including the notes thereto and theindependent auditors’ report thereon, are set forth below in this Item.

 

59

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**Report of Independent Registered Public Accounting Firm**

** **

The Board of Directors

1st ColonialBancorp, Inc.:

 

We have audited theaccompanying consolidated statements of financial condition of 1stColonial Bancorp, Inc. and subsidiary (the Company) as of December 31, 2004 and2003, and the related consolidated statements of operations, shareholders’equity and comprehensive income, and cash flows for each of the years in thethree-year period ended December 31, 2004. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of 1st Colonial Bancorp,Inc. and subsidiary as of December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2004, in conformity with U.S. generally accepted accountingprinciples.

 
|   | /s/  KPMG LLP |   |
|--------|---------------|--------|

 

Philadelphia,PennsylvaniaMarch 17, 2005

 

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**1ST COLONIAL BANCORP, INC.**

 

ConsolidatedStatements of Financial Condition

 

December31, 2004 and 2003

 

(Dollarsin thousands)

 
| ** **                                                                                                                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                                                        |       |     |       |     |       |
| Cash and due  from banks                                                                                                                                          |       | $        | 3,777      |     | 6,281      |   |
| Federal funds  sold                                                                                                                                               |       | —   |       | 9,735    |       |
| Interest-bearing  deposits                                                                                                                                        |       | —   |       | 500      |       |
| Cash and cash  equivalents                                                                                                                                        |       | 3,777    |       | 16,516   |       |
| Investments held  to maturity (fair value of $16,854 at December 31, 2004 and $5,796 at  December 31, 2003)                                                       |       | 16,860   |       | 5,808    |       |
| Securities  available for sale (amortized cost of $36,883 at December 31, 2004 and  $28,107 at December 31, 2003)                                                 |       | 36,686   |       | 27,985   |       |
| Mortgage loans  held for sale                                                                                                                                     |       | 240      |       | 281      |       |
| Loans                                                                                                                                                             |       | 77,390   |       | 66,550   |       |
| Less allowance  for loan losses                                                                                                                                   |       | (971     | )          | (768     | )          |
| Net loans                                                                                                                                                         |       | 76,419   |       | 65,782   |       |
| Premises and  equipment, net                                                                                                                                      |       | 949      |       | 935      |       |
| Accrued interest  receivable                                                                                                                                      |       | 510      |       | 373      |       |
| Deferred tax  assets                                                                                                                                              |       | 320      |       | 301      |       |
| Other assets                                                                                                                                                      |       | 212      |       | 91       |       |
| Total assets                                                                                                                                                      |       | $        | 135,973    |     | 118,072    |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                    |       |     |       |     |       |
| Liabilities:                                                                                                                                                      |       |     |       |     |       |
| Deposits                                                                                                                                                          |       | $        | 111,186    |     | 104,323    |   |
| Short-term  borrowings                                                                                                                                            |       | 7,146    |       | 4,087    |       |
| Accrued interest  payable                                                                                                                                         |       | 8        |       | 8        |       |
| Income taxes  payable                                                                                                                                             |       | 118      |       | 48       |       |
| Other  liabilities                                                                                                                                                |       | 116      |       | 55       |       |
| Total  liabilities                                                                                                                                                |       | 118,574  |       | 108,521  |       |
| Shareholders’  equity:                                                                                                                                       |       |     |       |     |       |
| Common stock, $0  par value; authorized 5,000,000 shares; issued and outstanding 2,251,642  shares at December 31, 2004 and 1,414,487 shares at December 31, 2003 |       | —   |       | —   |       |
| Additional  paid-in capital                                                                                                                                       |       | 17,003   |       | 9,238    |       |
| Retained  earnings                                                                                                                                                |       | 515      |       | 386      |       |
| Accumulated  other comprehensive loss, net                                                                                                                        |       | (119     | )          | (73      | )          |
| Total  shareholders’ equity                                                                                                                                  |       | 17,399   |       | 9,551    |       |
| Total liabilities  and shareholders’ equity                                                                                                                  |       | $        | 135,973    |     | 118,072    |   |

 

See accompanying notes to consolidated financial statements.

 

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**1ST COLONIAL BANCORP, INC.**

 

ConsolidatedStatements of Operations

 

Yearsended December 31, 2004, 2003, and 2002

 

(Dollarsin thousands, except share data)

 
| ** **                                           | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Interest income:                                     |       |      |       |      |       |      |       |
| Loans                                                |       | $         | 4,266      |      | 3,769      |      | 3,251      |   |
| Federal funds  sold and interest-bearing deposits    |       | 142       |       | 78        |       | 176       |       |
| Investments:                                         |       |      |       |      |       |      |       |
| Taxable                                              |       | 887       |       | 870       |       | 647       |       |
| Nontaxable                                           |       | 110       |       | 47        |       | 11        |       |
| Total interest  income                               |       | 5,405     |       | 4,764     |       | 4,085     |       |
| Interest expense:                                    |       |      |       |      |       |      |       |
| Deposits                                             |       | 1,348     |       | 1,203     |       | 1,082     |       |
| Short-term  borrowings                               |       | 24        |       | 41        |       | 83        |       |
| Total interest  expense                              |       | 1,372     |       | 1,244     |       | 1,165     |       |
| Net interest  income                                 |       | 4,033     |       | 3,520     |       | 2,920     |       |
| Provision for  loan losses                           |       | 218       |       | 225       |       | 275       |       |
| Net interest  income after provision for loan losses |       | 3,815     |       | 3,295     |       | 2,645     |       |
| Other income:                                        |       |      |       |      |       |      |       |
| Service charges  on deposit accounts                 |       | 141       |       | 139       |       | 85        |       |
| Gain on sales of  mortgage loans held for sale       |       | 62        |       | 103       |       | 62        |       |
| Other income,  service charges, and fees             |       | 83        |       | 53        |       | 31        |       |
| Gain on sales of  securities available for sale      |       | 15        |       | 4         |       | 24        |       |
| Total other  income                                  |       | 301       |       | 299       |       | 202       |       |
| Other expenses:                                      |       |      |       |      |       |      |       |
| Compensation and  employee benefits                  |       | 1,344     |       | 1,175     |       | 842       |       |
| Occupancy and  equipment expenses                    |       | 393       |       | 335       |       | 218       |       |
| Advertising  expense                                 |       | 117       |       | 145       |       | 75        |       |
| Data processing  expense                             |       | 300       |       | 275       |       | 223       |       |
| Professional  services                               |       | 260       |       | 222       |       | 195       |       |
| Other operating  expenses                            |       | 693       |       | 607       |       | 470       |       |
| Total other  expenses                                |       | 3,107     |       | 2,759     |       | 2,023     |       |
| Income before  income taxes                          |       | 1,009     |       | 835       |       | 824       |       |
| Income tax  expense                                  |       | 384       |       | 335       |       | 329       |       |
| Net income                                           |       | $         | 625        |      | 500        |      | 495        |   |
| Earnings per  share:                                 |       |      |       |      |       |      |       |
| Basic earnings  per share                            |       | $         | 0.31       |      | 0.35       |      | 0.44       |   |
| Diluted earnings  per share                          |       | 0.31      |       | 0.35      |       | 0.43      |       |
|                                                 |       |      |       |      |       |      |       |
| Weighted average  number of shares outstanding:      |       |      |       |      |       |      |       |
| Basic earnings  per share                            |       | 1,987,008 |       | 1,411,529 |       | 1,139,076 |       |
| Diluted earnings  per share                          |       | 2,045,010 |       | 1,446,334 |       | 1,143,212 |       |

 

See accompanying notes to consolidated financial statements.

 

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1STCOLONIAL BANCORP, INC.

 

Consolidated Statementsof Shareholders’ Equity and Comprehensive Income

 

Years ended December 31,2004, 2003, and 2002

 

(Dollars in thousands)

 
| ** **                                                        | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Accumulated  other  comprehensive  (loss) income** | ** ** | **Total  shareholders’  equity** | ** ** | **Comprehensive  income** | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|---------------------------|------------|
| Balance at  December 31, 2001                                     |       | $                 | —     |                             | 7,000      |                              | (329       | )                                                    | 98         |                                  | 6,769      |                      |       |   |
| Proceeds from  stock offering                                     |       | —            |       | 1,931                            |       | —                            |       | —                                               |       | 1,931                                 |       |                      |       |
| Exercise of  director’s options                              |       | —            |       | 4                                |       | —                            |       | —                                               |       | 4                                     |       |                      |       |
| Net unrealized  gain on securities available for sale, net of tax |       | —            |       | —                           |       | —                            |       | 3                                                    |       | 3                                     |       | $                         | 3          |   |
| Net income                                                        |       | —            |       | —                           |       | 495                               |       | —                                               |       | 495                                   |       | 495                       |       |
| Total  comprehensive income                                       |       |              |       |                             |       |                              |       |                                                 |       |                                  |       | $                         | 498        |   |
| Balance at  December 31, 2002                                     |       | —            |       | 8,935                            |       | 166                               |       | 101                                                  |       | 9,202                                 |       |                      |       |
|                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |                      |       |
| Stock issuance  expenses                                          |       | —            |       | (9                               | )          | —                            |       | —                                               |       | (9                                    | )          |                      |       |
| Exercise of  warrants                                             |       | —            |       | 32                               |       | —                            |       | —                                               |       | 32                                    |       |                      |       |
| Stock dividend                                                    |       | —            |       | 280                              |       | (280                              | )          | —                                               |       | —                                |       |                      |       |
| Net unrealized  loss on securities available for sale, net of tax |       | —            |       | —                           |       | —                            |       | (174                                                 | )          | (174                                  | )          | $                         | (174       | ) |
| Net income                                                        |       | —            |       | —                           |       | 500                               |       | —                                               |       | 500                                   |       | 500                       |       |
| Total  comprehensive income                                       |       |              |       |                             |       |                              |       |                                                 |       |                                  |       | $                         | 326        |   |
| Balance at  December 31, 2003                                     |       | —            |       | 9,238                            |       | 386                               |       | (73                                                  | )          | 9,551                                 |       |                      |       |
|                                                              |       |              |       |                             |       |                              |       |                                                 |       |                                  |       |                      |       |
| Net proceeds  from sale of 828,000 shares of common stock         |       | —            |       | 7,191                            |       | —                            |       | —                                               |       | 7,191                                 |       |                      |       |
| Exercise of  warrants                                             |       | —            |       | 78                               |       | —                            |       | —                                               |       | 78                                    |       |                      |       |
| Stock dividend                                                    |       | —            |       | 496                              |       | (496                              | )          | —                                               |       | —                                |       |                      |       |
| Net unrealized  loss on securities available for sale, net of tax |       | —            |       | —                           |       | —                            |       | (46                                                  | )          | (46                                   | )          | $                         | (46        | ) |
| Net income                                                        |       | —            |       | —                           |       | 625                               |       | —                                               |       | 625                                   |       | 625                       |       |
| Total  comprehensive income                                       |       |              |       |                             |       |                              |       |                                                 |       |                                  |       | $                         | 579        |   |
| Balance at  December 31, 2004                                     |       | $                 | —     |                             | 17,003     |                              | 515        |                                                 | (119       | )                                     | 17,399     |                      |       |   |

 

See accompanyingnotes to consolidated financial statements.

 

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1STCOLONIAL BANCORP, INC.

 

Consolidated Statementsof Cash Flows

 

Years ended December 31,2004, 2003, and 2002

 

(Dollars in thousands)

 
| ** **                                                                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                                          |       |     |       |     |       |     |       |
| Net income                                                                                                                      |       | $        | 625        |     | 500        |     | 495        |   |
|                                                                                                                            |       |     |       |     |       |     |       |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                              |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                                                  |       | 152      |       | 113      |       | 90       |       |
| Amortization of  premium on securities, net                                                                                     |       | 154      |       | 173      |       | 19       |       |
| Amortization of  deferred fees/cost, net                                                                                        |       | 13       |       | 41       |       | 10       |       |
| Gain on sales of  mortgage loans held for sale                                                                                  |       | (62      | )          | (103     | )          | (62      | )          |
| Gain on sales of  securities available for sale                                                                                 |       | (15      | )          | (4       | )          | (24      | )          |
| Loss on fixed  asset retirements                                                                                                |       | 2        |       | 19       |       | —   |       |
| Provision for  loan losses                                                                                                      |       | 218      |       | 225      |       | 275      |       |
| Cash disbursed  for mortgage banking activities                                                                                 |       | (14,622  | )          | (21,771  | )          | (12,784  | )          |
| Cash received  for mortgage banking activities                                                                                  |       | 14,725   |       | 21,656   |       | 12,965   |       |
| Increase in  accrued interest receivable                                                                                        |       | (137     | )          | (32      | )          | (11      | )          |
| Deferred income  tax expense (benefit)                                                                                          |       | 11       |       | (14      | )          | (19      | )          |
| (Increase)  decrease in other assets                                                                                            |       | (121     | )          | (56      | )          | 26       |       |
| Decrease in  accrued interest payable                                                                                           |       | —   |       | (2       | )          | (20      | )          |
| Increase  (decrease) in income taxes payable                                                                                    |       | 70       |       | (3       | )          | (74      | )          |
| Increase  (decrease) in other liabilities                                                                                       |       | 61       |       | (21      | )          | (48      | )          |
| Total  adjustments                                                                                                              |       | 449      |       | 221      |       | 343      |       |
| Net cash  provided by operating activities                                                                                      |       | 1,074    |       | 721      |       | 838      |       |
| Cash flows from  investing activities:                                                                                          |       |     |       |     |       |     |       |
| Proceeds from  maturities and sales of securities available for sale                                                            |       | 9,154    |       | 28,129   |       | 21,714   |       |
| Proceeds from  maturities of securities held to maturity                                                                        |       | 5,744    |       | 1,220    |       | 931      |       |
| Purchases of  securities held to maturity                                                                                       |       | (16,796  | )          | (5,808   | )          | (935     | )          |
| Purchases of  securities available for sale                                                                                     |       | (22,042  | )          | (31,665  | )          | (35,344  | )          |
| Repayment of  principal of securities available for sale                                                                        |       | 3,972    |       | 5,036    |       | 893      |       |
| Increase in  loans receivable, net                                                                                              |       | (10,868  | )          | (12,426  | )          | (17,646  | )          |
| Capital  expenditures                                                                                                           |       | (168     | )          | (304     | )          | (411     | )          |
| Net cash used in  investing activities                                                                                          |       | (31,004  | )          | (15,818  | )          | (30,798  | )          |
| Cash flows from  financing activities:                                                                                          |       |     |       |     |       |     |       |
| Net increase in  deposits                                                                                                       |       | 6,863    |       | 21,375   |       | 15,683   |       |
| Net increase  (decrease) in short-term borrowings                                                                               |       | 3,059    |       | (1,946   | )          | 573      |       |
| Exercise of  warrants                                                                                                           |       | 78       |       | 23       |       | —   |       |
| Issuance of  common stock, net                                                                                                  |       | 7,191    |       | —   |       | 1,935    |       |
| Net cash  provided by financing activities                                                                                      |       | 17,191   |       | 19,452   |       | 18,191   |       |
| Net (decrease)  increase in cash and cash equivalents                                                                           |       | (12,739  | )          | 4,355    |       | (11,769  | )          |
| Cash and cash  equivalents at beginning of year                                                                                 |       | 16,516   |       | 12,161   |       | 23,930   |       |
| Cash and cash  equivalents at end of year                                                                                       |       | $        | 3,777      |     | 16,516     |     | 12,161     |   |
| Supplemental  disclosures:                                                                                                      |       |     |       |     |       |     |       |
| Cash paid during  the year for:                                                                                                 |       |     |       |     |       |     |       |
| Interest                                                                                                                        |       | $        | 1,372      |     | 1,242      |     | 1,185      |   |
| Income taxes                                                                                                                    |       | 308      |       | 350      |       | 346      |       |
|                                                                                                                            |       |     |       |     |       |     |       |
| Noncash items:                                                                                                                  |       |     |       |     |       |     |       |
| Net change in  unrealized gains on securities available for sale, net of taxes of $30 for  2004, $106 for 2003, and $8 for 2002 |       | $        | (46        | )        | (174       | )        | 3          |   |
| Issuance of  stock dividend                                                                                                     |       | 496      |       | 280      |       | —   |       |

 

See accompanyingnotes to consolidated financial statements.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**(1)**       Nature ofOperations

** **

1st ColonialBancorp, Inc. (the Company) is a Pennsylvania corporation headquartered inCollingswood, New Jersey, and the parent company of 1st ColonialNational Bank (the Bank). The Bank opened for business on June 30, 2000,and provides a wide range of business and consumer financial services throughits two New Jersey branch offices located in Collingswood and Westville.

 

The Company was organized asthe holding company for the Bank, in connection with the reorganizationapproved by the Bank’s shareholders at the annual meeting on June 12,2002. As a bank holding company registered under the Bank Holding Company Actof 1956, the Company is subject to the supervision and regulation of the Boardof Governors of the Federal Reserve System (the FRB). The Bank is a nationalbank whose deposits are insured by the Bank Insurance Fund (BIF) of the FederalDeposit Insurance Corporation (FDIC). The Company’s operations and those of theBank are subject to supervision and regulation by FRB, the FDIC, and the Officeof the Comptroller of the Currency (OCC). The principal activity of the Bank isto provide its local communities with general commercial and retail bankingservices. The Bank is managed as one business segment.

 

**(2)**       Summary ofSignificant Accounting Policies

** **

***(a)***       Basisof Presentation

 

The consolidated financialstatements include the accounts of the parent company, 1st ColonialBancorp, Inc., and its wholly owned subsidiary, 1st ColonialNational Bank.

 

***(b)***       Use ofEstimates

*** ***

The preparation of financialstatements 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 differfrom those estimates.

 

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***(c)***        Cash and CashEquivalents

*** ***

For purposes of reportingcash flows, cash and cash equivalents include cash and amounts due from banks,interest-bearing deposits (including certificates of deposit with originalterms of three months or less), and federal funds sold. Generally, federalfunds sold are repurchased the following day.

 

***(d)***       InvestmentsHeld to Maturity

*** ***

Debt securities that management has the positiveintent and ability to hold until maturity are classified as held to maturityand are carried at their remaining unpaid principal balance, net of unamortizedpremiums or unaccreted discounts. Premiums are amortized and discounts areaccreted using a method that produces results that approximate level yield overthe estimated remaining term of the underlying security.

 

***(e)***        SecuritiesAvailable for Sale

*** ***

Securities not classified asheld to maturity are classified as available for sale and are stated at fairvalue. Unrealized gains and losses are excluded from earnings and are reportedas accumulated other comprehensive (loss) income, net of tax, a separatecomponent of shareholders’ equity, until realized. Gains and losses aredetermined using the specific-identification method and are accounted for on atrade-date basis.

 

***(f)***        Mortgage LoansHeld for Sale

*** ***

The Bank originates andsells residential mortgage loans (without recourse) servicing released to thesecondary market. This activity enables the Bank to fulfill the credit needs ofthe community while reducing its overall exposure to interest rate and creditrisk. These loans are reported at the lower of their cost or fair market value.

 

***(g)***       Loans

*** ***

Loans are stated at theprincipal amount outstanding, net of deferred loan fees and costs. Interestincome is accrued on the principal amount outstanding. Loan origination feesand related direct costs are deferred and amortized to interest income over theterm of the respective loan as a yield adjustment.

 

66

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Loans are reported asnonaccrual if they are past due as to principal or interest payments for aperiod of 90 days or more. Exceptions may be made if a loan is deemed bymanagement to be well collateralized and in the process of collection. Loansthat are on a current payment status may also be classified as nonaccrual ifthere is serious doubt as to the borrower’s ability to continue interest orprincipal payments. When a loan is placed in the nonaccrual category, interestaccruals cease and uncollected accrued interest receivable is reversed andcharged against current interest income. Nonaccrual loans are generally notreturned to accruing status until principal and interest payments have beenbrought current and full collectibility is reasonably assured. Impaired loansare measured based on the present value of expected future discounted cashflows, the market price of the loan, or the fair value of the underlyingcollateral if the loan is collateral dependent. For purposes of applying the measurementcriteria for impaired loans, the Bank excludes large groups of smaller balancehomogeneous loans, primarily consisting of residential real estate and consumerloans, as well as commercial loans with balances of less than $100,000. Therecognition of interest income on impaired loans is the same as for nonaccrualloans discussed above.

 

***(h)***       Allowance forLoan Losses

*** ***

The allowance for loan losses reflects management’sbest estimate of losses, both known and inherent, in the existing loanportfolio. Management uses significant estimates to determine the allowance forloan losses. Management’s estimates consider such factors as changes in thenature and volume of the portfolio, overall portfolio quality, review ofspecific problem loans, and current economic conditions that may affect theborrowers’ ability to pay. The provision for loan losses charged to operatingexpenses represents the amount necessary to maintain an appropriate allowance.Loan losses are charged directly against the allowance for loan losses whenloans are determined to be uncollectible. Recoveries on previously charged-offloans are added to the allowance when received.

 

In addition, regulatoryauthorities, as an integral part of their examinations, periodically review theallowance for loan losses. They may require additions to the

 

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allowance based upon theirjudgments about information available to them at the time of examination.

 

***(i)***        Premises andEquipment

*** ***

Premises and equipment arerecorded at cost less accumulated depreciation and amortization. Depreciationis computed using the straight-line method over the expected useful lives ofthe assets. Amortization of leasehold improvements is computed using thestraight-line method over the shorter of the useful lives or the remaininglease term. Software costs, furniture, and equipment have depreciable lives of3 to 10 years. Building and improvements have estimated useful lives of 30years. The costs of maintenance and repairs are expensed as they are incurred,and renewals and betterments are capitalized.

 

***(j)***        Other RealEstate Owned

*** ***

Other real estate ownedwould be comprised of properties acquired through foreclosure proceedings oracceptance of a deed in lieu of foreclosure. Other real estate owned isrecorded at the lower of the carrying value of the loan or the fair value ofthe property, net of estimated selling costs. Costs relating to the developmentor improvement of properties are capitalized, while expenses related to theoperation and maintenance of properties are expensed as incurred. Gains orlosses upon dispositions are reflected in earnings as realized. The Bank had noreal estate owned at December 31, 2004 and 2003.

 

***(k)***       Earnings PerShare

*** ***

Basic earnings per share iscalculated as net income divided by the weighted average number of sharesoutstanding. Dilutive earnings per share includes dilutive common stockequivalents as computed under the treasury stock method using average commonstock prices. Share and per-share data for all periods presented have beenrestated to reflect the 10% stock dividend paid on January 15, 2002, the5% stock dividend paid on April 15, 2003, and the 5% stock dividend paidon April 15, 2004.

 

***(l)***        Income Taxes

*** ***

Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of

 

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existing assets andliabilities and their respective tax bases, as well as operating losscarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. A valuation allowance isestablished against deferred tax assets when, in the judgment of management, itis more likely than not that such deferred tax assets will not becomeavailable.

 

***(m)***      Stock Options

*** ***

Asof December 31, 2004, the Company had four stock-based compensation plans,which are described more fully in note 19. The Company accounts for those plansunder the recognition and measurement principles of Accounting Principles Board(APB) Opinion No. 25, *Accounting for StockIssued to Employees,*and related interpretations. No stock-basedemployee compensation cost is reflected in net income, as all options grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of Statement of Financial AccountingStandards (SFAS) No. 123, *Accounting for Stock-BasedCompensation,*to stock-based employee compensation (dollars inthousands, except per-share amounts).

 
| ** **            | ** ** | **Net income** | ** ** | **Basic  earnings  per share** | ** ** | **Dilutive  earnings  per share** | ** ** |
|-----------------------|------------|----------------|------------|--------------------------------|------------|-----------------------------------|------------|
| 2004:                 |       |           |       |                           |       |                              |       |
| As reported           |       | $              | 625        |                           | 0.31       |                              | 0.31       |   |
| Compensation  expense |       | (339           | )          | (0.17                          | )          | (0.17                             | )          |
| Pro forma             |       | $              | 286        |                           | 0.14       |                              | 0.14       |   |
| 2003:                 |       |           |       |                           |       |                              |       |
| As reported           |       | $              | 500        |                           | 0.35       |                              | 0.35       |   |
| Compensation  expense |       | (102           | )          | (0.07                          | )          | (0.07                             | )          |
| Pro forma             |       | $              | 398        |                           | 0.28       |                              | 0.28       |   |
| 2002:                 |       |           |       |                           |       |                              |       |
| As reported           |       | $              | 495        |                           | 0.44       |                              | 0.43       |   |
| Compensation  expense |       | (44            | )          | (0.04                          | )          | (0.04                             | )          |
| Pro forma             |       | $              | 451        |                           | 0.40       |                              | 0.39       |   |

 

69

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***(n)***       RecentAccounting Pronouncements

*** ***

*Consolidationof Variable Interest Entities*

 

In December 2003, theFinancial Accounting Standards Board (FASB) issued a revised FASBInterpretation No. 46, *Consolidated of VariableInterest Entities* (FIN46R). This interpretation addresses how a business should evaluate whether ithas a controlling financial interest in an entity through means other thanvoting rights and accordingly should consolidate the entity. FIN 46Rreplaced FIN 46, C*onsolidated of VariableInterest Entities*, whichwas originally issued in January 2003. FIN 46R will be applied to variableinterest entities created after December 15, 2003.

 

*Accountingfor**Temporary Impairment and Its Application to Certain Investments*

 

In November 2003, theEmerging Issues Task Force (EITF) issued EITF Issue No. 03-1, *The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments*. Therequirements apply to investments in debt and marketable equity securities thatare accounted under SFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities,*and to investments bynot-for-profit entities accounted for under SFAS No. 124, *Accounting for Certain Investments Held by Not-for-Profit Organizations*, and the requirements apply only toannual financial statements. The additional disclosures required by EITF IssueNo. 03-1 include the following items: the amount of unrealized losses andrelated fair market values of investment securities, the nature of theinvestment securities, the number of investment securities that are in anunrealized loss position, the severity and duration of the impairments, thecause of impairments, and a conclusion as to whether any of the unrealizedlosses represent an other-than-temporary impairment. As a result of theimplementation of EITF Issue No. 03-1, the Company’s disclosures relatedto investment securities have been modified.

 

*EffectiveDate of Paragraphs 10-20 of EITF Issue No. 03-1*

 

In September 2004, the EITFissued FASB Staff Position (FSP) EITF Issue No. 03-1-1, *Effective Date of Paragraphs 10-20 of EITF IssueNo. 03-1, The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments*. The proposed FSP would provide

 

70

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implementation guidance withrespect to debit securities that are impaired solely due to interest ratesand/or sector spreads and analyzed for other-than-temporary impairment underparagraph 16 of EITF Issue No. 03-1. The Board has directed the FASB staffto delay the effective date for the measurement and recognition guidancecontained in paragraphs 10 to 20 of EITF Issue No. 03-1. This delay doesnot suspend the requirement to recognize other-than-temporary impairments asrequired by existing authoritative literature. The delay of the effective datefor paragraphs 10 to 20 of EITF Issue No. 03-1 will be supersededconcurrent with the final issuance of proposed FSP EITF Issue No. 03-1-a, *Implication Guidance for the Application of Paragraph16 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments*. The disclosure guidancein paragraphs 21 and 22 of EITF Issue No. 03-1 remains effective. TheCompany will evaluate any potential impact of this revised proposed FSP when itis available.

 

*Share-BasedPayment, an Amendment of FASB Statements No. 123 and 95*

 

In December 2004, the FASBissued SFAS No. 123R, *Share-BasedPayment, an Amendment of FASB Statements No. 123 and 95*, requiringcompanies to recognize expense on the grant date for the fair value of stockoptions and other equity-based compensation issued to employees andnonemployees. All public companies must use either the modified prospective orthe modified retrospective transition method. The Company will adopt SFASNo. 123R on January 1, 2006. The Company is currently evaluating thepotential impact of SFAS No. 123R.

 

*Accountingfor Certain Loans or Debt Securities Acquired in a Transfer*

 

In December 2003, the American Institute ofCertified Public Accountants Accounting Standards Executive 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 in fiscal years beginning afterDecember 15, 2004, with early adoption encouraged. A certain transitionprovision applies for certain aspects of loans currently within the scope ofPractice Bulletin 6, *Amortization ofDiscounts on Certain Acquired*

 

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*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 includes loans acquired in business combinationsand applies to all nongovernmental entities, including not-for-profitorganizations. SOP 03-3 does not apply to loans originated by the entity.The Company will adopt SOP 03-3 for any pools of loans purchased afterDecember 31, 2004.

 

**(3)**       Common StockOffering

** **

On December 20, 2002,the Company completed its 2002 public offering of units of common stock andwarrants. In the offering, the Company sold 254,399 units at an offering priceof $8.50 per unit. Each unit consisted of one share of common stock and awarrant to purchase an additional share of common stock during the next threeyears at a purchase price of $9.60 per share. After giving effect to the 5% stockdividend paid in April 2003 and the 5% stock dividend paid in April 2004, theCompany issued in this offering 280,475 shares of common stock and warrants toacquire 280,475 shares of common stock at an exercise price of $8.71 per share.The Company raised net proceeds of $1.93 million in the offering. Theseproceeds were used to fund, among other things, the continued growth of theBank, including the establishment of additional branches.

 

On April 26, 2004, theCompany completed its 2004 offering of common stock. In the offering, theCompany sold, through Ryan Beck & Co., Inc. as underwriter, 828,000 sharesat an offering price of $10 per share. Net proceeds were $7.2 million. Theproceeds are being used to fund, among other things, the continued growth ofthe Bank, including the establishment of additional branches.

 

**(4)**       Common StockDividends

** **

On November 19, 2003,the Company declared a 5% stock dividend to all shareholders of record as ofApril 1, 2004 payable on April 15, 2004.

 

On April 15, 2003, theCompany paid a 5% stock dividend to all shareholders of record as ofApril 1, 2003. On January 15, 2002, the Company paid a 10% stockdividend to all shareholders of record as of January 2, 2002. The numberof shares and earnings-per-share amounts were restated to

 

72

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reflect the stock dividendspaid on January 15, 2002, April 15, 2003, and April 15, 2004 asof the earliest date presented herein.

 

**(5)**       Cash and Duefrom Banks

** **

The Bank is required tomaintain certain daily average reserve balances in accordance with FRBrequirements. At December 31, 2004 and 2003, the FRB reserve requirementwas $1,382,000 and $1,444,000, respectively.

 

In addition, the Bank wasrequired to maintain $200,000 in cash reserves at its correspondent banks atDecember 31, 2004 and 2003.

 

**(6)**       InvestmentSecurities

** **

Acomparison of amortized cost and approximate fair value of investmentsecurities held to maturity and securities available for sale atDecember 31, 2004 and 2003 is as follows (in thousands):

 
| ** **                      | ** ** | **2004**      | ** ** |
|---------------------------------|------------|---------------|------------|
| ** **                      | ** ** | ** **    | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Amortized** | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **cost**      | ** ** | **gains** | ** ** | **losses** | ** ** | **Fair value** | ** ** |
| Investments held  to maturity:  |       |          |       |   |   |   |   |   |   |
| Municipal  securities           |       | $             | 16,860     |   | — |   | (6 | ) | 16,854 |   |
| Total                           |       | $             | 16,860     |   | — |   | (6 | ) | 16,854 |   |
| Securities  available for sale: |       |          |       |   |   |   |   |   |   |
| U.S. government  securities     |       | $             | 22,131     |   | 11 |   | (215 | ) | 21,927 |   |
| Mortgage-backed  securities     |       | 14,266        |       | 57 |   | (50 | ) | 14,273 |   |
| Equity  securities              |       | 486           |       | — |   | — |   | 486 |   |
| Total                           |       | $             | 36,883     |   | 68 |   | (265 | ) | 36,686 |   |

 

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| ** **                      | ** ** | **2003**      | ** ** |
|---------------------------------|------------|---------------|------------|
| ** **                      | ** ** | ** **    | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Amortized** | ** ** | **unrealized** | ** ** | **unrealized** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **cost**      | ** ** | **gains** | ** ** | **losses** | ** ** | **Fair  value** | ** ** |
| Investments held  to maturity:  |       |          |       |   |   |   |   |   |   |
| Municipal  securities           |       | $             | 5,808      |   | — |   | (12 | ) | 5,796 |   |
| Total                           |       | $             | 5,808      |   | — |   | (12 | ) | 5,796 |   |
| Securities  available for sale: |       |          |       |   |   |   |   |   |   |
| U.S. government  securities     |       | $             | 18,536     |   | 54 |   | (111 | ) | 18,479 |   |
| Mortgage-backed  securities     |       | 9,265         |       | 13 |   | (78 | ) | 9,200 |   |
| Equity  securities              |       | 306           |       | — |   | — |   | 306 |   |
| Total                           |       | $             | 28,107     |   | 67 |   | (189 | ) | 27,985 |   |

 

Thescheduled maturities of investments held to maturity and securities availablefor sale at December 31, 2004 are as follows (in thousands):

 
| ** **                            | ** ** | **Investments held to maturity** | ** ** | **Securities available for sale** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Amortized**                    | ** ** | ** **                        | ** ** | **Amortized** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **cost**                         | ** ** | **Fair value**                    | ** ** | **cost** | ** ** | **Fair value** | ** ** |
| Due in one year  or less              |       | $                                | 16,860     |                              | 16,854     |   | 2,000 |   | 1,988 |   |
| Due after one  year up to five years  |       | —                           |       | —                            |       | 21,740 |   | 21,538 |   |
| Due after five  years up to ten years |       | —                           |       | —                            |       | 5,969 |   | 5,980 |   |
| Due after ten  years                  |       | —                           |       | —                            |       | 6,688 |   | 6,694 |   |
| Equity  securities                    |       | —                           |       | —                            |       | 486 |   | 486 |   |
| Total                                 |       | $                                | 16,860     |                              | 16,854     |   | 36,883 |   | 36,686 |   |

 

Proceeds from sales ofsecurities available for sale totaled $1,954,000 and $2,203,000 during 2004 and2003, respectively. Gross gains realized from the sale of securities availablefor sale totaled $15,000 and $4,000 for the years ended December 31, 2004and 2003, respectively. There were no losses realized on sales of securities in2004 and 2003.

 

At December 31, 2004,the Company pledged $35,134,000 in investment securities as collateral foruninsured municipal deposits, uninsured deposits underlying retail repurchaseagreements, and a secured line of credit with a commercial bank.

 

The Bank is required tomaintain an investment in Federal Reserve Bank stock. The amount of this stockrequirement is based on Bank capital. The Bank had $446,000 and $266,000 inFederal Reserve Bank stock at December 31, 2004 and 2003, respectively.

 

74

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Grossunrealized losses and fair value, aggregated by investment category and lengthof time that individual securities have been in continuous unrealized lossposition, at December 31, 2004 are as follows (in thousands):

 
| ** **                              | ** ** | **Less than 12 months** | ** ** | **Over 12 months** | ** ** | **Total**      | ** ** |
|-----------------------------------------|------------|-------------------------|------------|--------------------|------------|----------------|------------|
| ** **                              | ** ** | ** **              | ** ** | **Unrealized**     | ** ** | ** **     | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                              | ** ** | **Fair value**          | ** ** | **losses**         | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
| Investments held  to maturity:          |       |                    |       |               |       |           |       |   |   |   |   |   |   |
| Municipal  securities                   |       | $                       | 1,355      |               | (6         | )              | —     |   | — |   | 1,355 |   | (6 | ) |
| Total                                   |       | 1,355                   |       | (6                 | )          | —         |       | — |   | 1,355 |   | (6 | ) |
| Securities  available for sale:         |       |                    |       |               |       |           |       |   |   |   |   |   |   |
| U.S. government  securities             |       | 15,592                  |       | (159               | )          | 2,444          |       | (56 | ) | 18,036 |   | (215 | ) |
| Mortgage-backed  securities             |       | 5,934                   |       | (39                | )          | 1,303          |       | (11 | ) | 7,237 |   | (50 | ) |
| Total                                   |       | 21,526                  |       | (198               | )          | 3,747          |       | (67 | ) | 25,273 |   | (265 | ) |
| Total temporarily  impaired investments |       | $                       | 22,881     |               | (204       | )              | 3,747      |   | (67 | ) | 26,628 |   | (271 | )  |

 

For all of the aboveinvestment securities, the unrealized losses are generally due to changes ininterest rates and, as such, are considered to be temporary by the Company. Thetemporary impairment of fixed-rate investments is likely to continue in arising interest rate environment.

 

All temporarily impairedinvestments are bank qualified investments. There has been no significantchange in the credit quality of issuers since the securities were purchased.

 

**(7)**       LoansReceivable

** **

Loansreceivable consist of the following at December 31, 2004 and 2003 (inthousands):

 
| ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Commercial                      |       | $        | 16,191     |     | 16,953     |   |
| Real estate –  commercial  |       | 34,850   |       | 27,227   |       |
| Real estate –  residential |       | 20,010   |       | 16,512   |       |
| Construction                    |       | 3,446    |       | 2,884    |       |
| Consumer                        |       | 2,782    |       | 2,853    |       |
|                            |       | 77,279   |       | 66,429   |       |
| Less allowance  for loan losses |       | (971     | )          | (768     | )          |
| Deferred loan  costs            |       | 111      |       | 121      |       |
| Loans  receivable, net          |       | $        | 76,419     |     | 65,782     |   |

 

The Bank is subject to a loans-to-one-borrowerlimitation of 15% of capital funds. At December 31, 2004, theloans-to-one-borrower limitation was $2,628,000; this excludes an additional10% of adjusted capital funds or $1,752,000, which

 

75

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may be loaned ifcollateralized by readily marketable securities as defined by regulations. AtDecember 31, 2004, there are no loans outstanding or committed to any oneborrower that individually or in the aggregate exceeds that limit.

 

The Bank lends primarily tocustomers in its local market area. Most loans are mortgage loans. Mortgageloans include loans secured by commercial and residential real estate andconstruction loans. Accordingly, lending activities could be affected bychanges in the general economy, the regional economy, or real estate values. AtDecember 31, 2004 and 2003, mortgage loans totaled $58,306,000 and$46,623,000, respectively. Mortgage loans represent 75.4% and 70.2% of totalgross loans at December 31, 2004 and 2003, respectively.

 

During the year, the Bankhad a $60,000 nonaccruing loan that has since returned to an accruing status.The Bank had one nonaccruing loan at December 31, 2004 in the amount of$24,000. The Bank did not have any nonaccrual or impaired loans at or duringthe year ended December 31, 2003.

 

Thefollowing is a summary of the activity of the allowance for loan losses (inthousands):

 
| ** **                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance,  beginning of year |       | $        | 768        |     | 576        |     | 335        |   |
| Provision for  loan losses  |       | 218      |       | 225      |       | 275      |       |
| Charge-offs, net            |       | (15      | )          | (33      | )          | (34      | )          |
| Balance, end of  year       |       | $        | 971        |     | 768        |     | 576        |   |

 

**(8)**       Premises andEquipment, Net

** **

Premisesand equipment at December 31, 2004 and 2003 are summarized as follows (inthousands):

 
| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Furniture and  equipment                   |       | $        | 650        |     | 505        |   |
| Building and  land                         |       | 374      |       | 374      |       |
| Leasehold  improvements                    |       | 353      |       | 335      |       |
|                                       |       | 1,377    |       | 1,214    |       |
|                                       |       |     |       |     |       |
| Accumulated  depreciation and amortization |       | (428     | )          | (279     | )          |
| Premises and  equipment, net               |       | $        | 949        |     | 935        |   |

 

76

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Depreciation expense was$152,000, $113,000, and $90,000 for the years ended December 31, 2004,2003, and 2002, respectively.

 

The Company leases its mainoffice and operations center, both of which are located in Collingswood, NewJersey. The Company owns its branch located in Westville, New Jersey. TheWestville branch opened in January 2003.

 

**(9)**       Deposits

** **

Depositsconsist of the following major classifications at December 31, 2004 and2003 (dollars in thousands):

 
| ** **               | ** ** | **2004**         | ** ** | **2003**   | ** ** |
|--------------------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | **Weighted**     | ** ** | ** ** | ** ** | **% of total** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **% of total** | ** ** |
| ** **               | ** ** | **average rate** | ** ** | **Amount** | ** ** | **deposits** | ** ** | **average rate** | ** ** | **Amount** | ** ** | **deposits** | ** ** |
| Interest  checking       |       | 1.77             | %          | $          | 34,806     |   | 31.3 | % | 1.70 | % | $ | 37,311 |   | 35.8 |   |
| Noninterest  checking    |       | —           |       | 22,092     |       | 19.9 |   | — |   | 20,406 |   | 19.6 |   |
| Money market             |       | 0.85             |       | 18,084     |       | 16.3 |   | 0.50 |   | 15,121 |   | 14.5 |   |
| Savings                  |       | 0.48             |       | 6,743      |       | 6.0 |   | 0.38 |   | 5,253 |   | 5.0 |   |
| Certificates of  deposit |       | 2.50             |       | 29,461     |       | 26.5 |   | 2.35 |   | 26,232 |   | 25.1 |   |
| Total                    |       | 1.38             | %          | $          | 111,186    |   | 100.0 | % | 1.29 | % | $ | 104,323 |   | 100.0 | % |

 

The Bank has a concentrationof deposits from local municipalities. Municipal deposits, which are mostlyinterest checking accounts, were $26,916,000 or 24.2% of total deposits atDecember 31, 2004 and $29,453,000 or 28.2% of total deposits atDecember 31, 2003. Municipal deposit accounts in excess of $100,000 arecollateralized by investment securities with a carrying value of $24,295,000 atDecember 31, 2004.

 

Certificates of depositaccounts of $100,000 and over totaled $19,557,000 and $16,884,000 atDecember 31, 2004 and 2003, respectively.

 

Interestexpense on deposits consisted of the following for the year endedDecember 31, 2004, 2003, and 2002 (dollars in thousands):

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest  checking            |       | $        | 547        |     | 531        |     | 427        |   |
| Money market                  |       | 100      |       | 97       |       | 192      |       |
| Savings                       |       | 19       |       | 31       |       | 38       |       |
| Certificates of  deposit      |       | 682      |       | 544      |       | 425      |       |
| Interest expense  on deposits |       | $        | 1,348      |     | 1,203      |     | 1,082      |   |

 

77

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Thefollowing is a schedule of certificates of deposit by maturities as ofDecember 31, 2004 (in thousands):

 
| Year ended  December 31: |   |   |   |
|--------------------------|--------|--------|--------|
| 2005                     |   | $      | 24,084 |   |
| 2006                     |   | 1,688  |   |
| 2007                     |   | 3,598  |   |
| 2008                     |   | 91     |   |
| Total                    |   | $      | 29,461 |   |

 

**(10)**         BorrowingAvailability

** **

At December 31, 2004,the Bank had a secured line of credit with First Tennessee Bank in theaggregate amount of $2.4 million, and an unsecured line of credit with AtlanticCentral Bankers Bank in the aggregate amount of $5 million. AtDecember 31, 2004, the Bank had $2,870,000 outstanding against its linesof credit. The Bank had borrowed funds outstanding for seventeen days in 2004.The amounts outstanding ranged from $670,000 to $6,849,000. Total outstandingloans averaged $105,000 for the year ended December 31, 2004. AtDecember 31, 2003, the Bank had no balances outstanding against its linesof credit. The Bank had borrowed funds outstanding for 12 days in 2003. Theamounts outstanding ranged from $140,000 to $2,823,000. Total outstanding loansaveraged $35,000 for the year ended December 31, 2003.

 

In addition, the Bank soldsecurities under agreements to repurchase as a short-term funding source. As ofDecember 31, 2004 and 2003, the Bank had $4,276,000 and $4,087,000,respectively, of securities sold under agreements to repurchase. As ofDecember 31, 2004, these repurchase agreements had fixed rates ranging from0.5% to 2% and terms ranging from 3 days to 144 days. The underlying securitiesfor the repurchase agreements were U.S. government securities andmortgage-backed securities with an aggregate book value of $7,897,000 and$6,294,000 as of December 31, 2004 and 2003, respectively.

 

78

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**(11)**         Earnings PerShare

** **

The following is areconciliation of the numerators and denominators of the basic and dilutedearnings per share calculation for the years ended December 31, 2004,2003, and 2002 (dollars in thousands, except per-share data):

 
| ** **                            | ** ** | **Net  income** | ** ** | **Weighted  average  number  of shares****outstanding** | ** ** | **Per-share****amount** | ** ** |
|---------------------------------------|------------|-----------------|------------|---------------------------------------------------------|------------|-------------------------|------------|
| 2004:                                 |       |            |       |                                                    |       |                    |       |
| Basic earnings  per share             |       | $               | 625        |                                                    | 1,987,008  |                    | $          | 0.31 |   |
| Effect of  dilutive stock equivalents |       | —          |       | 58,002                                                  |       | —                  |       |
| Diluted earnings  per share           |       | $               | 625        |                                                    | 2,045,010  |                    | $          | 0.31 |   |
| 2003:                                 |       |            |       |                                                    |       |                    |       |
| Basic earnings  per share             |       | $               | 500        |                                                    | 1,411,529  |                    | $          | 0.35 |   |
| Effect of  dilutive stock equivalents |       | —          |       | 34,805                                                  |       | —                  |       |
| Diluted earnings  per share           |       | $               | 500        |                                                    | 1,446,334  |                    | $          | 0.35 |   |
| 2002:                                 |       |            |       |                                                    |       |                    |       |
| Basic earnings  per share             |       | $               | 495        |                                                    | 1,139,076  |                    | $          | 0.44 |   |
| Effect of  dilutive stock equivalents |       | —          |       | 4,136                                                   |       | (0.01                   | )          |
| Diluted earnings  per share           |       | $               | 495        |                                                    | 1,143,212  |                    | $          | 0.43 |   |

 

Earnings per share iscalculated on the basis of weighted average number of shares outstanding.Options to purchase 136,680, 79,380, and 52,440 shares of common stock wereoutstanding at December 31, 2004, 2003, and 2002, respectively. Warrantsto purchase 364,981, 373,805, and 377,499 shares of common stock wereoutstanding at December 31, 2004, 2003, and 2002, respectively. Optionsand warrants, to the extent dilutive, were included in the denominator in thecomputation of earnings per diluted share. Options to purchase 48,300, 0, and30,602 shares were antidilutive for 2004, 2003, and 2002, respectively, and,therefore, excluded from the calculation of earnings per diluted common share.Warrants to purchase 0, 97,023, and 377,499 shares were antidilutive for 2004,2003, and 2002, respectively.

 

**(12)**         Fair Value ofFinancial Instruments

** **

The following requireddisclosure of the estimated fair value of financial instruments has beendetermined by the Company using available market information and appropriatevaluation methodologies. However, considerable judgment is necessarily requiredto interpret market data to develop

 

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the estimates of fair value.Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts the Company could realize in a current market exchange. The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

 

The methods and assumptionsused to estimate the fair values of each class of financial instrument are asfollows:

 

***(a)***   ***Cash and Cash Equivalents,Accrued Interest Receivable, and Accrued Interest Payable***

 

The items are generallyshort term in nature, and accordingly, the carrying amounts reported in thestatements of financial condition are reasonable approximations of their fairvalues.

 

***(b)******  ******InvestmentSecurities***

*** ***

Fair values for investmentsecurities are based on quoted market prices, if available. If quoted marketprices are not available, then fair values are based on quoted market prices ofcomparable instruments.

 

***(c)******  ******Loansand Mortgage Loans Held for Sale***

*** ***

For variable-rate loans thatreprice frequently and with no significant change in credit risk, fair value isbased on carrying value. The fair value for other loans receivable wasestimated using a discounted cash flow analysis, which uses interest ratescurrently being offered for loans with similar terms to borrowers of similarcredit quality. Consideration was given to prepayment speeds, economicconditions, risk characteristics, and other factors considered appropriate.

 

***(d)******  ******Deposits***

*** ***

The fair values of depositssubject to immediate withdrawal, such as interest and noninterest checking,statement savings, and money market demand deposit accounts, are equal to theircarrying amounts in the accompanying statements of financial condition. Fairvalues for certificates of deposit are estimated by discounting future cashflows using interest rates currently offered on certificates of deposit withsimilar remaining maturities.

 

80

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***(e)******  ******Off-Balance-SheetInstruments***

*** ***

Off-balance-sheetinstruments are primarily comprised of loan commitments and unfunded lines ofcredit that are generally priced at market rate at the time of funding. Therefore,these instruments have nominal value prior to funding.

 

Theestimated fair value of the Company’s financial instruments atDecember 31, 2004 and 2003 was as follows (in thousands):

 
| ** **                      | ** ** | **2004**     | ** ** | **2003**       | ** ** |
|---------------------------------|------------|--------------|------------|----------------|------------|
| ** **                      | ** ** | **Carrying** | ** ** | **Estimated**  | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                      | ** ** | **amount**   | ** ** | **fair value** | ** ** | **amount** | ** ** | **fair value** | ** ** |
| Financial  assets:              |       |         |       |           |       |   |   |   |   |
| Cash and cash  equivalents      |       | $            | 3,777      |           | 3,777      |   | 16,516 |   | 16,516 |   |
| Investments held  to maturity   |       | 16,860       |       | 16,854         |       | 5,808 |   | 5,796 |   |
| Investments  available for sale |       | 36,686       |       | 36,686         |       | 27,985 |   | 27,985 |   |
| Mortgages held  for sale        |       | 240          |       | 240            |       | 281 |   | 281 |   |
| Loans  receivable, net          |       | 76,419       |       | 76,194         |       | 65,782 |   | 65,638 |   |
| Accrued interest  receivable    |       | 510          |       | 510            |       | 373 |   | 373 |   |
| Total financial  assets         |       | $            | 134,492    |           | 134,261    |   | 116,745 |   | 116,589 |   |
| Financial liabilities:          |       |         |       |           |       |   |   |   |   |
| Demand deposits                 |       | $            | 56,898     |           | 56,898     |   | 57,717 |   | 57,717 |   |
| Money market  deposits          |       | 18,084       |       | 18,084         |       | 15,121 |   | 15,121 |   |
| Savings deposits                |       | 6,743        |       | 6,743          |       | 5,253 |   | 5,253 |   |
| Certificates of  deposit        |       | 29,461       |       | 29,751         |       | 26,232 |   | 26,609 |   |
| Short-term  borrowings          |       | 7,146        |       | 7,145          |       | 4,087 |   | 4,087 |   |
| Accrued interest  payable       |       | 8            |       | 8              |       | 8 |   | 8 |   |
| Total financial  liabilities    |       | $            | 118,340    |           | 118,629    |   | 108,418 |   | 108,795 |   |

 
| ** **                      | ** ** | **Notional  amount** | ** ** | ** ** | ** ** | **Notional  amount** | ** ** | ** ** | ** ** |
|---------------------------------|------------|----------------------|------------|------------|------------|----------------------|------------|------------|------------|
| Off-balance-sheet  instruments: |       |                 |       |       |       |                 |       |       |       |
| Commitments to  extend credit   |       | $                    | 10,073     |       | —     |                 | 8,319      |       | —     |   |
|                                 |            |                      |            |            |            |                      |            |            |            |  |

 

81

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**(13)**         Income Taxes

** **

Total income tax expense(benefit) was allocated for the years ended December 31, 2004, 2003, and2002, as follows (in thousands):

 
| ** **                                                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income before  income taxes                                                            |       | $        | 384        |     | 335        |     | 329        |   |
| Shareholders’  equity for unrealized gain (loss) on securities available for sale |       | (30      | )          | (106     | )          | (8       | )          |
|                                                                                   |       | $        | 354        |     | 229        |     | 321        |   |

 

Incometax expense (benefit) consisted of the following for the years endedDecember 31, 2004, 2003, and 2002 (in thousands):

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Federal:   |       |     |       |     |       |     |       |
| Current    |       | $        | 277        |     | 267        |     | 268        |   |
| Deferred   |       | 10       |       | (13      | )          | (16      | )          |
|       |       | 287      |       | 254      |       | 252      |       |
| State:     |       |     |       |     |       |     |       |
| Current    |       | 96       |       | 83       |       | 80       |       |
| Deferred   |       | 1        |       | (2       | )          | (3       | )          |
|       |       | 97       |       | 81       |       | 77       |       |
| Total      |       | $        | 384        |     | 335        |     | 329        |   |

 

Thefollowing is a reconciliation between expected tax expense at the statutoryrate of 34% and actual tax expense (in thousands):

 
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| At federal  statutory rate         |       | $        | 343        |     | 284        |     | 280        |   |
| Adjustments  resulting from:       |       |     |       |     |       |     |       |
| State tax, net  of federal benefit |       | 62       |       | 55       |       | 52       |       |
| Tax-exempt  interest income        |       | (31      | )          | (13      | )          | (3       | )          |
| Other                              |       | 10       |       | 9        |       | —   |       |
| Total                              |       | $        | 384        |     | 335        |     | 329        |   |

 

82

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Significantdeferred tax assets and liabilities of the Bank at December 31, 2004 and2003 are as follows (dollars in thousands):

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                               |       |     |       |     |       |
| Organization  costs                                 |       | $        | 15         |     | 42         |   |
| Book bad debt  reserves – loans                |       | 378      |       | 296      |       |
| Unrealized  losses on securities available for sale |       | 79       |       | 49       |       |
| Total gross  deferred tax assets                    |       | 472      |       | 387      |       |
| Deferred tax  liabilities:                          |       |     |       |     |       |
| Depreciation                                        |       | (24      | )          | (4       | )          |
| Deferred loan  costs                                |       | (80      | )          | (77      | )          |
| Unrealized gains  on securities available for sale  |       | —   |       | —   |       |
| Prepaid expenses                                    |       | (48      | )          | (5       | )          |
| Total gross  deferred tax liabilities               |       | (152     | )          | (86      | )          |
| Net deferred tax  asset                             |       | $        | 320        |     | 301        |   |

 

The realizability of deferred tax assets isdependent upon various factors, including the generation of future taxableincome, the existence of taxes paid and recoverable, the reversal of deferredtax liabilities, and tax planning strategies.

 

Based upon these and otherfactors, management has determined that it is more likely than not that theCompany will realize the benefits of deferred tax assets that exist atDecember 31, 2004.

 

**(14)**         Properties

** **

The Bank operates from itsmain office in Collingswood, New Jersey, and its Westville, New Jersey branchoffice. In addition, the Bank maintains an operations center in Collingswood,New Jersey.

 

The Westville branchlocation was purchased on August 30, 2002. Subsequent to regulatoryapproval and renovation, this new branch opened in January 2003.

 

The main office andoperations center are leased. The main office lease expires in December 2009with options to renew for two additional five-year terms. The operations centerlease expires in February 2006.

 

83

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Future minimum paymentsunder leases are summarized as follows (dollars in thousands):

 
| 2005       |   | $      | 110    |   |
|------------|--------|--------|--------|--------|
| 2006       |   | 60     |   |
| 2007       |   | 50     |   |
| 2008       |   | 50     |   |
| 2009       |   | 50     |   |
| Thereafter |   | — |   |
|       |   | $      | 320    |   |

 

Total rent expense was$93,000, $76,000, and $62,000 for the years ended December 31, 2004, 2003,and 2002, respectively.

 

**(15)**         Capital Leases

** **

At December 31, 2002,the Bank was obligated, under noncancelable capital leases, for a portion ofits computer equipment. The Bank repaid these leases in full in July 2003.

 

**(16)**         Commitments andContingencies

** **

***(a)***   Financial Instruments WithOff-Balance-Sheet Risk

*** ***

The Bank is a party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness. These financial instruments include commitments to extend credit tomeet the financing needs of its customers. Such commitments have been made inthe normal course of business and at current prevailing market terms. Thecommitments, once funded, are principally to originate commercial loans andother loans secured by real estate. The Bank uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance-sheetinstruments.

 

Commitmentsissued to potential borrowers of the Bank at December 31, 2004 and 2003were as follows (dollars in thousands):

 
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Fixed-rate  commitments               |       | $        | 488        |     | 444        |   |
| Variable/adjustable-rate  commitments |       | 9,585    |       | 7,875    |       |
| Total                                 |       | $        | 10,073     |     | 8,319      |   |

 

84

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***(b)******       LegalProceedings***

*** ***

At December 31, 2004,the Company was neither engaged in any existing nor aware of any pending legalproceedings. From time to time, the Bank is a party to legal proceedings withinthe normal course of business wherein it enforces its security interest inloans made by it, and other matters of a similar nature.

 

**(17)**         Related-PartyTransactions

** **

The Bank routinely entersinto transactions with its directors and officers. Such transactions are madein the ordinary course of business on substantially the same terms andconditions, including interest rates and collateral, as those prevailing at thesame time for comparable transactions with other customers, and do not, in theopinion of management, involve more than normal credit risk or present otherunfavorable features. The aggregate amount of loans to such related parties was$1,531,000 and $1,443,000 at December 31, 2004 and 2003, respectively.During 2004 and 2003, new loans and credit line advances to such relatedparties amounted to $405,000 and $1,436,000, respectively, and repaymentsamounted to $317,000 and $399,000, respectively. The aggregate amount ofdeposits from related parties was $12,123,000 and $7,216,000 atDecember 31, 2004 and 2003, respectively.

 

The Bank engaged in certainproperty inspection services and branch renovations with an entity that isaffiliated with a director of the Bank. Such aggregate services amounted tofees of $19,000, $86,000, and $110,000 for the years ended December 31,2004, 2003, and 2002, respectively. The majority of these fees were capitalizedas premises and equipment. The Bank engages a law firm that is affiliated witha director of the Bank for certain debt collection services. Total fees forsuch services amounted to $16,000, $9,000, and $7,000 for the years endedDecember 31, 2004, 2003, and 2002, respectively. In management’s opinion,the terms of the services provided were substantially equivalent to that whichwould have been obtained from unaffiliated parties.

 

**(18)**         Dividend Policy

** **

***(a)***       Company

 

The Company has not paid acash dividend since its inception in June 2000. Any payment of cashdividends to our shareholders would be dependent on the payment

 

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of a cash dividend from theBank to the Company. The payment of cash dividends by the Bank to the Companyis limited under federal banking law. The Company’s future dividend policy issubject to the discretion of its board of directors and will depend upon anumber of factors, including future earnings, financial conditions, cash needs,and general business conditions. Holders of common stock will be entitled toreceive dividends as and when declared by the board of directors out of fundslegally available for that purpose.

 

***(b)***       Bank

*** ***

The amount of dividends thatmay be paid by the Bank depends upon the Bank’s earnings and capital position,and is limited by federal law, regulations, and policies. As a national banksubject to the regulations of the OCC, the Bank must obtain approval for anydividend if the total of all dividends declared in any calendar year wouldexceed the total of its net profits, as defined by applicable regulations, forthat year, combined with its retained net profits for the preceding two years,less any required transfers to surplus. In addition, the Bank may not paya dividend in an amount greater than its undivided profits then on hand afterdeducting its losses and bad debts.

 

In addition, the OCC isauthorized to determine under certain circumstances relating to the financialcondition of a national bank that the payment of dividends would be an unsafeor unsound practice and to prohibit payment thereof. The payment of dividendsthat depletes a bank’s capital base could be deemed to constitute such anunsafe or unsound practice.

 

**(19)**         Stock OptionPlans and Stock Warrants

** **

Common stock options andwarrants for all periods presented herein were adjusted to reflect the 10%stock dividend paid on January 15, 2002, the 5% stock dividend paid onApril 15, 2003, and the 5% stock dividend paid on April 15, 2004.

 

***(a)***           Stock Options

*** ***

Two new stock optionprograms were adopted in April 2003.

 

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The 2003 Employee StockOption Plan provides up to 78,750 options for key employees. The exercise priceof options granted under this program will be equal to at least the fair marketvalue of common stock as of the grant date. Options vest over a period of timeno less than 12 months as designated by the board of directors. Options expire10 years from the grant date. In January 2004, 32,550 options were grantedat an exercise price of $10.89 per share.

 

The 2003 Outside DirectorPlan provides up to 52,500 options for nonemployee directors. The exerciseprice of options granted under this program will be equal to at least the fairmarket value of common stock as of the grant date. Options become fully vested11 months after the grant date. Options expire 10 years from the grant date. InApril 2003, 7,880 options were granted at an exercise price of $8.71 pershare. In January 2004, 15,750 options were granted at an exercise priceof $10.89 per share. In May 2004, 9,000 options were granted at anexercise price of $9.88 per share.

 

The Company adopted theBank’s Employee and Outside Director Stock Option Plans as part of thereorganization and formation of the holding company in 2002. The discussionthat follows refers to these two stock option plans as the Original EmployeeStock Option Plan and the Original Outside Director Stock Option Plan.

 

A total of 48,519 optionswere granted under the Original Employee Stock Option Plan. InJanuary 2003, 11,028 options were granted at an exercise price of $7.82per share. The exercise price of all options granted under the OriginalEmployee Plan was equal to the fair market value of the common stock at grantdate. Options vest in five equal annual installments commencing on the firstanniversary of the grant and expire 10 years after the grant date. No optionsare available for future grants under the Original Employee Stock Option Plan.At December 31, 2004, 43,320 options were outstanding under this plan.

 

A total of 29,706 optionswere granted under the Original Outside Director Stock Option Plan. InJanuary 2003, 8,280 options were granted at an exercise price of $7.82 pershare. The exercise price of all options granted under the Original Outside

 

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Director Plan was equal tothe fair market value of the common stock at grant date. All optionsoutstanding under the Original Outside Director Plan are fully vested. Optionsexpire 10 years after the grant date. No options are available for futuregrants under the Original Outside Director Stock Option Plan. AtDecember 31, 2004, 28,180 options were outstanding under this plan.

 

A summary status of the Company’sstock option plans as of December 31, 2004 and 2003, and the changesduring the years then ended, is as follows:

 
| ** **                                                             | ** ** | **2004**   | ** ** | **2003**           | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **Weighted**       | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                             | ** ** | ** ** | ** ** | **average**        | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                                                             | ** ** | **Shares** | ** ** | **exercise price** | ** ** | **Shares** | ** ** | **exercise price** | ** ** |
| Outstanding,  beginning of year                                        |       | 79,380     |       | $                  | 7.93       |   | 52,440 |   | $ | 7.86 |   |
| Granted                                                                |       | 57,300     |       | 10.73              |       | 27,190 |   | 8.09 |   |
| Exercised  and forfeited                                               |       | —     |       |               |       | (250 | ) | (9.30 | ) |
| Outstanding,  end of year                                              |       | 136,680    |       | 9.10               |       | 79,380 |   | 7.93 |   |
|                                                                   |       |       |       |               |       |   |   |   |   |
| Options  exercisable at December 31                               |       | 107,234    |       |               |       | 42,416 |   |   |   |
|                                                                   |       |       |       |               |       |   |   |   |   |
| Weighted  average fair value of options granted during during the year |       |       |       | $                  | 6.44       |   |   |   | $ | 4.81 |   |

 

The following tablesummarizes all stock options outstanding and exercisable for option plans as ofDecember 31, 2004 segmented by range of exercise prices:

 
| ** **            | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** |
|-----------------------|------------|-----------------|------------|-----------------|------------|
| ** **            | ** ** | ** **      | ** ** | ** **      | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | ** **      | ** ** | **Weighted**    | ** ** | **average** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **            | ** ** | ** **      | ** ** | **average**     | ** ** | **remaining** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **            | ** ** | **Number**      | ** ** | **exercise**    | ** ** | **contractual** | ** ** | **Number** | ** ** | **exercise** | ** ** |
| ** **            | ** ** | **outstanding** | ** ** | **price**       | ** ** | **life** | ** ** | **exercisable** | ** ** | **price** | ** ** |
| Stock  options:       |       |            |       |            |       |   |   |   |   |   |   |
| $6.50  – $8.00   |       | 41,151          |       | $               | 7.17       |   | 6.7 years |   | 28,884 |   | $ | 7.04 |   |
| $8.01  – $9.00   |       | 27,474          |       | 8.52            |       | 7.3 years |   | 25,748 |   | 8.54 |   |
| $9.01  – $10.00  |       | 19,755          |       | 9.56            |       | 8.2 years |   | 4,302 |   | 9.30 |   |
| $10.01  – $11.00 |       | 48,300          |       | 10.89           |       | 9.0 years |   | 48,300 |   | 10.89 |   |
| Total                 |       | 136,680         |       | 9.10            |       | 7.8 years |   | 107,234 |   | 9.22 |   |
|                       |            |                 |            |                 |            |  |  |  |  |  |  |  |  |

 

88

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The following tablesummarizes the fair value of each option grant in 2004 and 2003 using theBlack-Scholes pricing model and the significant assumptions used therein.

 
| **Grant  date** | ** ** | **Option  plan** | ** ** | **Exercise  price** | ** ** | **Fair value  per option** | ** ** | **Risk-free  rate** | ** ** | **Cash  dividends** | ** ** | **Expected  life** | ** ** | **Expected  volatility** | ** ** |
|-----------------|------------|------------------|------------|---------------------|------------|----------------------------|------------|---------------------|------------|---------------------|------------|--------------------|------------|--------------------------|------------|
| May 2004   |       |             | Director   |                | $          | 9.88                       |       | 4.30                |       | 4.79                | %          | none               |       | 10 years                 |       | 19 | % |
| Jan 2004        |       |             | Employee   |                | 10.89      |                       | 6.84       |                | 4.38       |                | none       |               | 10 years   |                     | 46         |   |
| Jan 2004        |       |             | Director   |                | 10.89      |                       | 6.84       |                | 4.38       |                | none       |               | 10 years   |                     | 46         |   |
| Apr 2003        |       |             | Director   |                | 8.71       |                       | 5.36       |                | 4.01       |                | none       |               | 10 years   |                     | 45         |   |
| Jan 2003        |       |             | Employee   |                | 7.82       |                       | 4.59       |                | 4.15       |                | none       |               | 10 years   |                     | 41         |   |
| Jan 2003        |       |             | Director   |                | 7.82       |                       | 4.59       |                | 4.15       |                | none       |               | 10 years   |                     | 41         |   |
|                 |            |                  |            |                     |            |                            |            |                     |            |                     |            |                    |            |                          |            |  |  |

 

***(b)***           Stock Warrants

*** ***

Stock warrants were issuedon two separate occasions.

 

In connection with theBank’s initial stock offering in 2000, the Bank issued warrants to purchase97,023 shares of the Bank’s common stock at $9.57 per share. These warrantsexpire in June 2005. All 97,023 of these warrants are outstanding atDecember 31, 2004.

 

In connection with theCompany’s public stock offering in December 2002, the Company issued280,475 units. Each unit consisted of one share of common stock, no par value,and one warrant to purchase one share of common stock at an exercise price of$8.71. The warrants expire in December 2005. During 2003, 3,694 of thesewarrants were exercised. During 2004, 8,823 of these warrants were exercised.The remaining 267,958 warrants are outstanding at December 31, 2004.

 

**(20)**         RegulatoryMatters

** **

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies. Failure to meet minimum capital requirements can initiate certainmandatory – and possibly additional discretionary – actions by regulators that,if undertaken, could have a direct material effect on the Bank’s financialstatements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Bank must meet specific capital guidelines thatinvolve quantitative measures of the Bank’s assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accounting practices.The Bank’s capital amounts and classification are also subject to qualitativejudgments by

 

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the regulators aboutcomponents, risk weightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth in the following table) of totaland Tier I capital (as defined in the regulations) to risk-weighted assets (asdefined), and of Tier I capital (as defined) to average assets (as defined).Management believes, as of December 31, 2004 and 2003, the Bank meets allcapital adequacy requirements to which it is subject.

 

As of December 31, 2004, the most recentnotification from the FDIC categorized the Bank as well capitalized under theregulatory framework for prompt corrective action. To be categorized as wellcapitalized, the Bank must maintain minimum total risk-based, Tier Irisk-based, and Tier I leverage ratios as set forth in the table. There are noconditions or events since that notification that management believes havechanged the institution’s category.

 

The Bank’s actual capitalamounts and ratios at December 31, 2004 and 2003 are presented in thefollowing table (dollars in thousands):

 
| ** **                                | ** ** | **Actual** | ** ** | **For capital  adequacy purposes** | ** ** | **To be well capitalized  under prompt corrective  action provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                             | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| At  December 31, 2004:               |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Total  capital (to risk-weighted assets)  |       | $          | 17,181     |                               | 20.28      | %                                                                      | $          | 6,777 |   | 8 | % | $ | 8,472 |   | 10 | % |
| Tier  I capital (to risk-weighted assets) |       | 16,210     |       | 19.13                              |       | 3,389                                                                  |       | 4 |   | 5,083 |   | 6 |   |
| Tier  I capital (to average assets)       |       | 16,210     |       | 11.56                              |       | 5,609                                                                  |       | 4 |   | 7,011 |   | 5 |   |
|                                      |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| At  December 31, 2003:               |       |       |       |                               |       |                                                                   |       |   |   |   |   |   |   |
| Total  capital (to risk-weighted assets)  |       | $          | 10,332     |                               | 14.60      | %                                                                      | $          | 5,660 |   | 8 | % | $ | 7,075 |   | 10 | % |
| Tier  I capital (to risk-weighted assets) |       | 9,564      |       | 13.52                              |       | 2,830                                                                  |       | 4 |   | 4,245 |   | 6 |   |
| Tier  I capital (to average assets)       |       | 9,564      |       | 8.73                               |       | 4,383                                                                  |       | 4 |   | 5,479 |   | 5 |   |

 

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**(21)**         Parent CompanyFinancial Information

** **

A summary of the statementsof financial condition at December 31, 2004 and 2003 follows (dollars inthousands):

 
| ** **                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  in subsidiary                              |       | $          | 1,281      |       | 43         |   |
| Investment  in subsidiary                        |       | 16,091     |       | 9,490      |       |
| Deferred  tax asset                              |       | 25         |       | 14         |       |
| Other  assets                                    |       | 2          |       | 5          |       |
| Total  assets                                    |       | $          | 17,399     |       | 9,552      |   |
| **Liabilities  and Shareholders’ Equity**   |       |       |       |       |       |
| Payable  to subsidiary                           |       | $          | —     |       | 1          |   |
| Shareholders’  equity                       |       | 17,399     |       | 9,551      |       |
| Total  liabilities and stockholders’ equity |       | $          | 17,399     |       | 9,552      |   |

 

A summary of the statementsof operations for the years ended December 31, 2004 and 2003 follows(dollars in thousands):

 
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Equity  income from subsidiary    |       | $        | 646        |     | 515        |     | 256        |   |
|                              |       |     |       |     |       |     |       |
| Other  expenses:                  |       |     |       |     |       |     |       |
| Organizing  expense               |       | —   |       | —   |       | 9        |       |
| Other  operating expenses         |       | 32       |       | 24       |       | 3        |       |
| Total  other expenses             |       | 32       |       | 24       |       | 12       |       |
| Income  before income tax benefit |       | 614      |       | 491      |       | 244      |       |
| Income  tax benefit               |       | (11      | )          | (9       | )          | (4       | )          |
| Net  income                       |       | $        | 625        |     | 500        |     | 248        |   |

 

Asummary of the statements of cash flows for the years ended December 31,2004 and 2003 follows (dollars in thousands):

 

91

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| ** **                                                                                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash  flows from operating activities:                                                                            |       |     |       |     |       |     |       |
| Net  income                                                                                                       |       | $        | 625        |     | 500        |     | 248        |   |
| Adjustments  to reconcile net income to net cash used in operating activities:                                    |       |     |       |     |       |     |       |
| Equity  in income from subsidiary                                                                                 |       | (646     | )          | (516     | )          | (256     | )          |
| Increase  in deferred tax assets                                                                                  |       | (11      | )          | (10      | )          | (4       | )          |
| (Decrease)  increase in payable to subsidiary                                                                     |       | (1       | )          | 1        |       | —   |       |
| Decrease  (increase) in other assets                                                                              |       | 3        |       | (5       | )          | —   |       |
| Total  adjustments                                                                                                |       | (655     | )          | (530     | )          | (260     | )          |
| Net  cash used in operating activities                                                                            |       | (30      | )          | (30      | )          | (12      | )          |
|                                                                                                              |       |     |       |     |       |     |       |
| Cash  flows from investing activities:                                                                            |       |     |       |     |       |     |       |
| Investment  in subsidiary                                                                                         |       | (6,001   | )          | —   |       | (1,873   | )          |
| Net  cash used in investing activities                                                                            |       | (6,001   | )          | —   |       | (1,873   | )          |
|                                                                                                              |       |     |       |     |       |     |       |
| Cash  flows from financing activities:                                                                            |       |     |       |     |       |     |       |
| Issuance  of common stock, net                                                                                    |       | 7,269    |       | 23       |       | 1,935    |       |
| Net  cash provided by financing activities                                                                        |       | 7,269    |       | 23       |       | 1,935    |       |
| Net  increase (decrease) in cash and cash equivalents                                                             |       | 1,238    |       | (7       | )          | 50       |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Cash  and cash equivalents at beginning of period                                                                 |       | 43       |       | 50       |       | —   |       |
| Cash  and cash equivalents at end of period                                                                       |       | $        | 1,281      |     | 43         |     | 50         |   |
|                                                                                                              |       |     |       |     |       |     |       |
| Noncash  items:                                                                                                   |       |     |       |     |       |     |       |
| Net  change in unrealized gains on securities available for sale, net of taxes of  $30 for 2004 and $106 for 2003 |       | $        | (46        | )        | (174       | )        | 3          |   |

 

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**(22)**         OtherComprehensive Income (Loss)

** **

Other comprehensive income(loss) components and related tax benefits are as follows for the years endedDecember 31, 2004, 2003, and 2002 (in thousands):

 
| ** **                                                         | ** ** | **2004**       | ** ** |
|--------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                         | ** ** | **Before-tax** | ** ** | **Tax benefit** | ** ** | **Net-of-tax** | ** ** |
| ** **                                                         | ** ** | **amount**     | ** ** | **(expense)** | ** ** | **amount** | ** ** |
| Unrealized  losses on securities available for sale:               |       |           |       |   |   |   |   |
| Unrealized  holding losses arising during the year                 |       | $              | (61        | ) | 24 |   | (37 | ) |
| Less  reclassification adjustment for gains included in net income |       | (15            | )          | 6 |   | (9 | ) |
| Other  comprehensive loss                                          |       | $              | (76        | ) | 30 |   | (46 | ) |

 
| ** **                                                         |       | **2003**       |       |
|--------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                         | ** ** | **Before-tax** | ** ** | **Tax benefit** | ** ** | **Net-of-tax** | ** ** |
| ** **                                                         | ** ** | **amount**     | ** ** | **(expense)** | ** ** | **amount** | ** ** |
| Unrealized  losses on securities available for sale:               |       |           |       |   |   |   |   |
| Unrealized  holding losses arising during the year                 |       | $              | (276       | ) | 104 |   | (172 | ) |
| Less  reclassification adjustment for gains included in net income |       | (4             | )          | 2 |   | (2 | ) |
| Other  comprehensive loss                                          |       | $              | (280       | ) | 106 |   | (174 | ) |

 
| ** **                                                         |       | **2002**       |       |
|--------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                         | ** ** | **Before-tax** | ** ** | **Tax benefit** | ** ** | **Net-of-tax** | ** ** |
| ** **                                                         | ** ** | **amount**     | ** ** | **(expense)** | ** ** | **amount** | ** ** |
| Unrealized  gains on securities available for sale:                |       |           |       |   |   |   |   |
| Unrealized  holding gains arising during the year                  |       | $              | 19         |   | (2 | ) | 17 |   |
| Less  reclassification adjustment for gains included in net income |       | (24            | )          | 10 |   | (14 | ) |
| Other  comprehensive income                                        |       | $              | (5         | ) | 8 |   | 3 |   |

 

**ITEM 8.****         ****Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

 

None.

 

**ITEM 8A.****      ****Controls and Procedures**

 

1stColonial, 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 1st Colonial’sdisclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended (the

 

93

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“Exchange Act”)) as ofthe end of the period covered by this report. Based on that evaluation, 1st Colonial’s Chief Executive Officer andChief Financial Officer concluded that 1st Colonial’s disclosure controls andprocedures are effective. There were no significant changes to 1st Colonial’sdisclosure controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

Exchange ActRule 13a-15(e) defines “disclosure controls and procedures” ascontrols and other procedures of an issuer that are designed to ensure thatinformation required to be disclosed by the issuer in the reports that it filesor submits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Commission’srules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that such information is accumulated and communicated to theissuer’s management, including its principal executive officer and principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**ITEM 8B.****       OtherInformation**

 

None.

 

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**PART III**

 

**ITEM 9.****          Directors,Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) ofthe Exchange Act**

 

**Board ofDirectors**

 

Thetable set forth below contains information concerning our board of directors,including their principal occupations or employment during the past five yearsand their ages.

 
| **Name**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Age**    | ** ** | **Director  Since(1)** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** ** | ** ** | ** **             |
| LINDA M.  ROHRER  Since 1985, Ms. Rohrer has owned and served as the President of Rohrer  and Sayers Real Estate, a commercial and residential real estate sales  company.  Ms. Rohrer served as a  director of Community National Bank of New Jersey from October 1988 to May 1996.                                                                                                                                                                                                                                                                                                             |       | 57         |       | 2000                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |       |       |                   |
| GERARD M.  BANMILLERMr. Banmiller has been  President and Chief Executive Officer of the Bank since its opening in June 2000.  From October 1999 to June 2000, Mr. Banmiller  organized the Bank on a full-time basis.   He served as a Regional President of Hudson United Bank from August 1998  until September 1999.  He served  as a director and President of Community National Bank of New Jersey from its  formation in 1987 until its acquisition by Hudson United Bank in August 1998.                                                                  |       | 57         |       | 2000                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |       |       |                   |
| MARY R.  BURKESince July 1993, Ms. Burke  has owned and served as the President and Treasurer of Standardized Test  Scoring Co., Inc., an independent test scoring and reporting company,  and S-Tests Assessments, Inc., which assesses, develops, tests and  evaluates the testing methods of school districts.  From August 2003 to June 2004,  she served as the principal of St. Rose of Lima School in Haddon Heights, New  Jersey.  From January 2003 to June 2003,  she served as the principal of Christ the King Regional School in  Haddonfield, New Jersey. |       | 52         |       | 2002                   |

 

 

95

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| **Name**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Age**    | ** ** | **Director  Since(1)** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | ** ** | ** ** | ** **             |
| THOMAS A.  CLARK, IIIMr. Clark is a practicing  attorney.  Since 1992, he has been a  shareholder, officer and director of the law firm of Cureton Caplan, P.C.                                                                                                                                                                                                                                                                                                                 |       | 51         |       | 2000                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |       |       |                   |
| LETITIA G.  COLOMBI  Since May 2001, Ms. Colombi has served as the Mayor of the Borough  of Haddonfield, New Jersey, and since 1985, she has been a Borough  Commissioner and the Director of Public Works for Haddonfield.  From August 1998 until April 2000,  she served as a member of an advisory board at Hudson United Bank.  Ms. Colombi served as a director of  Community National Bank of New Jersey from October 1988 to August 1998. |       | 60         |       | 2000                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |       |       |                   |
| GERALD J.  DEFELICIS  Since 1984, Mr. DeFelicis has been retired, having served from 1945 to  1984 with Sun Company, Inc., where he held the position of Manager of  Systems Policy and Strategic Facilities.   From August 1998 to April 2000, Mr. DeFelicis served as  a member of an advisory board at Hudson United Bank.  Mr. DeFelicis served as a director of  Community National Bank of New Jersey from 1987 to August 1998.             |       | 78         |       | 2000                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |       |       |                   |
| JOHN J.  DONNELLY IV  Since 1998, Mr. Donnelly has served as President of J.J. Donnelly  Inc., a general contractor in the commercial construction industry. From 1992  to 1998, Mr. Donnelly served as President of John J. Donnelly Inc.                                                                                                                                                                                                                            |       | 50         |       | 2001                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |       |       |                   |
| EDUARDO F.  ENRIQUEZ  Since 1994, Dr. Enriquez has been self-employed as a Doctor of  Medicine.  Since 1997, he has been a  member of the Physicians Counsel to the Board of Trustees of Virtua Health  Systems.                                                                                                                                                                                                                                                                     |       | 47         |       | 2000                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |       |       |                   |
| MICHAEL C.  HAYDINGERFrom 1994 to the present, Mr. Haydinger  has served as the Controller of First Montgomery Group, a real estate  management and construction firm in Marlton, New Jersey.                                                                                                                                                                                                                                                                                             |       | 35         |       | 2002                   |

 

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| **Name**                                                                                                                                                                                                    | ** ** | **Age**    | ** ** | **Director  Since(1)** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|
| ** **                                                                                                                                                                                                  | ** ** | ** ** | ** ** | ** **             |
| HARRISON  MELSTEIN  Mr. Melstein is retired.  From  1985 to 2002, he was a registered pharmacist and owned and operated Ames Drug  Store in Collingswood, New Jersey.                             |       | 62         |       | 2002                   |
|                                                                                                                                                                                                        |       |       |       |                   |
| STANLEY H.  MOLOTSKY  Mr. Molotsky is a counselor in financial matters.  Since 1988, Mr. Molotsky has been the  owner and operator of SHM Financial Group, a financial counseling firm. |       | 69         |       | 2000                   |

 

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(1)     Includes serviceas a director of the Bank.

 

**ExecutiveOfficers**

 

Thefollowing table identifies our current executive officers.

 
| **Name**             | ** ** | **Age** | ** ** | **Capacities in Which Served**                                                                                | ** ** | **In  Current  Positions  Since** |
|----------------------|------------|---------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| Gerard  M. Banmiller |       | 57      |       | President  and Chief Executive Officer of 1st Colonial and the Bank                                      |       | 2000                              |
| James  E. Strangfeld |       | 58      |       | Executive  Vice President of 1st Colonial and Executive Vice President and Senior  Loan Officer the Bank |       | 2000                              |
| Robert  C. Faix      |       | 58      |       | Senior  Vice President and Chief Financial Officer of 1st Colonial and the Bank                          |       | 2001                              |

 

**Gerard M. Banmiller.**  Mr. Banmiller is the President and ChiefExecutive Officer of 1st Colonial and the Bank.  He is also a director.  Please see “Board of Directors” above formore information regarding Mr. Banmiller.

 

**James E. Strangfeld.**  Mr. Strangfeld serves as Executive VicePresident of 1st Colonial and Executive Vice President and

 

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Senior Loan Officer the Bank.  From 1996 until being engaged by the Bank in2000, Mr. Strangfeld served as a Regional Executive with PNC Bank inCherry Hill, New Jersey, where he directed the consumer banking operations for40 branches in Burlington and Camden Counties. From 1986 to 1996, heserved as Senior Vice President/Manager Community Lending for Chemical Bank NewJersey, where he directed all functions of its New Jersey Community LendingDepartment, which was designed to service small business customers.

 

**Robert C.Faix. **Mr. Faixserves as Senior Vice President and Chief Financial Officer of1st Colonial and the Bank.  From June 2000until being engaged by the Bank in May 2001, Mr. Faix served as theSenior Vice President and Chief Financial Officer of Crusader Holding Corp.,the holding company for Crusader Savings Bank. From July 1999 through June 2000,Mr. Faix served as Senior Vice President and Chief Financial Officer forthe Student Finance Corp., a sub prime student lender located in Newark,Delaware.  From June 1998 through June 1999,Mr. Faix served as the Vice President and Controller of Keystone Bank,N.A., a commercial bank located in Horsham, Pennsylvania.  From May 1995 through June 1998, Mr. Faixserved as the Senior Vice President and Chief Financial Officer of AmericanHeritage FCU, a credit union located in Philadelphia, Pennsylvania.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), requiresthe directors and officers of any issuer having any class of equity securitiesregistered under Section 12 of the Exchange Act, and any persons owningten percent or more of such class of equity securities, to file in theirpersonal capacities initial statements of beneficial ownership, statements ofchanges in beneficial ownership and annual statements of beneficial ownershipwith the Securities and Exchange Commission (the “SEC”).  The Common Stock of 1st Colonial is notregistered under Section 12 of the Exchange Act.  Therefore, 1st Colonial’s directors, officersand 10% shareholders are not subject to the requirements of Section 16(a).

 

**Code ofEthics**

 

1stColonial has not adopted a code of ethics that applies to its principalexecutive officer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions.  1st Colonial’s wholly owned

 

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subsidiary, 1st ColonialNational Bank, has a Conflicts of Interest and Business Ethics Policy thatapplies to all officers and employees of the Bank.  This policy covers (i) disqualificationarising from a conflict of interest; (ii) the receipt of gifts,entertainment and favors; (iii) outside employment with another for-profitbusiness, (iv) improper use of Bank information, and (v) consequencesof ethics violation.  Because the solematerial asset of 1st Colonial is the common stock of the Bank, and because 1stColonial’s principal executive officer, principal financial officer andprincipal accounting officer are the principal executive officer, principalfinancial officer and principal accounting officer of the Bank, 1st Colonialdid not believe it was necessary or desirable to prepare and adopt a its ownseparate code of ethics.

 

**Audit Committee; Audit Committee Financial Expert**

 

The Board of Directors of1st Colonial Bancorp has a standing audit committee.  The primary duties and responsibilities of1st Colonial Bancorp’s audit committee are to:

 

•      Oversee that management maintains thereliability and integrity of the accounting policies and financial reportingand disclosure practices of 1st Colonial Bancorp;

 

•      Oversee that management establishes andmaintains processes to assure that an adequate system of internal controls isfunctioning within 1st Colonial Bancorp; and

 

•      Oversee that management establishes andmaintains processes to assure compliance by 1st Colonial Bancorp with allapplicable laws, regulations and corporate policy.

 

In connection with theseduties, the audit committee is responsible for the appointment, compensation,oversight and termination of our independent auditors.  The audit committee is responsible also for,among other things, reporting to the 1st Colonial Bancorp Board of Directors onthe results of the annual audit, and reviewing the financial statements andrelated financial and non-financial disclosures included in our earningsreleases, Annual Reports on Form 10-KSB and Quarterly Reports on Form 10-QSB.  The audit committee is also responsible forreceiving and responding to complaints and concerns relating to accounting andauditing matters.  The audit committeehas a charter in place that has been adopted by the Board of Directors.

 

In 2004, prior to the 2004Annual Meeting of Shareholders in June 2004, the audit committee wascomprised of Mary Burke, Eduardo Enriquez, Michael Haydinger, Stanley Molotskyand Linda Rohrer.  The

 

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current members of theaudit committee are Mary Burke, Gerald DeFelicis, Eduardo Enriquez and LindaRohrer.  Each member is “independent,” asdefined by the rules of the National Association of Securities Dealers(NASD).  During the year ended December 31,2004, the 1st Colonial Bancorp audit committee met four (4) times.

 

1st Colonial’s board of directors does not have an “auditcommittee financial expert,” within the meaning of such phrase under applicableregulations of the Securities and Exchange Commission, serving on its auditcommittee.  The board of directorsbelieves that all members of its audit committee are financiallyliterate and experienced in business matters, and that one or more members of the audit committee are capable of (i) understandinggenerally accepted accounting principles (“GAAP”) and financial statements, (ii) assessingthe general application of GAAP principles in connection with our accountingfor estimates, accruals and reserves, (iii) analyzing and evaluating ourfinancial statements, (iv) understanding our internal controls andprocedures for financial reporting; and (v) understanding audit committeefunctions, all of which are attributes of an audit committee financialexpert.  However, the board of directorsbelieves that there is not any audit committee member who has obtained theseattributes through the experience specified in the SEC’s definition of “auditcommittee financial expert.”  Further, likemany small companies, it is difficult for 1st Colonial to attractand retain board members who qualify as “audit committee financial experts,”and competition for these individuals is significant. The board believes thatits current audit committee is able to fulfill its role under SEC regulationsdespite not having a designated “audit committee financial expert.”

 

**ITEM10.   Executive Compensation.**

 

Ourexecutive officers do not receive any compensation for serving as officers of1st Colonial Bancorp.  The followingtable sets forth the compensation paid, during the each of the years in thethree-year period ended December 31, 2004, by the Bank to our ChiefExecutive Officer and any other executive officer who received cashcompensation exceeding $100,000 during year ended December 31, 2004:

 

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**SUMMARY COMPENSATION TABLE**

 
| **Name and  Principal Position** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Other Annual  Compensation (1)** | ** ** |
|----------------------------------|------------|----------|------------|------------|------------|-----------|------------|------------------------------------|------------|
|                             |       |     |       |       |       |      |       |                               |       |
| Gerard M. Banmiller         |       | 2004     |       | $          | 159,120    |      | $          | 10,000                             |       | $ | 25,206 |   |
| President and Chief              |       | 2003     |       | 153,258    |       | 10,000    |       | 24,383                             |       |
| Executive Officer                |       | 2002     |       | 137,500    |       | 16,000    |       | 21,204                             |       |
|                             |       |     |       |       |       |      |       |                               |       |
| James E. Strangfeld         |       | 2004     |       | $          | 132,600    |      | $          | 8,500                              |       | $ | 3,890 |   |
| Executive Vice                   |       | 2003     |       | 127,758    |       | 8,500     |       | 3,888                              |       |
| President                        |       | 2002     |       | 115,000    |       | 14,000    |       | 3,883                              |       |
|                             |       |     |       |       |       |      |       |                               |       |
| Robert C. Faix              |       | 2004     |       | $          | 100,776    |      | $          | 6,500                              |       | $ | 12,399 |   |
| Senior Vice President            |       | 2003     |       | 97,132     |       | 6,500     |       | 11,719                             |       |
| and Chief Financial Officer      |       | 2002     |       | 92,500     |       | 3,000     |       | 8,079                              |       |

 

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(1)           Consistsof an automobile expense allowance, life, health, automobile and long-term disabilityinsurance annual premiums, and club membership dues.

 

**EmploymentAgreements**

 

Gerard M.Banmiller, the President, Chief Executive Officer and a director of 1stColonial Bancorp and the Bank, has an employment agreement with the Bank.  The Bank’s obligations under this agreementare guaranteed by 1st Colonial Bancorp. This agreement has an initial three-year term and provides for annualone-year extensions on each anniversary of June 29, 2000, the date theBank received regulatory authority to open for business, unless the Bank or Mr. Banmillergives prior written notice of nonrenewal to the other party.  Under this agreement, Mr. Banmiller isentitled to receive an annual base salary of not less than $100,000. Except fora reduction which is proportionate to a company-wide reduction in executivepay, the annual base salary paid to Mr. Banmiller in any period cannot beless than the annual base salary paid to him in any prior period.

 

Underhis agreement, Mr. Banmiller is entitled to participate in any incentivecompensation and employee benefit plans that the Bank maintains.  He also is entitled to participate in andenjoy any other plans and arrangements which provide for sick leave, vacation,sabbatical, or personal days, club memberships and dues, education payment orreimbursement, business-related seminars, and similar fringe benefits providedto or for the executive officers of the bank from time to time.  He also is entitled to be reimbursed foramounts he pays as lease or loan payments due with respect to the lease or

 

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purchase of hisautomobile, up to and not to exceed an amount equal to $700.00 per month.

 

In the event the Bankterminates Mr. Banmiller’s employment for “Cause” as defined in hisagreement, he will be entitled to receive his accrued but unpaid base salaryand an amount for all accumulated but unused vacation time earned through thedate of his termination.

 

In the event the Bankterminates Mr. Banmiller’s employment without Cause, he will be entitledto receive, during the remaining term of his agreement, an annual amount equalto the greater of (i) his highest base salary received during one of thetwo years immediately preceding the year in which he is terminated, or (ii) hisbase salary in effect immediately prior to his termination.  In addition, during the remaining term of hisagreement, Mr. Banmiller will annually be entitled to (i) an amountequal to the higher of the aggregate bonuses paid to him in one of the twoyears immediately preceding the year in which he is terminated and (ii) anamount equal to the sum of the highest annual contribution made on his behalf(other than his own salary reduction contributions) to any tax qualified andnon-qualified defined contribution plans maintained by the Bank in the year inwhich he is terminated or in one of the two years immediately preceding suchyear.  Mr. Banmiller will also beentitled to certain retirement, health and welfare benefits.

 

In the event Mr. Banmillerterminates his employment with the Bank for “Good Reason,” as defined in hisagreement, he will be entitled to receive the same annual amounts and benefitshe would be entitled to receive if he was terminated without Cause, but for aperiod of three years from the date of termination of employment.  In the event Mr. Banmiller terminateshis employment with the Bank without Good Reason, he will be entitled toreceive his accrued but unpaid base salary until the date of termination and anamount for all accumulated but unused vacation time through the date of thetermination of his employment.  In theevent of Mr. Banmiller’s death or disability during the term of hisemployment, he and his eligible dependents or his spouse and her eligibledependents, as the case may be, will be entitled to receive the sameannual amounts and benefits Mr. Banmiller would be entitled to receive ifhe was terminated without Cause, but only for a period of one year from thedate of termination of employment.  Theywill also be entitled to certain health and welfare benefits.

 

In the event that Mr. Banmilleris required to pay any excise tax imposed under Section 4999 of theInternal Revenue Code (or any similar tax imposed under federal, state or locallaw), as a result of any compensation and benefits received under his agreementin connection with a change in control, the Bank will pay him an additionalamount such that the net amount retained by him, after the payment of suchexcise taxes (and any additional income tax resulting from such payment by theBank), equals the amount he would have received but for the imposition of suchtaxes.

 

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The employment agreementfurther provides that in the event Mr. Banmiller’s employment is terminatedfor any reason or he voluntarily terminates his employment, he may not,for a period of 12 months after the date of termination, without the priorwritten consent of the Bank’s Board of Directors, become an officer, directoror a shareholder or equity owner of 4.9% or more of any entity engaged in thebanking, lending, asset management, mutual fund, financial planning orinvestment security business within the New Jersey Counties of Camden,Gloucester, Burlington, Salem, Atlantic, Cape May or Cumberland, or anyother county in which the Bank has an office. In addition, during his employment and for a period of 12 monthsfollowing the termination of his employment, except following a change incontrol of the Bank, Mr. Banmiller may not solicit, endeavor toentice away from the Bank, its subsidiaries or affiliates, or otherwiseinterfere with the relationship of the Bank or its subsidiaries or affiliateswith, any person who is, or was within the then most recent 12-month period, anemployee or associate of the Bank or any of its subsidiaries or affiliates.

 

The Bank also has employmentagreements with Mr. Strangfeld, its Executive Vice President and SeniorLoan Officer, and Mr. Faix, its Senior Vice President and Chief FinancialOfficer.  These agreements aresubstantially identical to Mr. Banmiller’s employment agreement (includingcontaining the covenant not to compete described above), except that theyprovide that (i) the executive is entitled to receive an annual basesalary of at least $90,000; (ii)  the executive is not entitled to bereimbursed for any amounts he pays as lease or loan payments with respect tohis automobile; (iii) in the event the Bank terminates the executive’semployment without Cause, he will be entitled to his salary and benefits asdetermined in the same manner as under Mr. Banmiller’s agreement, but forone year only and (iv) in the event the executive terminates hisemployment for “Good Reason,” he will be entitled to his salary and benefits asdetermined in the same manner, but for a period of (a) 18 months inthe event of a termination prior to a change in control of the Bank or (b) twoyears in the event of a termination after a change in control of the Bank.

 

The Bank’s obligations underits employment agreements with Mr. Strangfeld and Mr. Faix also areguaranteed by 1st Colonial Bancorp.

 

**ExecutiveCompensation Program**

 

The Bank maintains anExecutive Compensation Program (the “Compensation Program”) pursuant to whichthe Bank pays bonuses to its key employees. The Compensation Program is a pay-for-performance based compensationsystem consisting of incentives that pay key employees for the achievement ofperformance levels designed to increase shareholder value.  These incentives consist of annualincentives, which reward for achievement against pre-established goals andincreases in shareholder value, and long-term incentives, which reward forsignificant increases in the value of the Bank.

 

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The Compensation Programenables the Bank to reward those key employees whose performance increasesshareholder value.  The CompensationProgram also assists the Bank in its efforts to hire, retain and motivate high-qualityexecutives who it believes can meet the immediate business challenges andimprove the long-term performance of the Bank. The Compensation Program is administered by the Compensation Committeeof the Bank’s Board of Directors.  Onlythe president, executive vice presidents, senior vice presidents or divisionmanagers of the Bank may participate in this plan.

 

Under the CompensationProgram, bonus awards are determined by the Compensation Committee based on apre-determined mix of corporate and individual performance goals.  Sixty percent of the annual award is based oncorporate performance.  Corporateperformance is measured by the year to year percentage increase in averageassets (in excess of a pre-determined hurdle rate) and the year to yearpercentage increase in return on average assets, each of which receives a fiftypercent weighting.

 

The remaining forty percentof the annual award is based on individual performance using performance goalsdesigned to reflect a balance between attainable and “stretch” objectives andthat are specific to each participant. Individual performance objectives are established at the beginning ofthe year based on the functions and responsibilities of each executive.  Also included in the evaluation of individualperformance are goals which measure the executive’s contribution to makingpeople-focused cultural changes at the Bank.

 

The total bonus pool isdetermined by multiplying the aggregate base salaries of the Bank’s employeeswho are participating in the Compensation Program by the corporate performancepercentage increase, and then dividing that amount (the “Corporate PerformanceDollar Bonus”) by 0.6.  The differencebetween the total bonus pool and the Corporate Performance Dollar Bonus is theamount eligible to be distributed to individual participants.  The individual bonus pool may or may not bedistributed entirely.  The distributionof individual bonus awards for all participants except the President will bedetermined by a recommendation of the President that is approved by the CompensationCommittee.  The Compensation Committeewill determine the value of the individual performance bonus of the President.

 

**Option Grants in Last Fiscal Year**

 

The following table setsforth information concerning the grant of stock options during the fiscal yearended December 31, 2004 to our named executive officers.

 

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| **Name**                 | ** ** | **Number of  Securities  Underlying  Options  Granted(1)** | ** ** | **Percentage of  Total Options  Granted to  Employees in  Fiscal  Year(2)** | ** ** | **Per Share  Exercise or  Base  Price(1)(3)** | ** ** | **Expiration  Date** | ** **           |
|--------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------|----------------------|
|                     |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| Gerard M. Banmiller |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| President and Chief      |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| Executive Officer        |       | 12,075                                                     |       | 37.1                                                                        | %          | $                                             | 10.89      |                 | January 2, 2014 |   |
|                     |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| James E. Strangfeld |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| Executive Vice           |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| President                |       | 12,075                                                     |       | 37.1                                                                        | %          | $                                             | 10.89      |                 | January 2, 2014 |   |
|                     |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| Robert C. Faix           |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| Senior Vice              |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| President and Chief      |       |                                                       |       |                                                                        |       |                                          |       |                 |                 |
| Financial Officer        |       | 7,350                                                      |       | 22.6                                                                        | %          | $                                             | 10.89      |                 | January 2, 2014 |   |

 

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(1)           Reflectsadjustments resulting from the 5% stock dividend paid on April 15, 2004 toshareholders of record on April 1, 2004. Options vested and became exercisable in full on January 2, 2005,the first anniversary date of grant.  Ifthe optionee’s employment terminates due to retirement, death or disability,the optionee or his legal representative may exercise the option until theearlier of the expiration of the term of the option or three months after thetermination of employment.  If theoptionee’s employment is terminated for any reason except retirement, death ordisability, all options terminate on the date employment is terminated, unlessthe Stock Option Plan Committee permits the optionee to exercise the optionuntil the earlier of the expiration of the term of the option or three monthsafter the termination of employment.

 

(2)           1stColonial Bancorp does not have any employees. This percentage reflects the grant as a percentage of the total optionsgranted to employees of the Bank, but does not include options to purchase27,000 shares granted in fiscal year 2004 to directors of 1st ColonialBancorp and the Bank who are not employees.

 

(3)           Theexercise price per share is equal to the fair market value on the date theoption was granted.  The exercise pricemay be paid in cash, or upon the approval of the Stock Option Plan Committee,in shares of common stock valued at their fair market value on the date ofexercise, or in a combination of cash and stock.

 

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**Aggregated Option Exercises inLast Fiscal Yearand Fiscal Year-End Option Values**

 

Nooptions were exercised during the year ended December 31, 2004 by ournamed executive officers.  The followingtable sets forth the aggregate options to purchase shares of common stock heldby our named executive officers at December 31, 2004, separatelyidentifying exercisable and unexercisable options, and the aggregate dollarvalue of in-the-money unexercised options, separately identifying exercisableand unexercisable options.

 
| ** **               | ** ** | **Number of Securities  Underlying  Unexercised  Options Held at 12/31/04 (1)** | ** ** | **Value of Unexercised  In-the-Money  Options at 12/31/04 (2)** | ** ** |
|--------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **Name**                 | ** ** | **Exercisable**                                                                 | ** ** | **Unexercisable**                                               | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|                     |       |                                                                            |       |                                                            |       |   |   |   |   |
| Gerard M. Banmiller |       | 26,356                                                                          |       | 10,936                                                          |       | $ | 53,160 |   | $ | 31,785 |   |
| James E. Strangfeld |       | 18,723                                                                          |       | 6,103                                                           |       | $ | 23,701 |   | $ | 17,025 |   |
| Robert C. Faix      |       | 8,738                                                                           |       | 2,031                                                           |       | $ | 3,840 |   | $ | 5,122 |   |

 

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(1)           Reflectsadjustments resulting from the 10% stock dividend paid on January 15,2002, the 5% stock dividend paid on April 15, 2003, and the 5% stock dividendpaid on April 15, 2004.

 

(2)           Based uponthe mean between the bid and asked prices of our common stock of $10.93 pershare on December 31, 2004 less the exercise price of the options (in eachcase, as adjusted to reflect the 5% stock dividend paid in April 2004).

 

**DirectorCompensation**

 

The Chairman of the Boardreceives a quarterly retainer of $1,000 for service on the Board of Directors,and each director, other than Mr. Banmiller, receives a quarterly retainerof $500.  Each committee chairman receivesan annual retainer of $500 for chairing such committee.  Each director, other than Mr. Banmiller,receives $50 per committee meeting attended; provided that no committeechairman (other than the loan committee chairman) receives both the retainerand the per meeting fee.  An aggregate of$27,950 was paid to directors during the year ended December 31, 2004 forserving as directors of 1st Colonial Bancorp.

 

In the year ended December 31,2004, options to purchase shares of 1st Colonial Bancorp common stock weregranted to directors of 1st Colonial Bancorp and the Bank under our StockOption Plan for Non-Employee Directors. On January 2, 2004 each non-employee director

 

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of 1st Colonial Bancorpand the Bank was granted options to purchase 1,575 shares of 1st ColonialBancorp common stock, at an exercise price of $10.89 per share (these amountsare as adjusted to reflect the April 2004 5% stock dividend).  On May 19, 2004, each non-employeedirector of 1st Colonial Bancorp and the Bank was granted options to purchase750 shares of our common stock at an exercise price equal to $9.88 pershare.  On January 1, 2005 eachnon-employee director of 1st Colonial Bancorp and the Bank was granted optionsto purchase 1,650 shares of our common stock at an exercise price equal to$10.93 per share.

 

Options have a term of tenyears from the date of grant.  Optionsvest on the earlier of the date on which (i) the optionee has completed 11months of continuous service as a director of the Bank from the date of grantor (ii) a change in control of the Bank occurs.  In the event of the optionee’s retirementfrom the Board of Directors, death or disability, his or her stock optionslapse at the earlier of three months from the date of retirement, death ordisability, or the expiration of the term of the option.  If his or her service as a director isterminated for any reason except retirement, death or disability, all optionsterminate upon the date service is terminated, unless the Stock Option PlanCommittee permits the optionee to exercise such options until the earlier ofthe expiration of the term of the option or three months after the terminationof service.

 

If the amendments to ourStock Option Plan for Non-Employee Directors set forth in Matter No. 3below are approved, then commencing with the annual meeting of shareholders tobe held in the year 2006, each director of 1st Colonial Bancorp and the Bankwill receive stock options to purchase 750 shares of common stock at eachannual shareholders’ meeting during his or her term as director.  These options will be automatically grantedunder that plan at an exercise price equal to the fair market value of thecommon stock on the date of the meeting. Each director also may receive additional stock options under the planat other times in the discretion of our stock option plan committee.

 

1st Colonial Bancorpmaintains a directors and officers liability insurance policy.  The policy covers all directors and officersof 1st Colonial Bancorp and the Bank for certain liability, loss, or damagethat they may incur in their capacities as such.  To date, no claims have been filed under thisinsurance policy.

 

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**ITEM 11.****       SecuritiesOwnership of Certain Beneficial Owners and Management and Related ShareholderMatters**

 

**PrincipalShareholders of the Company**

 

Thefollowing table sets forth information regarding person known by us to own 5%or more of the outstanding shares of 1st Colonial Bancorp common stock asof December 31, 2004.  The amountsin this table and its footnotes have not been adjusted to give effect to the 5%stock dividend paid on April 15, 2005 to shareholders of record as of April 1,2005.

 
| **Name and Address of Beneficial  Owner**                                 | ** ** | **Shares of Common Stock  Beneficially Owned** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                | ** ** | **Amount**                                     | ** ** | **Percent(1)** | ** ** |
| Linda M.  Rohrer  310 West Cuthbert Blvd.  Haddon Township, NJ 08108 |       | 114,416                                        | (2)        | 5.0 | % |

 

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(1)           The percentage was calculated on a fullydiluted basis assuming that the beneficial owner’s warrants and outstandingvested options were exercised.

 

(2)           Includes 6,469 shares that Ms. Rohrerhas the right to acquire upon the exercise of vested stock options and12,972 shares that Ms. Rohrer has the right to acquire upon theexercise of warrants.  Ms. Rohrer isChairman of the Board of Directors of 1st Colonial Bancorp.

 

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**SecurityOwnership of Management**

 

Thefollowing table sets forth certain information concerning the numberof shares of 1st Colonial Bancorp common stock held as of December 31,2004 by each director, each executive officer, and all directors and executiveofficers as a group.  This table does notgive effect to the 5% stock dividend payable on April 15, 2005 to ourshareholders of record on April 1, 2005.

 
| **Name of Beneficial Owner**                                                                | ** ** | **Total  Beneficial  Ownership(1)** | ** ** | **Sole Voting  and  Investment   Power** | ** ** | **Shared  Voting and  Investment  Power** | ** ** | **Percent  of  Class(2)** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|---------------------------|------------|
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Linda M. Rohrer (3)                                                                    |       | 114,416                             |       | 114,416                                  |       | 0                                         |       | 5.0                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Gerard M. Banmiller (4)                                                                |       | 85,955                              |       | 37,996                                   |       | 47,959                                    |       | 3.8                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Mary R. Burke (5)                                                                      |       | 10,842                              |       | 10,842                                   |       | 0                                         |       | 0.5                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Thomas A. Clark III (6)                                                           |       | 30,241                              |       | 30,241                                   |       | 0                                         |       | 1.3                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Letitia G. Colombi (7)                                                                 |       | 12,298                              |       | 6,303                                    |       | 5,995                                     |       | 0.5                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Gerald J. DeFelicis (8)                                                                |       | 27,191                              |       | 27,191                                   |       | 0                                         |       | 1.2                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| John J. Donnelly, IV (9)                                                               |       | 32,727                              |       | 19,919                                   |       | 12,808                                    |       | 1.4                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Eduardo F. Enriquez (10)                                                               |       | 41,453                              |       | 31,615                                   |       | 9,838                                     |       | 1.8                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Michael C. Haydinger (11)                                                              |       | 108,552                             |       | 108,552                                  |       | 0                                         |       | 4.8                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Harrison Melstein (12)                                                                      |       | 35,659                              |       | 29,663                                   |       | 5,996                                     |       | 1.6                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Stanley H. Molotsky (13)                                                               |       | 39,190                              |       | 30,974                                   |       | 8,216                                     |       | 1.7                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| James E. Strangfeld (14)                                                               |       | 26,784                              |       | 20,653                                   |       | 6,131                                     |       | 1.2                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| Robert C. Faix (15)                                                                    |       | 17,645                              |       | 16,281                                   |       | 1,364                                     |       | 0.8                       | %          |
|                                                                                        |       |                                |       |                                     |       |                                      |       |                      |       |
| All nominees, continuing directors and executive  officers as a group (13 persons)(16) |       | 582,953                             |       | 484,646                                  |       | 98,307                                    |       | 24.1                      | %          |

 

----

| (1) |   | Based on  information furnished by the respective individuals as of December 31,  2004 and our books and records as of such date. Under applicable regulations,  shares are deemed beneficially owned by a person if he or she directly or  indirectly has or shares the power to vote or dispose of the shares. Unless  otherwise indicated, the named beneficial owner has sole voting |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

109

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|   |   | and dispositive  power with respect to the shares. Under applicable regulations, a person is  deemed to have beneficial ownership of shares which may be received upon  the exercise of outstanding stock options or warrants if the option or  warrant is exercisable within 60 days. As of December 31, 2004, all  warrants held by our executive officers and directors are fully vested, have  a three-year term expiring on December 16, 2005 and have an exercise  price of $8.71 per share. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (2)    |   | The percentage  is calculated on a fully diluted basis (as if such person’s or group’s vested  options and warrants were exercised).                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (3)    |   | Includes 6,469  shares that Ms. Rohrer has the right to acquire upon the exercise of  vested stock options, and 12,972 shares that Ms. Rohrer has the right to  acquire upon the exercise of vested warrants.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (4)    |   | Includes 44,872  shares jointly owned by Mr. Banmiller with his spouse, 28,561 shares that  Mr. Banmiller has the right to acquire upon the exercise of vested stock  options and 3,087 shares that Mr. Banmiller and his wife have the joint  right to acquire upon the exercise of vested warrants.                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (5)    |   | Includes 4,019  shares that Ms. Burke has the right to acquire upon the exercise of  vested stock options.                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (6)    |   | Includes 6,891  shares owned by the Cureton Caplan Hunt Scaramella & Clark Profit  Sharing Plan over which Mr. Clark has control, 5,546 shares that  Mr. Clark has the right to acquire upon the exercise of vested stock  options, and 1,323 shares that Mr. Clark has the right to acquire upon  the exercise of vested warrants.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (7)    |   | Includes 4,892  shares owned by Ms. Colombi’s spouse, 1,103 shares that  Ms. Colombi’s spouse has the right to acquire upon the exercise of  vested warrants, and 5,546 shares that Ms. Colombi has the right to  acquire upon the exercise of vested stock options.                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (8)    |   | Includes 5,546  shares that Mr. DeFelicis has the right to acquire upon the exercise of  vested stock options and 3,245 shares that Mr. DeFelicis has the right  to acquire upon the exercise of vested warrants.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (9)    |   | Includes 5,546  shares that Mr. Donnelly has the right to acquire upon the exercise of  vested stock options, 3,308 shares that Mr. Donnelly has the right to  acquire upon the exercise of vested warrants, 3,308 shares owned by The  Eighdies, LLC, a limited liability company in which Mr. Donnelly has a  25% membership interest, and 3,308 shares that The Eighdies, LLC has the  right to acquire upon the exercise of vested warrants.                                                        |

 

110

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| (10)   |   | Includes 5,546  shares that Dr. Enriquez has the right to acquire upon the exercise of  vested stock options; 2,594 shares that Dr. Enriquez has the right to  acquire upon the exercise of vested warrants; 4,919 shares jointly owned by  Dr. Enriquez with his spouse; 4,919 shares that Dr. Enriquez and  his spouse have the joint right to acquire upon the exercise of vested  warrants; 2,863 shares owned by the Eduardo F. Enriquez MD LLC Profit  Sharing Plan (the “Enriquez Profit Sharing Plan”), over which  Dr. Enriquez has sole voting and investment control; and 2,863 shares  that the Enriquez Profit Sharing Plan has the right to acquire upon the  exercise of vested warrants. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (11)   |   | Includes 4,019  shares that Mr. Haydinger has the right to acquire upon the exercise of  vested stock options, 40,692 shares owned by First Montgomery Properties,  50,869 shares owned by Marlton Investment Group and 12,972 shares of common  stock that Marlton Investment Group has the right to acquire upon the  exercise of warrants. Mr. Haydinger is an executive officer of First  Montgomery Properties and Marlton Investment Group (which are affiliated  companies) and through his position exercises voting and investment power  over these shares.                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (12)   |   | Includes 4,019  shares that Mr. Melstein has the right to acquire upon the exercise of  vested stock options, 2,205 shares that Mr. Melstein has the right to  acquire upon the exercise of vested warrants, and 5,996 shares that  Mr. Melstein owns jointly with his spouse.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (13)   |   | Includes 5,546  shares that Mr. Molotsky has the right to acquire upon the exercise of  vested stock options, 5,459 shares owned by Mr. Molotsky’s spouse, 3,859  shares that Mr. Molotsky’s spouse has the right to acquire upon the  exercise of vested warrants and 1,000 shares held in a Profit Sharing Plan  for Mr. Molotsky’s employee.                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (14)   |   | Includes 2,426  shares owned by Mr. Strangfeld’s spouse, 1,103 shares jointly owned by  Mr. Strangfeld and his spouse, 1,103 shares that Mr. Strangfeld and  his spouse have the joint right to acquire upon the exercise of vested  warrants, and 20,046 shares that Mr. Strangfeld has the right to acquire  upon the exercise of vested stock options.                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (15)   |   | Includes 1,364  shares jointly owned by Mr. Faix with his spouse, 9,179 shares that  Mr. Faix has the right to acquire upon the exercise of vested stock  options, and 2,756 shares that Mr. Faix has the right to acquire upon  the exercise of vested warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (16)   |   | Includes 109,587  shares that the directors and executive officers, in the aggregate, have the  right to acquire upon the exercise of vested stock options, and  61,617 shares that the directors and officers, in the aggregate, have  the right to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

 

111

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acquire upon the exercise of vested warrants.

 

**EquityPlan Compensation Information**

 

Thefollowing table provides certain information regarding securities issued orissuable under 1st Colonial’s equity compensation plans as of December 31,2004.

 
| **Plan Category**                                           | ** ** | **Number of shares of  common stock to be  issued upon  exercise  of outstanding  options, warrants  and rights (1)(2)** | ** ** | **Weighted-  average  exercise price  of outstanding  options,  warrants  and rights** | ** ** | **Number of shares of  common stock  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in  first column)(2)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                                     |       |                                                                                   |       |                                                                                                                                                                     |       |
| Equity compensation plans approved by security  holders     |       | 136,680                                                                                                                  |       | $                                                                                      | 9.10       |                                                                                                                                                                     | 66,070     |   |
|                                                        |       |                                                                                                                     |       |                                                                                   |       |                                                                                                                                                                     |       |
| Equity compensation plans not approved by security  holders |       | 0                                                                                                                        |       | 0                                                                                      |       | 0                                                                                                                                                                        |       |
| Total                                                       |       | 136,680                                                                                                                  |       | $                                                                                      | 9.10       |                                                                                                                                                                     | 66,070     |   |

 

----

(1)           Does notinclude outstanding warrants to acquire 97,023 shares of common stock issued in2000 to the underwriter of the Bank’s initial public offering of common stock,or outstanding warrants to acquire 267,958 shares of common stock issued in December 2002as part of 1st Colonial Bancorp’s public offering of common stock and warrants.

 

(2)           Does notreflect the options to purchase 64,800 shares granted under these plans in2005.

 

**Item 12.  Certain Relationships and RelatedTransactions**

 

**Indebtednessof Management**

 

1stColonial Bancorp does not make any loans to its officer or directors.  The Bank offers various types of loans to itsdirectors, officers, and employees. Under applicable Federal law, any loan made to a director, officer,employee or other affiliate is required to be on substantially the same termsand conditions available to non-related borrowers (in particular as to interestrate and collateral).  In addition, therisk of nonpayment must not be greater than the risk of nonpayment on loans tonon-related borrowers, and the

 

112

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loan must be approved bya majority of the full Board of Directors, with the loan applicant not votingor influencing the vote.

 

**Transactionswith Related Persons**

 

Certaindirectors and officers of the Bank are customers of and during the year ended December 31,2004 had banking transactions with the Bank in the ordinary course ofbusiness.  Similar transactions may beexpected to occur in the future.  Allloans and commitments to loan were made under substantially the same terms,including interest rates, collateral, and repayment terms, as those prevailingat the time for comparable transactions with other persons and, in our opinion,do not involve more than the normal risk of collection or present otherunfavorable features.  The aggregateamount of loans to such related parties was approximately $1,531,000 and $1,443,000at December 31, 2004 and 2003, respectively. During 2004 and 2003, newloans and credit line advances to such related parties amounted toapproximately $405,000 and $1,436,000, respectively, and repayments amounted toapproximately $317,000 and $399,000, respectively.   The aggregate amount of deposits fromrelated parties was approximately $12,123,000 and $7,216,000 at December 31,2004 and 2003, respectively.

 

TheBank retained an entity that is affiliated with John J. Donnelly IV, a directorof the Bank, to perform certain property inspection services and branchrenovations. The total amount paid by the Bank for such services amounted tofees of approximately $19,000, $86,000 and $110,000 for the years ended December 31,2004, 2003 and 2002. Such fees were capitalized as premises and equipment.  Mr. Donnelly’s company was selected bythe Bank pursuant to a competitive bidding process involving other generalcontractors.

 

TheBank engages a law firm that is affiliated with Thomas A. Clark III, a directorof the Bank, for certain debt collection and other services.  Total fees for such services amounted toapproximately $16,000, $9,000 and $7,000 for the years ended December 31,2004, 2003 and 2002, respectively.  Theterms of the services provided were substantially equivalent to that whichwould have been obtained from unaffiliated parties.

 

**ITEM13.  Exhibits**

 

Theexhibits attached hereto are listed in the Exhibit Index immediatelyfollowing the signature pages to this Form 10-KSB.

 

113

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**Item14.  Principal Accountant Fees andServices**

 

**AuditFees**

 

Total annual audit feesbilled for professional services rendered by KPMG LLP during the 2004 and 2003fiscal years for the audit of 1st Colonial Bancorp’s annual financialstatements and the review of the financial statements included in our quarterlyreports on Form 10-QSB, or services that are normally provided by KPMG LLPin connection with statutory and regulatory filings or engagements for thosefiscal years, totaled $62,709 and $57,680, respectively.

 

**Audited Related Fees**

 

Total annual audit feesbilled during the 2004 and 2003 fiscal years for assurance and related servicesby KPMG LLP that are reasonably related to the performance of the audit or reviewof 1st Colonial Bancorp’s financial statements and not reported in theparagraph above under “Audit Fees” were $324 and $0, respectively.

 

**Tax Fees**

 

The total fees billed duringthe 2004 and 2003 fiscal years for professional services rendered by KPMG LLPfor tax compliance, tax advice, and tax planning services were $14,525 and$14,275, respectively.  Specifically,these services involved the preparation of 1st Colonial Bancorp’s consolidatedtax returns and guidance on tax accruals.

 

**All Other Fees**

 

The total fees billed byKPMG LLP during our 2004 fiscal year for other services, which included thepreparation of an comfort letter to Ryan Beck & Co. for our 2004offering, were $189,553.  There were nofees billed by KPMG LLP during 1st Colonial Bancorp’s 2003 fiscal year for anyother products or services rendered to 1st Colonial Bancorp other than theamounts set forth above.

 

**Audit Committee Pre-Approval Policies andProcedures**

 

All auditing services (which may entail providing comfort letters inconnection with securities underwritings) and all non-audit services to beprovided to 1st Colonial Bancorp by its auditors that are notprohibited by law must be pre-approved by 1st Colonial Bancorp ‘saudit committee pursuant to such processes as are determined to be advisable,before such services can commence.  Pre-approvalshall include blanket pre-approval of non-prohibited services for limiteddollar amounts which the audit committee, in its business judgment, does notbelieve possess the potential for abuse or conflict.

 

This pre-approval requirement is not be applicable with respect to theprovision of non-audit services if:

 

114

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•      the aggregate amount of all such non-auditservices provided to 1st Colonial Bancorp constitutes not more thanfive percent of the total amount of revenues paid by 1stColonial Bancorp to its auditor during the fiscal year in which the non-auditservices are provided;

 

•      such services were not recognized by 1stColonial Bancorp at the time of the engagement to be non-audit services; and

 

•      such services are promptly brought to theattention of the audit committee and approved prior to the completion of theaudit by the audit committee or by one or more members of the audit committeeto whom authority to grant such approvals has been delegated by the auditcommittee.

 

The audit committee may delegate to one or more designated members ofthat committee the authority to grant required pre-approvals.  The decisions of any member to whom authorityis delegated under this paragraph to pre-approve an activity under this subsection shallbe presented to the full committee at its next scheduled meeting.

 

All services performed by KPMG LLP in 2004 were pre-approved inaccordance with the pre-approval policy. There were no waivers by the Audit Committee of the pre-approvalrequirement for permissible non-audit services in 2004.

 

115

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                                    |   | 1ST COLONIAL  BANCORP, INC. |
|-----------------------------------------|--------|-----------------------------|
|                                    |   |                        |   |
| Dated:    March 29, 2005 | By:    |                        | /s/ Gerard M.  Banmiller |   |
|                                    |   |                        | Gerard M.  Banmiller, |
|                                    |   | President and               |
|                                    |   | Chief Executive  Officer    |

 

(Signatures continued on next page)

 

116

----

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedated indicated.

 
|                                 |   | Dated:    March      , 2004       |
|--------------------------------------|--------|---------------------------------------------------------------------------|
| Linda M. Rohrer                      |   |                                                                      |
| Chairman of the  Board               |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   |                                                                      |
| /s/ Gerard M.  Banmiller             |   | Dated:   March 29,  2004                                   |
| Gerard M.  Banmiller,           |   |                                                                      |
| President, Chief  Executive Officer  |   |
| and a Director                       |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   |                                                                      |
| /s/ Mary R. Burke                    |   | Dated:   March 30,  2004                                   |
| Mary R. Burke,  Director             |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   | Dated:   March 30,  2004                                   |
| /s/ Letitia G.  Colombi              |   |                                                                      |
| Letitia G.  Colombi, Director        |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   | Dated:   March       ,  2004 |
| Thomas A. Clark, III,  Director |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   |                                                                      |
| /s/ Gerald  DeFelicis                |   | Dated:   March 30,  2004                                   |
| Gerald  DeFelicis, Director          |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   | Dated:   March       ,  2004 |
| John J.  Donnelly, IV, Director      |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   | Dated:   March       ,  2004 |
| Eduardo F.  Enriquez, Director       |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   |                                                                      |
|                                 |   | Dated:   March       ,  2004 |
| Michael C.  Haydinger, Director |   |                                                                      |

 

117

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|                           |   |                        |
|--------------------------------|--------|-----------------------------|
| /s/ Harrison  Melstein         |   | Dated: March 30,  2004 |
| Harrison  Melstein, Director   |   |                        |
|                           |   |                        |
|                           |   |                        |
| /s/ Stanley H.  Molotsky       |   | Dated: March 30,  2004 |
| Stanley H. Molotsky,  Director |   |                        |
|                           |   |                        |
|                           |   |                        |
| /s/ Robert C.  Faix            |   | Dated: March 29,  2004 |
| Robert C. Faix,                |   |                        |
| Senior Vice  President,        |   |                        |
| Chief Financial  Officer       |   |                        |
| Principal  Financial and       |   |                        |
| Accounting  Officer)           |   |                        |

 

118

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**EXHIBIT INDEX**
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION OF EXHIBITS**                                                                                                                                                                                                                                                                |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                       |
| 3.1                 |       | Amended and  Restated Articles of Incorporation of 1st Colonial Bancorp, Inc.  (Incorporated by reference to Exhibit 3.1 to 1st Colonial Bancorp, Inc.’s  Quarterly Report on Form 10-QSB for the Quarter ended June 30,  2003)                              |
|                |       |                                                                                                                                                                                                                                                                                       |
| 3.2                 |       | Bylaws of 1st  Colonial Bancorp, Inc. (Incorporated by reference from Exhibit 3.2  to Registration Statement No. 333-84114 on Form S-4)                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                       |
| 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) |
|                |       |                                                                                                                                                                                                                                                                                       |
| 10.1                |       | 1st Colonial  Bancorp, Inc. Employee Stock Option Plan. (Incorporated by reference  from Exhibit 10.9 to 1st Colonial Bancorp, Inc.’s Quarterly Report  on Form 10-QSB for the Quarter ended June 30, 2003)                                                  |
|                |       |                                                                                                                                                                                                                                                                                       |
| 10.2                |       | 1st Colonial  Bancorp, Inc. Stock Option Plan for Non-Employee Directors.  (Incorporated by reference from Exhibit 10.10 to 1st Colonial Bancorp, Inc.’s  Quarterly Report on Form 10-QSB for the Quarter ended June 30,  2003)                              |
|                |       |                                                                                                                                                                                                                                                                                       |
| 10.3                |       | Employment  Agreement dated as of June 29, 2000, between 1st Colonial National Bank  and Gerard M. Banmiller. (Incorporated by reference from Exhibit 10.3 to  1st Colonial Bancorp, Inc.’s Registration Statement No. 333–84114  on Form S-4)          |
|                |       |                                                                                                                                                                                                                                                                                       |
| 10.4                |       | Employment  Agreement dated as of June 29, 2000, between 1st Colonial National Bank  and James E. Strangfeld. (Incorporated by reference from Exhibit 10.4  to 1st Colonial Bancorp, Inc.’s Registration Statement No. 333–84114  on Form S-4)     |

 

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| 10.5   |   | Employment  Agreement dated as of May 9, 2001, between 1st Colonial National Bank  and Robert C. Faix. (Incorporated by reference from Exhibit 10.5 to 1st  Colonial Bancorp, Inc.’s Registration Statement No. 333–84114 on Form S-4)                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Lease Agreement  dated October 1, 1999 between 1st Colonial National Bank and First  States Partners No. 203, LLC.(Incorporated by reference from Exhibit 10.6  to 1st Colonial Bancorp, Inc.’s Registration Statement No. 333 -  84114 on Form S-4)                                  |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.7   |   | Data Processing  Services Agreement dated December 23, 1999 between Intercept Group  (successor to SLMsoft.com Inc.) and 1st Colonial National Bank. (Incorporated  by reference from Exhibit 10.7 to 1st Colonial Bancorp, Inc.’s  Registration Statement No. 333–84114 on Form S-4) |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.8   |   | Warrant  Agreement dated December 16, 2002 between 1st Colonial Bancorp, Inc.  and StockTrans, Inc.(Incorporated by reference from Exhibit 10.8 to  1st Colonial Bancorp, Inc.’s Registration Statement No. 333–92310  on Form SB-2)                                        |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.9   |   | Enterprise  License and Services Agreement dated as of October 16, 2003 between 1st  Colonial National Bank and S1, Inc. (Incorporated by reference from Exhibit 10.9  to 1st Colonial Bancorp, Inc.’s Registration Statement No. 333–113779  on Form SB-2).                     |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 11.1   |   | Not required  because clearly determinable from Annual Report on Form 10-KSB.                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 21.1   |   | Subsidiaries of  the Registrant                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 23.2   |   | Consent of KPMG  LLP                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 32.1   |   | Section 1350  Certification of Chief Executive Officer                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 32.2   |   | Section 1350  Certification of Chief Financial Officer                                                                                                                                                                                                                                                              |

 

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