UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-KSB

For the transition period from                       to

Commission File Number:  333-84114

1st Colonial Bancorp, Inc.

Exact name of small business issuer as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Exchange Act:  None.

Securities registered pursuant to Section 12(g) of the Exchange Act:  None.

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ý

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

None.

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

PART I

ITEM 1.  Description of Business

General

1st Colonial Bancorp, Inc. is a Pennsylvania business corporation and bank holding company registered under the Bank Holding Company Act of 1956.  1st Colonial was incorporated on February 26, 2002 for the purpose of acquiring 1st Colonial National Bank (referred to in this report as the Bank), thereby enabling the Bank to operate within a holding company structure.  On June 30, 2002, 1st Colonial acquired 100% of the outstanding 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 financial services to businesses and individuals in Camden County, New Jersey and surrounding areas.  We believe that we will continue to gain market share in our geographic market.  We compete with the many existing and larger financial institutions in our geographic market by emphasizing personalized service, responsive decision making and an overall commitment to excellence.

The Bank offers commercial and consumer loans of all types, including real estate loans, residential mortgage loans, home equity loans and lines of credit, auto loans and other credit products.  The Bank’s deposit services include business and individual demand and time deposit accounts, NOW accounts, money market accounts, Individual Retirement Accounts and holiday accounts.  Our strategy for deposit acquisition and development has been to attract and retain core deposits, and we traditionally have not priced our deposits to attract short-term relationships.  We do not accept brokered deposits.  The Bank is not authorized to offer trust services and does not presently offer the sale of investment products such as mutual funds to its customers.

We provide a number of convenience-oriented services and products to our customers, including direct payroll and social security deposit services, bank-by-mail services, letters of credit, access to a national automated teller machine network, safe deposit boxes, night depository facilities, notary services, courier services and travelers checks.  We also offer telephone banking services that enable our customers to obtain

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account information, effectuate transfers between accounts, order new checks and make stop payment requests.  In addition, we began offering Internet-banking services to our customers in the third quarter of 2004, using a third-party service provider.

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

As of December 31, 2004, we employed 23 full-time and four part-time employees.

Business Strategy

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

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

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

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

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services to these customers in 2003.  We also are planning to add up to two full-service branches by the end of 2006.

An important element of our strategy is to capitalize on the prior experience of our management team in our market, as well as their pre-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’s executive vice president, directed various business and consumer banking operations for the southern New Jersey divisions of two large regional banks from 1986 to 2000.  Many of the Bank’s customers, including governmental entities and local businesses, were customers of Mr. Banmiller and Mr. Strangfeld in their prior positions.  It is a fundamental belief of management that having knowledge of our local markets facilitates a bank’s deposit gathering capabilities and its ability to make sound credit decisions.  This extensive knowledge of our local markets has allowed us to develop and implement a highly focused and disciplined approach to deposit and lending relationships with the customers in our market area.

Corporate History

Reorganization

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

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

2002 Stock Offering

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

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

2004 Stock Offering

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

Loan Portfolio

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

Lending Policy

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

The Board maintains a loan committee consisting of at least four “outside” directors.  Outside directors are directors who are not officers of the Bank.  Our senior lending officer and 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 to consider and approve all loan requests in excess of the lending authority delegated to the loan officers.  Credit review and analysis on each loan is prepared by the individual loan officers for presentation to the loan committee.  Loan approval requires a majority of the voting members present.

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

The president/chief executive officer and the senior lending officer, or the senior lending officer and the vice president, loan department 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 in excess of $1,000,000 are presented to the board of directors for approval.

Commercial and Commercial Real Estate Loans

Our lending activity is concentrated primarily in commercial and commercial real estate loans.  At December 31, 2004, commercial and commercial real estate loans equaled $51.0 million, or 66.0%, of the loan portfolio.  The commercial and commercial real estate loan portfolio is comprised of $16.2 million of commercial and industrial loans, as well as $34.8 million of loans secured by commercial and multi-family real estate.  These commercial real estate loans have an average loan to value ratio under 80%.  Other than loans to operators of nonresidential buildings, which amount to $11.3 million or 14.6% of total loans, there is no material concentration in the commercial and commercial real estate loan portfolio within any business or industry segment.  Our strategy is to make commercial and commercial real estate loans based on our analysis of a borrower’s ability to repay the loan out of its operating cash flows.  With few exceptions, we also obtain real estate or other collateral for a commercial or commercial real estate loan, and typically require repayment guarantees by principals of a borrower.  Most of our commercial and commercial real estate loans are made to a diverse 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 together equaled $22.8 million, or 29.5% of the loan portfolio at December 31, 2004.  The residential real estate portfolio consists primarily of home equity loans.  The consumer loan portfolio consists primarily of automobile and personal loans.  Approximately 83.8% of the residential real estate/consumer portfolio at December 31, 2004 is home equity loans.  The average loan to value ratio of these loans is approximately 80%.  Substantially all residential first mortgage loans originated by us are sold in the secondary market on a servicing released 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 to contractors for the purpose of constructing or renovating single-family homes and loans to business owners for the purpose renovating existing facilities.  All of these loans mature within one year.  The average loan to value ratio of these loans is approximately 80%.  The Bank limits its lending to single-facility projects, and does not finance any tract developments.

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

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

Maturity Distribution

(1)                    Includes all mortgage and home equity loans.

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

(1)                    Includes all mortgage and home equity loans.

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Loans held for sale are residential mortgage loans that are subject to purchase commitments from third-party investors such as mortgage companies.  Funds for these sales have not yet been received from the investors.  The Bank usually receives funds within one week of the loan closing.  The Bank receives interest income from the investor from the date the loan closes to the date funds are received from the investor.  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 2004 compared to $23,000 for 2003, and is included in interest on loans.

Risk Elements

Risk elements in the loan portfolio include loans past due, non-accrual loans, other real estate owned and a concentration of loans to one type of borrower.  We closely monitor the loan portfolio to reduce the risk of delinquent and problem credits.  Strict underwriting criteria, 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 an outside entity that evaluates loan quality, including adherence to underwriting criteria.  This outside entity reports directly 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 to individuals and small and medium sized businesses located primarily within the greater 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 by making significant amounts of loans to borrowers outside its market area.  For a description of the Bank’s market area, see “Business—Market Area.”

Asset Quality

The Bank manages asset quality and controls credit risk through diversification of the loan portfolio and the application of policies designed to foster sound underwriting and loan monitoring practices.  The Bank’s senior officers are charged with monitoring asset quality, establishing credit policies and procedures subject to approval by the Board of Directors, seeking the consistent application of these policies and procedures across the Bank and adjusting policies as appropriate for changes in market conditions.

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Non-performing assets include non-performing loans and foreclosed real estate held for sale.  Non-performing loans consist of loans where the principal, interest, or both, is 90 or more days past due and loans that have been placed on non-accrual.  Income recognition of interest is discontinued when, in the opinion of management, the collectibility of such interest becomes doubtful.  A loan is generally classified as non-accrual when principal or interest has been in default for a period of 90 days or more or because of a deterioration in the financial condition of the borrower such that payment in full of principal or interest is not expected.  Loans past due 90 days or more and still accruing interest are loans that are generally well secured and in process of collection.  When loans are placed on non-accrual, accrued income from the current period will be reversed from current earnings.  Consumer loans are to be charged off when principal or interest is 120 or more days delinquent or will be placed on non-accrual if the collateral is insufficient to recover the principal.  At December 31, 2004, the Bank had one non-performing loan in the amount of $24,000.  As of December 31, 2004, for purposes of accounting and reporting in accordance with SFAS 15, the Bank had no significant troubled debt restructuring.  As of December 31, 2004, for purposes of accounting and reporting in accordance with SFAS 114, the Bank had no “impaired” loans.

Allowance for Loan Losses

The Bank determines the provision for loan losses through a quarterly analysis of the allowance for loan losses.  Factors such as changes in the nature and volume of the portfolio, overall portfolio quality, concentrations of credit risk, review of specific problem loans, current economic conditions and trends that may affect the ability of borrowers to pay, and prior loss experience within the various categories of the portfolio are considered when reviewing the risks in the portfolio.  Substantially, all loans greater than $200,000 and all classified loans are analyzed individually.  While management believes the allowance for loan losses is currently appropriate, future additions to the allowance may be necessary based on changes in general economic conditions and/or the condition of specific borrowers.  The allowance is reviewed quarterly by the Board of Directors and senior management 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 to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

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

At each quarterly review cycle, all classified loans are assigned a specific reserve allocation based on the guidelines established in the Bank’s credit policy which was approved by the Board of Directors.  These could range from 2.5%-10% of the principal 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 is deducted from the general portfolio classification.  The general category is currently segregated by commercial real estate loans, commercial and industrial loans, residential real estate loans, construction loans and other consumer loans.  Each category of loan is then assigned loss factors based on a review of the following areas:  (i) historical losses (due to limited loss experience, we use the loss experience of peer banks as reported in the Uniform 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 loans from these categories, the sum of the assigned loss factors is then applied to the outstanding balance of the respective category.

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

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

(1)                    Includes average 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’s recognition of losses previously provided for in the overall allowance for loan losses through the provisions charged to operations in the respective periods.

The following schedule sets forth the allocation of the

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allowance for possible loan losses among various categories.  The allocation is based upon the historical experience of the Bank, the historical experience of the Bank’s management while at other institutions and management’s review of the specific amount or specific loan category in which future losses may ultimately occur.  However, the entire allowance for possible loan losses is available to absorb future loan losses in any category.  The Bank is unable to accurately predict in what category future charge offs and recoveries may actually occur.

Allocation of Allowance for Possible Loan Losses

*  Percentages indicate 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 total assets at December 31, 2004.  The Bank’s securities portfolio serves several purposes.  Portions are held to maturity.  The remaining portions are used to assist the Bank in liquidity and asset/liability management.  Total amortized cost of securities at December 31, 2004 was $53.7 million or 39.5% of total assets compared to $33.9 million or 28.7% of total assets at December 31, 2003.

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

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

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

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

Securities Portfolio

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The amortized cost and weighted average yield of the Bank’s investment securities and securities available-for-sale at December 31, 2004, by contractual maturity, are reflected in the following table.  Actual maturities will differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

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Deposits

The Bank’s predominant source of funds is depository accounts.  The Bank’s deposit base is comprised of demand deposits, savings and money market accounts and other time deposits.

The following table sets forth the distribution of average deposits by major category and the average rate paid in each year as applicable.

Distribution of Average Deposits

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

Maturities of Time Deposits of $100,000 and Over

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

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

The Bank’s strategy for deposit acquisition and development has been to attract and retain core deposits, and the Bank has not priced its deposits to attract short-term relationships.  In addition, we have had success marketing our deposit account services to local government entities such as municipalities, school districts and public authorities.  This success is largely due to the experience and reputation of our management in handling local government entity business, which has led to referrals and additional relationships.  These deposits are typically operating accounts and longer term certificates of deposit, so they are a stable source of funding for us.

Short-Term Borrowings

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

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

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Market Area

We are located in the southwestern part of New Jersey, approximately five miles east of the City of Philadelphia, Pennsylvania, which is the fifth largest city in the United States.  Our market area consists of the greater Cherry Hill, New Jersey area and the 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 as the balance of New Jersey and the Philadelphia area, is highly competitive with respect to both loans and deposits and is dominated by a number of major regional and super-regional banks and non-depository institutions which have many offices.  Many of these institutions, particularly the larger banking firms that have enhanced their local presence through mergers in recent years, have substantially greater resources and offer a wider array of services than we do.  In addition, many of these institutions are permitted to make larger loans than we can.  In addition, the present bank regulatory environment has undergone significant change.  This change affects the banking industry and competition between banks and non-bank financial institutions.  There have been significant regulatory, statutory and case law changes in the bank merger and acquisition area, in the products and services banks can offer, and in the non-banking activities in which bank holding companies can engage.  We face competition for loans and deposits from institutions such as credit unions, mortgage brokers, mortgage banking companies, mutual funds, money market funds, investment bankers, insurance companies and others.  These non-bank financial institutions have the power to acquire and own banks that could compete with us.  See “Supervision and Regulation.”

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

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SUPERVISION AND REGULATION

General

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

The Federal Reserve Board has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source 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 resources to provide adequate capital funds to the Bank during periods of financial stress or adversity.

The Bank Holding Company Act prohibits us from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of, any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board.  Additionally, the Bank Holding Company Act prohibits us from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business, unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto.  The types of businesses that are permissible for bank holding companies to own have been expanded by recent federal legislation; see discussion of Gramm-Leach-Bliley Act below.

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

The OCC, which has primary supervisory authority over the 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 the protection of the Bank’s depositors rather than the Bank’s shareholders.  The Bank must furnish annual and quarterly Call Reports to the OCC, which has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business.

The various laws and regulations administered by the OCC affect corporate practices, such as the payment of dividends, incurrence of debt and acquisition of other financial institutions and companies, and affect business practices, such as the payment of interest on deposits, the charging of interest on loans, the types of business conducted and the location of offices.

Sarbanes-Oxley Act

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 or are required to file periodic reports with the Securities and Exchange Commission (the SEC), under the Securities Exchange Act of 1934 (the Exchange Act).  The stated goals of SOX are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.  SOX is the most far-reaching U.S. securities legislation enacted in some time.

SOX includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of specified issues by the SEC and the Comptroller General.  SOX represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.  SOX addresses, among other matters:

•                  audit committees;

•                  certification of financial statements by the chief executive officer and the chief financial officer;

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•                  the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the 12-month period following initial publication of any financial statements that later require restatement;

•                  a prohibition on insider trading during pension plan blackout periods;

•                  disclosure of off-balance sheet transactions;

•                  a prohibition on personal loans to directors and officers;

•                  expedited filing requirements for Form 4 statements of changes of beneficial ownership of securities required to be filed by officers, directors and 10% shareholders;

•                  disclosure of whether or not a company has adopted a code of ethics;

•                  “real time” filing of periodic reports;

•                  auditor independence; and

•                  various increased criminal penalties for violations of securities laws.

The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.  To date, the SEC has implemented most of the provisions of SOX, and continues to monitor and modify its rules, reports, and releases, 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 voluntarily file annual, quarterly and current reports on Forms 10-KSB, 10-QSB and 8-K, we are required to comply with the requirements of those forms, many of which have been changed or added due to SOX.  In addition, in the event we have 300 or more shareholders of record at the beginning of any year, we would become subject to the provisions of SOX.

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USA PATRIOT Act

In October 2001, the President signed into law the USA PATRIOT Act.  This Act was in direct response to the terrorist attacks on September 11, 2001, and strengthens the anti-money laundering provisions of the Bank Secrecy Act.  Most of the new provisions added by this Act apply to accounts at or held by foreign banks, or accounts of or transactions with foreign entities.  The bank does not have a significant foreign business and does not expect this Act to materially affect its operations.  This Act does, however, require the banking regulators to consider a bank’s record of compliance under the Bank Secrecy Act in acting on any application filed by a bank.  As the Bank is subject to the provisions of the 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 additional factor in any applications filed by it in the future.  To the Bank’s knowledge, its record of compliance in this area is satisfactory and its processes and procedures to insure compliance with this Act are satisfactory.

Gramm-Leach-Bliley Act

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

The GLB Act creates a new category of bank holding company called a “financial holding company.”  In order to avail itself of the expanded financial activities permitted under the GLB Act, a bank holding company must notify the Federal Reserve that it 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 Community Reinvestment Act rating, each in accordance with the definitions prescribed by the Federal Reserve and the regulators of the company’s subsidiary banks.  Once a bank holding company makes such an election, and provided

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that the Federal Reserve does not object to such election, the financial holding company may engage in financial activities (i.e., securities underwriting, insurance underwriting, and certain other activities that are financial in nature as to be determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business.  This makes the regulatory approval process to engage in financial activities much more streamlined than it was under prior law.  We have no present intention of electing to become a financial holding company.

The GLB Act also permits certain financial activities to be undertaken by a subsidiary of a national bank.  Generally, for financial activities that are conducted as a principal, such as a securities underwriter or dealer holding an inventory, a national bank must be one of the 100 largest national banks in the United States and have debt that is rated investment grade.  However, smaller national banks may own a securities broker or an insurance agency, or certain other financial agency entities under the GLB Act.  Under prior law, national banks could only own an insurance agency if it was located in a town of fewer than 5,000 residents, or under certain other conditions.  Under the GLB Act, there is no longer any restriction on where the insurance agency subsidiary of a national bank is located or does business.

The GLB Act also contains a number of provisions that affect the operations of all financial institutions.  One of the provisions relates to the financial privacy of consumers, authorizing the federal banking regulators to adopt rules that would limit the ability of banks and other financial entities to disclose non-public information about consumers to entities that are not affiliates.  Under these rules, banks must establish a disclosure policy for non-public customer information, disclose the policy to their customers, and give their customers the opportunity to object to non-public information being disclosed to a third party.

Capital Requirements

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

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equivalent” value, determined by multiplying the off-balance sheet item by a credit conversion factor established 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, less goodwill (“Tier 1 capital”).  The remainder (“Tier 2 capital”) may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan and lease loss reserves.  The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.”  Federal regulations also require a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0%.

In addition, federal regulations have established a minimum leverage ratio (Tier 1 capital to quarterly average assets less goodwill) of 3.0% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating.  All other banks and bank holding companies are required to maintain a leverage ratio of 3.0% plus an additional amount of at least 100 to 200 basis points.  The regulations also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Banking regulators continue to indicate their desire to raise banking organization capital requirements beyond their current levels.  However, management is unable to predict whether higher capital ratios will be imposed and, if so, at what levels and on what schedule.

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

Limits on Dividends

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

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As a national bank subject to the regulations of the OCC, the Bank must obtain approval for any dividend if the total of all dividends declared in any calendar year would exceed the total of its net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years, less any required transfers to surplus.  In addition, the Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts.  For this purpose, bad debts are generally defined to include the principal amount of loans which are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection.  Moreover, for purposes of this limitation, the Bank is not permitted to add the balance in its allowance for loan loss account to its undivided profits then on hand; however, it may net the sum of its bad debts as so defined against the balance in its allowance for loan loss account and deduct from undivided profits only bad debts as so defined in excess of that amount.

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

Loans To One Borrower Limitation

Under applicable OCC regulations, a national bank’s total outstanding loans and extensions of credit to one borrower may not exceed 15 percent of the bank’s capital and surplus, plus an additional 10 percent of the bank’s capital and surplus if the amount that exceeds the bank’s 15 percent general limit is fully secured by readily marketable collateral, which is defined to include certain financial instruments and bullion.  To qualify for the additional 10 percent limit, the bank must perfect a security interest in the collateral under applicable law and the collateral must have a current market value at all times of at least 100 percent of the amount of the loan or extension of credit that exceeds the bank’s 15 percent general limit.  At December 31, 2004, the Bank’s loans to one borrower limitation was $2.6 million.

Community Reinvestment

Under the Community Reinvestment Act (“CRA”), a bank has a continuing and affirmative obligation consistent with its safe and sound operation 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 lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop types of products and services that it believes are best suited to its particular community, consistent with the CRA.  The CRA requires the OCC, in connection with its examination of national banks, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.  The OCC is required to provide a written evaluation of an institution’s CRA performance utilizing a four tiered descriptive rating system, which rating is disclosed to the public.

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

Prompt Corrective Action

The federal banking agencies are required to take “prompt corrective action” in respect of banks that do not meet minimum capital requirements.  There currently are five capital tiers: “well capitalized,” “adequately capitalized,” “under capitalized,” “significantly under capitalized” and “critically under capitalized.”  The Bank is “well capitalized.”  The following table sets forth the minimum capital ratios that a bank must satisfy in order to be considered well capitalized or adequately capitalized under OCC regulations:

The FDIC’s regulations establish specific actions that are permitted or, in certain cases required, to be taken by regulators with respect to institutions falling within one of the three undercapitalized categories.  Depending on the level

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of the institution’s capital, the agency’s correction powers can include:  requiring a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional stock (including voting stock) or be acquired by another institution in a transaction supervised by the FDIC; placing restrictions on transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election for the institution’s board of directors; requiring that certain senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; prohibiting the payment of principal or interest on subordinated debt; and, in the most severe cases, appointing a receiver for the institution.  A bank that is undercapitalized is required to submit a capital restoration plan.  Under certain circumstances, a “well capitalized,” “adequately capitalized” or “undercapitalized” institution may be required to comply with restrictions applicable to the next lowest capital category.

Safety and Soundness Standards

The OCC and the other federal banking agencies have adopted “Interagency Guidelines Establishing Standards for Safety and Soundness” (“Guidelines”).  These operational and managerial standards address an institution’s general practices, and are designed to provide a framework for the federal bank regulators to determine whether those practices are sound in principle and whether procedures are in place to ensure that they are applied in the normal course of business.  The guidelines cover such areas as internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation.  Banks failing to meet these standards are required to submit compliance plans to their appropriate federal regulators.

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

Insurance of Accounts and Regulations by the FDIC

The Bank is a member of the Bank Insurance Fund, which is administered by the FDIC.  Deposits are insured up to the applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States government.  As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examination of, and to require reporting by, FDIC-insured institutions.  It also may prohibit any FDIC-

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

The FDIC’s deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation.  Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets (“Tier 1 risk-based capital”) of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium, while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a total risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium.  Risk classification of all insured institutions 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 Bank Insurance Fund will be less than the designated reserve ratio of 1.25% of Bank Insurance Fund insured deposits.  In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC.

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

Legislative Proposals and Reforms

Legislative and regulatory proposals regarding changes in banking, and the regulation of banks, thrifts and other financial institutions, are considered from time to time by the executive branch of the federal 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 financial services industry.  We cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals will affect us.

Impact of Monetary Policies

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

The earnings and growth of the Bank and of the banking industry as a whole is affected not only by general domestic and foreign economic conditions, but also by the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board.  The Federal Reserve Board affects the national economy by its open market operations in United States government securities, limitations upon savings and time deposit interest rates, and adjustments to the discount and reserve retention rates applicable to borrowings by banks which are members of the Federal Reserve System.  These actions of the Federal Reserve Board influence the growth of bank loans, investments and deposits and affect interest rates charged on loans and paid on deposits.  The nature and impact of any future changes in monetary policies cannot be predicted but, in any event, may have a material effect on the results of operations.

Transactions with Affiliates

National banks must comply with Sections 23A and 23B of the Federal Reserve Act (“Sections 23A and 23B”) and Regulation W under that act relative to transactions with affiliates in the same manner and to the same extent as if the bank were a Federal Reserve member bank.  A bank holding company, its subsidiaries and any other company under common control are considered affiliates of the bank.  Generally, Sections 23A and 23B and Regulation W:  (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution’s capital and surplus and place an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to

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a non-affiliate.  The term “covered transaction” includes the making of loans, the purchase of assets, the issuance of a guarantee and similar types of transactions.  Any loan or extension of credit by the bank to an affiliate must be secured by collateral in accordance with Section 23A and Regulation W.  Exemptions from Section 23A or 23B may be granted only by the Federal Reserve.  The Bank has not been significantly affected by the rules regarding transactions with affiliates.

The Bank’s authority to extend credit to executive officers, directors and 10% shareholders, including 1st Colonial, as well as entities controlled by such persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O thereunder.  Pursuant to these laws and regulations, any loan made by the Bank to an executive officer or director, or his or her affiliates, (i) was made in the ordinary course of business, (ii) was made on terms and conditions substantially the same as those offered to unaffiliated individuals and (iii) did not involve more than the normal risk of repayment.  The Bank has not made any loans to a 10% shareholder.  Generally, Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to such persons based, in part, on the Bank’s capital position, and requires certain board approval procedures to be followed.

ITEM 2.  Description of Property

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

Certain back office and administrative functions are located in office space leased by the Bank at 900 Haddon Avenue, Collingswood, New Jersey.  This lease expires in 2006.

On January 16, 2003 the Bank opened a branch office at 321 Broadway, Westville, New Jersey.  The Bank purchased this facility from another financial institution.  The Bank did not

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

ITEM 3.  Legal Proceedings

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

ITEM 4.  Submission of Matters to a Vote of Security Holders

None.

PART II

ITEM 5.  Market for Common Equity, Related Shareholder Matters and Small Business Issuer Purchases of Equity Securities

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

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

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SALE PRICE INFORMATION FOR COMMON STOCK

(1)       The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

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

As of March 1, 2005, there were options outstanding to purchase 201,478 shares of common stock and warrants outstanding to purchase 364,981 shares of common stock.  These amounts are as adjusted to reflect the 10% stock dividend paid on January 15, 2002, and the 5% stock dividend paid on each of April 15, 2003 and April 15, 2004.

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

Boenning & Scattergood, Inc., Janney Montgomery Scott, LLC, Monroe Securities, Inc. and Ryan Beck & Co., Inc. make a market in our common stock.  Making a market involves maintaining bid and ask quotations and being able, as principal, 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 of willing buyers and sellers, the presence of which is not within our control.  An active and liquid market may not develop for the common stock.

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

Dividend Policy

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

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

The selected consolidated financial data presented below is derived from, and should be read in conjunction with, our audited financial statements for the years ended December 31, 2004 and 2003, including the related notes, included in this document as Item 7.  All per share data has been restated for the effect of the 10% stock dividend paid on January 15, 2002 to shareholders of record as of January 2, 2002, the 5% stock dividend paid on April 15, 2003 to shareholders of record as of April 1, 2003 and the 5% stock dividend paid on April 15, 2004 to shareholders of record as of April 1, 2004.

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Summary of Operations

Per Share Data

Balance Sheet Data

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Performance Ratios

Asset Quality Data

Selected Capital Ratios (7)

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

(2)   Includes mortgage loans held for sale.

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

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

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

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

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income and total other income.

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

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

ITEM 6.          MANAGEMENT’S DISCUSSION AND ANALYSIS

The following presents management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes included in Item 7 of this annual report.  This annual report contains forward-looking statements.  You can find many of these statements before and after words such as “may,” “could,” “should,” “will,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “seek,” “assume” or similar expressions.

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

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

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

•      expectations and estimates with respect to our revenues, expenses, earnings, asset quality and other financial data and capital and performance ratios.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, these statements involve risks and 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 financial performance to differ materially from our goals, plans, objectives, intentions, expectations, and other forward-looking statements:

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

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

•      inflation, interest rate, market and monetary fluctuations;

•      our ability to raise the capital necessary on a timely basis to support our continued asset growth and geographic expansion;

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

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

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

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

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

•      technological changes;

•      change in consumer spending and savings habits; and

•      regulatory or judicial proceedings.

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

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

Overview

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

The Bank conducts community banking activities by accepting deposits from the public and investing the proceeds in loans and investment securities.  The Bank’s lending products include commercial loans and lines of credit, consumer and home equity loans, and multi-family residential and non-residential real estate loans.  In order to manage its liquidity and interest rate risk, the Bank maintains an investment portfolio consisting of municipal, U.S. government and mortgage-backed securities, most of which are investment grade.  The Bank’s loan and investment portfolios are funded with deposits as well as collateralized borrowings secured by the Bank’s investment securities.

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

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Critical Accounting Matters

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of the deferred tax assets.

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

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for loan losses.  They may require additions to the allowance based upon their judgments about information available to them at the time of examination.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become available.

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The realizability of deferred tax assets is dependent upon various factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities, and tax planning strategies.

Comparison of Financial Condition

December 31, 2004 Versus December 31, 2003

Our assets totaled $136.0 million at December 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, consisted primarily of cash and cash equivalents which totaled $3.8 million, investment securities, which totaled $53.5 million and loans, including loans held for sale, which totaled $77.6 million.  Premises and equipment totaled $949,000 at December 31, 2004, and consisted primarily of our Westville branch and leasehold improvements.  Our assets at December 31, 2003, consisted primarily of cash and cash equivalents, including federal funds sold, which totaled $16.5 million, investment securities, which totaled $33.8 million and loans, including loans held for sale, which totaled $66.8 million.  Premises and equipment totaled $935,000 at December 31, 2003, and consisted primarily of our Westville branch and leasehold improvements.  The $17.9 million increase in total assets was primarily due to an increase in loans of $10.8 million, an increase in investment securities of $19.8 million, offset by a decrease in cash and short-term investments, such as Federal Funds sold and interest bearing 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 in April 2004.  The increase in loans was due to general growth in our loan portfolio resulting from the continued execution of our business plan.

Our deposits totaled $111.2 million at December 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 business relationships 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 to balances of $20.4 million at December 31, 2003.  Interest-bearing demand deposits totaled $34.8 million at December 31, 2004, a decrease

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of 6.7% as compared to balances of $37.3 million at December 31, 2003.  This increase in non-interest bearing demand deposits was the result of new relationships established with commercial accounts.  The decrease in interest bearing demand deposits was the result of a shift from interest bearing demand to money market deposits and certificates of deposit.  Savings and money market deposits 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.

Net Interest Income

The principal source of our revenue is net interest income.  Net interest income is the difference between income earned on loans and securities and the interest paid on deposits and borrowed funds.  Interest-earning assets are comprised primarily of loans and securities, while deposits represent the major portion of interest bearing liabilities.  Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.  Net interest margin is calculated as net interest income divided by average earning assets and represents our net yield on our earning assets.

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

Average Balance, Interest Income And Expense, Average Yield And Rates

The following table illustrates the average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity, and the related income, expense, and corresponding weighted average yields and costs.  The average balances used for the purposes of these tables and other statistical disclosures were calculated by using the daily average balances.  Non-accruing loans, if any, are included in the average balances of loans.

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