1st Colonial Bancorp, Inc.
Annual Report 2022

Plain-text annual report

2022 Annual Report April 5, 2023 Dear Fellow Shareholders, We hope thit s letter fiff nds you well. We are pleased to report another successfulff year foff r our company. We generated record eara nings of $8.5 million foff r the fuff ll yeara , which represents an increase of 17% over 2021 results. This equates to $1.77 per share on a fulff ly diluted basis. Although we faff ced many challenges during the year, including stubbornly high inflff ation, increased operating costs, and general economic uncertainty, ouruu Team continuenn d to stay foff cused on each other, as well as ouruu loyal customer base. The Federal Reserve raised the Fed Funds Rate aggressively duruu ing the year, which had a positive to stay very foff cused on our interest expex nse, the year. We continuenn impact on our net interest income forff as well as our overall asset and liabilitytt management ana d practices. We realized a 15% increase in total assets during thet yeara , mostly driven by an increase in our loans outstanding. Our effff iff ciency ratio improved to 60.3% frff om 62.5% at year end 2021. Our deposits increased by 10% during the year, ana d ouruu liquidity position remains strong with ample cash and borrowing capa acity trr ouruu uninsured deposits, should we see any uneuu xpected deposit outflff ow. Our balance sheet anda to suppor uu overall fiff nanca ial condition remains strt ong, and we are well capa italized to suppuu ortrr ouruu continued growtht plan. Asset qualitytt metrics continue to be stabla e, with no deterioration being detected. The increased costs associated with inflff ation and higher interest rates will certrr ainly have an impact on our clients’ disposable income levels andaa signs of stress and we are ready and able to support all of our clients, should they experience hardship. cash flff ow. We closely monitor our portfoff lio forff Our investment in technology will continue into 2023, providing foff r greater effff iff ciency and a better ouruu Team Members and ouruu customers. We launched ouruu new online account opening ly digital distrt ibution channel. We believe thit s grow ouruu customer base, as we appeal to a wider rana ge of clients that prefeff r overall experience forff tool, providing the delivery of ouruu products thrt ough a fulff will allow us to diversifyff anda to do their banking digitally, with the flff exibility of in person banking if needed. Lastly, we completed the move to our new corpor rate offff iff ce in Mount Laurel. The new space is the abia lity to grow over time, while not causing any unnu ecessaryrr modern and spacious, and will allow forff strain on ouruu overhead expenses. We anticipate 2023 will be fiff lled with new challenges and opportunities, which we are ready to faff ce and ultimately continunn e to overcome. We that nk you foff r your continued support. Sincerely, Linda M. Rohrer Chairmrr an of the Board Robert B. White President & Chief Executive Offff iff cer 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements December 31, 2022 and 2021 (With Independent Auditors’ Report Thereon) Crowe LLP Independent Member Crowe Global INDEPENDENT AUDITORS’ REPORT Shareholders and the Board of Directors 1st Colonial Bancorp, Inc. and Subsidiary Mount Laurel, New Jersey Opinion We have audited the consolidated financial statements of 1st Colonial Bancorp, Inc. and Subsidiary, which comprise the consolidated statements of financial condition December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of 1st Colonial Bancorp, Inc. and Subsidiary as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Basis for Opinion We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of 1st Colonial Bancorp, Inc. and Subsidiary and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about 1st Colonial Bancorp, Inc. and Subsidiary’s ability to continue as a going concern for one year from the date the financial statements are available to be issued. (Continued) Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements. In performing an audit in accordance with GAAS, we: • Exercise professional judgment and maintain professional skepticism throughout the audit. Identify and assess the risks of material misstatement of the consolidated financial statements, whether • due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures includeexamining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that • are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of 1st Colonial Bancorp, Inc. and Subsidiary’s internal control. Accordingly, no such opinion is expressed. Evaluate the appropriateness of accounting policies used and the reasonableness of significant the • accounting estimates made by management, as well as evaluate the overall presentation of consolidated financial statements. Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that • raise substantial doubt about 1st Colonial Bancorp, Inc. and Subsidiary’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit. Washington, D.C. March 30, 2023 Crowe LLP 3 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition (Dollars in thousands, except share data) Assets Cash and due from banks Federal funds sold Total cash and cash equivalents As of December 31, 2021 2022 $ 20,377 22 20,399 $ 40,853 24 40,877 Investments held to maturity (fair value of $38,114 as of December 31, 2022 and $18,476 as of December 31, 2021) 38,114 18,476 Investments available for sale ("AFS") (amortized cost of $99,160 as of December 31, 2022 and $92,957 as of December 31, 2021) Investment in restricted bank stock, at cost Loans held for sale Loans Less allowance for loan losses Net loans Premises and equipment, net Accrued interest receivable Deferred tax assets Bank-owned life insurance Other assets Total assets Liabilities and S hareholders’ Equity Liabilities: Deposits Subordinated debt, net of issuance costs Other borrowings Accrued interest payable Other liabilities Total liabilities Shareholders’ equity: Preferred stock. Authorized 1,000,000 shares, no shares issued Common stock, $0 par value. Authorized 10,000,000 shares; issued 5,148,221 and 5,120,331 shares as of December 31, 2022 and December 31, 2021, respectively, and outstanding of 4,675,244 and 4,726,235 shares as of December 31, 2022 and December 31, 2021, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Treasury stock at cost, 472,977 and 394,096 shares as of December 31, 2022 and December 31, 2021, respectively Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes to consolidated financial statements. 91,017 2,894 6,710 603,609 (8,331) 595,278 1,845 2,779 3,825 14,548 4,554 781,963 671,052 10,559 34,788 405 5,521 722,325 $ $ 93,331 1,474 9,957 501,883 (6,906) 494,977 1,072 1,664 1,555 16,160 3,291 682,834 610,476 10,440 - 303 3,798 625,017 $ $ - - - 38,619 31,149 (5,890) - 38,250 22,651 272 (4,240) 59,638 781,963 $ (3,356) 57,817 682,834 $ 3 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Operations For the years ended December 31, (Dollars in thousands, except share data) 2022 2021 Interest income: Loans Federal funds sold and interest-bearing deposits Investments: Taxable Nontaxable Total interest income Interest expense: Deposits Subordinated debt Other borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income: Gain on sales of mortgage loans held for sale Gain on sale of guaranteed portion of SBA loans M ortgage fee income Bank-owned life insurance income Gain on sale of securities Service charges on deposit accounts Gain (loss) on real estate owned Other income and fees Total other income Other expenses: Compensation and employee benefits Data processing expense Occupancy and equipment expenses Professional services FDIC and state assessments Loan expenses Other operating expenses Total other expenses Income before income tax expense Income tax expense Net income Earnings per share: Basic earnings per share Diluted earnings per share $ 27,674 142 $ 23,331 47 1,679 378 29,873 2,692 872 300 3,864 26,009 1,150 24,859 2,126 852 595 1,440 - 99 37 419 5,568 12,437 1,731 1,231 602 369 596 2,068 19,034 11,393 2,895 8,498 1.82 1.77 $ $ $ 1,282 275 24,935 2,248 786 3 3,037 21,898 1,715 20,183 4,878 2,276 965 802 110 92 (55) 422 9,490 12,422 1,606 1,245 758 290 1,139 2,159 19,619 10,054 2,796 7,258 1.49 1.47 $ $ $ Weighted average number of shares outstanding: Basic earnings per share Diluted earnings per share 4,681,122 4,791,574 4,861,992 4,953,191 See accompanying notes to consolidated financial statements. 4 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income (In thousands) Net income Other comprehensive (loss) income: Net unrealized loss on AFS investment securities: Net unrealized holding loss arising during the period Less reclassification adjustment for net gains on For the years ended December 31, Before tax amount $ 11,393 2022 Tax expense (benefit) $ 2,895 Net of tax amount $ 8,498 Before tax amount $ 10,054 2021 Tax expense (benefit) $ 2,796 Net of tax amount $ 7,258 (8,517) (2,355) (6,162) (1,085) (331) (754) sales realized in net income - - - 110 30 80 Total net unrealized loss on AFS investment securities Other comprehensive loss Total comprehensive income (8,517) (8,517) 2,876 $ (2,355) (2,355) 540 $ (6,162) (6,162) 2,336 $ (1,195) (1,195) 8,859 $ (361) (361) 2,435 $ (834) (834) 6,424 $ See accompanying notes to consolidated financial statements. 5 53,686 93 - (2,508) (834) 122 7,258 104 - (884) (6,162) 265 8,498 59,638 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders’ Equity For the years ended December 31, 2022 and 2021 (In thousands) Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total shareholders’ equity $ Balance as of Janaury 1, 2021 Stock issued Stock issuance expenses Purchase of treasury stock (256,220 shares) Net unrealized loss on securities available for sale, net of tax 38,035 93 Stock-based compensation Net income 122 Balance as of December 31, 2021 38,250 $ 15,393 $ 1,106 $ (848) $ (2,508) (834) 7,258 22,651 272 (3,356) 57,817 Stock issued Stock issuance expenses Purchase of treasury stock (78,881 shares) Net unrealized loss on securities available for sale, net of tax Stock-based compensation Net income Balance as of December 31, 2022 104 - 265 (884) (6,162) $ 38,619 $ 8,498 31,149 $ (5,890) $ (4,240) $ See accompanying notes to consolidated financial statements. 6 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows For the years ended December 31, 2022 and 2021 (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: 2022 2021 $ 8,498 $ 7,258 Depreciation and amortization Net amortization of premium on investment securities Net accretion of deferred fees and costs on loans Amortization of issuance costs on long-term debt Stock-based compensation expense Gain on sale of investment securities Gain on sales of mortgage loans held for sale Gain on sales of guaranteed portion of SBA loans Provision for loan losses Cash disbursed for mortgage banking activities Cash received for mortgage banking activities Net (gains) losses on sales of OREO Net loss on disposals of premises and equipment Increase in cash value of bank-owned life insurance, net Decrease (increase) in deferred income tax benefit Changes in assets and liabilities: (Increase) decrease in accrued interest receivable Increase in other assets Increase (decrease) in accrued interest payable Increase in other liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities: Proceeds from maturities and calls of AFS investment securities Proceeds from sales of AFS investment securities Proceeds from principal repayment of AFS investment securities Proceeds from maturities of securities held to maturity Purchases of securities available for sale Purchases of securities held to maturity Redemption of restricted bank stock Proceeds from sale of real estate owned Increase in loans receivable, net Capital expenditures Proceeds from bank owned life insurance policies Purchase of life insurance policies Net cash used in investing activities 323 184 (1,278) 119 265 - (2,126) (852) 1,150 (89,549) 94,940 (37) 68 (1,440) 66 (1,115) (1,262) 102 1,723 1,281 9,779 - - 10,469 16,498 (16,856) (36,136) (1,420) 76 (99,360) (1,164) 3,052 - (124,841) 351 571 (2,936) 36 122 (110) (4,878) (2,276) 1,715 (184,595) 201,375 55 63 (802) (25) 147 (911) (26) 306 8,182 15,440 3,000 1,110 18,585 54,716 (35,810) (18,037) 265 132 (74,144) (717) 1,381 (2,000) (51,519) 7 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows - Continued For the years ended December 31, 2022 and 2021 Cash flows from financing activities: Net increase in deposits Net increase (decrease) in short-term borrowings Acquisition of treasury stock Proceeds from exercise of stock options Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year 2022 2021 60,576 34,788 (884) 104 94,584 (20,478) 40,877 44,656 (2,325) (2,508) 93 39,916 3,837 37,040 Cash and cash equivalents at end of year $ 20,399 $ 40,877 Supplemental disclosures: Cash paid during the year for: Interest Income taxes paid Noncash items: Net change in unrealized gain on securities available for sale, net of tax benefit of $2,355 for 2022 and $361 for 2021 Transfer to real estate owned Lease liabilities for obtaining right of use assets See accompanying notes to the consolidated financial statements. $ $ 3,726 2,782 (6,162) 39 1,745 $ $ 3,063 3,957 (834) 187 344 8 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Note 1. Nature of Operations 1st Colonial Bancorp, Inc. (the “Company”, “We” or “Our”) is a Pennsylvania corporation headquartered in Mount Laurel, New Jersey, and the parent company of 1st Colonial Community Bank (the “Bank”). The Bank opened for business on June 30, 2000 and provides a wide range of business and consumer financial services through its two New Jersey branch offices located in Collingswood and Westville and its location in Limerick, Pennsylvania. The Company was organized as the holding company for the Bank, in connection with the reorganization approved by the Bank’s shareholders at the annual meeting on June 12, 2002. As a bank holding company registered under the Bank Holding Company Act of 1956, the Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”). The Bank was a national bank until November 1, 2012 when it was granted a state charter by the New Jersey Department of Banking and Insurance. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s operations and those of the Bank are subject to supervision and regulation by FRB, the FDIC, and the New Jersey Department of Banking and Insurance. The principal activity of the Bank is to provide its local communities with general commercial and retail banking services. The Bank is managed as one business segment. Subsequent Events The Company has evaluated subsequent events for recognition and disclosure through March 30, 2023, which is the date the financial statements were available to be issued. No subsequent events occurred requiring accrual or disclosure. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of the parent company, 1st Colonial Bancorp, Inc. and its wholly owned subsidiary, 1st Colonial Community Bank. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (“GAAP”) and, where applicable, to accounting and reporting guidelines prescribed by bank regulatory authorities. Prior period amounts have been reclassified, where necessary, to conform to current year classification. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Significant Concentration of Credit Risk Credit risk is one of our most significant risks. It is critical for consistent profitability that we effectively manage credit risk. Most of the Company’s activities are with customers located within the Mid-Atlantic region of the country. “Note 4 – Investment Securities” to the Consolidated Financial Statements discusses the types of securities in which the Company invests. “Note 5 – Loans Receivable” to the Consolidated Financial Statements discusses the types of lending in which we engage. We do not have any portion of our business dependent on a single or limited number of customers, the loss of which would have a material adverse effect on our business. We have 91% of our investment portfolio in securities issued by government sponsored entities. No substantial portion of loans is concentrated within a single industry or group of related industries, except a significant majority of loans are secured by real estate. There are numerous risks associated with commercial and consumer lending that could impact the borrower’s ability to repay on a timely basis. They include but are not limited to: the owner’s business expertise, changes in local, national, and in some cases international economies, competition, government regulation, and the general financial stability of the borrowing entity. Our commercial real estate, 9 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements construction and land development, and commercial and industrial loans comprised 39%, 11% and 5%, respectively, of the loan portfolio. We attempt to mitigate these risks through conservative underwriting policies and procedures which include an analysis of the borrower’s business and industry history, its financial position, as well as that of the business owner. We will also require the borrower to provide current financial information on the operation of the business periodically over the life of the loan. In addition, most commercial loans are secured by assets of the business or those of the business owner, which can be liquidated if the borrower defaults, along with the personal surety of the business owner. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements. Investments Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity (“HTM”) and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Securities not classified as held to maturity are classified as available-for-sale (“AFS”) and are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), net of tax. Premiums are amortized and discounts are accreted to interest income using a level yield method over the estimated remaining term of the underlying security. Gains and losses are determined using the specific identification method and are accounted for on a trade date basis. We evaluate declines in the fair value of securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) our intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts’ earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments. Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. Once a decline in value for a debt security is determined to be other-than-temporary, the OTTI is separated into (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total OTTI related to all other factors. The amount of the OTTI related to the credit loss is recognized in earnings. The amount of the OTTI related to all other factors is recognized in other comprehensive income. In determining our intent not to sell and whether it is more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, management considers the following factors: current liquidity and availability of other non-pledged assets that permits the investment to be held for an extended period of time but not necessarily until maturity, capital planning, and any specific asset liability committee goals or guidelines related to the disposition of specific investments. Restricted Bank Stock The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. The Bank is required to acquire and hold shares of capital stock in the FHLB based upon a percentage of the Bank’s FHLB borrowings, unused borrowing capacity, and the amount of residential first mortgage loans sold to the FHLB. The FHLB stock is carried at cost and 10 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements is included in bank stock in the consolidated statements of financial condition. The Bank evaluates FHLB stock for impairment based on the ultimate recoverability of par value rather than by recognizing temporary declines in value. The Bank is required to maintain an investment in Atlantic Community Bankers Bank (“ACBB”) stock. The ACBB stock is carried at cost because it does not have a readily determinable fair value. The Bank had $40 thousand in ACBB stock as of December 31, 2022 and 2021, respectively. Mortgage Loans Held for Sale We originate and sell residential mortgage loans with servicing released to the secondary market. This activity enables us to fulfill the credit needs of the community while reducing its overall exposure to interest rate and credit risk. These loans are reported at fair market value. Loans Receivable Loans receivable are classified as loans held for investment (“LHFI”) when management has the intent and ability to hold the loan or lease for the foreseeable future or until maturity or payoff. LHFI are stated at their outstanding unpaid principal balances, net of an allowance for loan and leases losses and any deferred fees or costs. Interest income is accrued on the principal amount outstanding. Loan origination fees and related direct costs are deferred and amortized to interest income over the term of the respective loan as a yield adjustment. LHFI are segmented into commercial real estate loans, construction and development loans, commercial loans, residential loans, and consumer loans. The commercial real estate loan segment consists of owner-occupied and non- owner occupied commercial real estate loans and multi-family real estate loans. The construction and development loan segment consists of residential and commercial acquisition and development loans. Commercial loans, which are also generally known as commercial and industrial loans, include permanent and short-term working capital and machinery or equipment financing. The residential loan segment consists of primary or secondary home mortgage loans, home equity lines of credit, and home equity loans. Commercial Real Estate Loans: The commercial real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, mixed-use and other properties used for commercial purposes primarily located in our market area. Although terms for commercial real estate and multi-family loans vary, the underwriting standards generally allow for terms up to 10 years with the interest rate being reset in the sixth year and with monthly amortization not greater than 25 years and loan-to-value ratios of not more than 80%. Interest rates are either fixed or adjustable and are predominantly based upon the prime rate or the five-year U.S. Treasury rate plus a margin. Prepayment fees are charged on most loans in the event of early repayment. Generally, the personal guarantees of the principals are obtained as additional collateral for commercial real estate and multi- family real estate loans. Construction and Development Loans: We originate construction loans to builders and developers predominantly in our market area. Construction and development loans are riskier than other loan types because they are more speculative in nature. Deteriorating economic or environmental conditions can negatively affect a project. Construction loans are also more difficult to evaluate and monitor. In order to mitigate some of the risks inherent in construction lending, limits are placed on the number of units that can be built on a speculative basis based upon the reputation and financial position of the builder, his/her present obligations, the location of the property and prior sales in the development and the surrounding area. Additionally, the construction budget is reviewed prior to loan origination and the properties under construction are inspected. During the construction phase of a real estate project, the loan requires interest payments only. Commercial: Our commercial business loans generally have been made to small to mid-sized businesses predominantly located in our market area. The commercial business loans are either a revolving line of credit or for a fixed term. Interest rates are adjustable, indexed to a published prime rate of interest, or fixed. Generally, equipment, machinery, real property or other corporate assets secure such loans. Personal guarantees from the business principals are generally obtained as additional collateral. 11 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Residential Loans: We originate residential mortgage loans that we retain in our loan portfolio to diversify credit risk. We have also acquired residential mortgages through pool purchases. The mortgages we originate or acquire are secured primarily by properties located in our primary market and surrounding areas. We originate home equity loans and home equity lines of credit in our market area. The collateral must be the borrower’s primary or secondary residence. Home equity lines of credit are variable rate and are indexed to the prime rate. Our home equity loans are either first or second liens and have a fixed rate. We have originated some home equity lines of credit or home equity loans for investment homes. Consumer Loans: We originate cash-secured and unsecured loans and lines of credit to individuals. Unsecured consumer loans generally have a higher interest rate than residential loans because they have additional credit risk associated with them. Loans are reported as non-accrual if they are past due as to principal or interest payments for a period of 90 days or more. Exceptions may be made if a loan is deemed by management to be well collateralized and in the process of collection. Loans that are on a current payment status may also be classified as non-accrual if there is serious doubt as to the borrower’s ability to continue interest or principal payments. When a loan is placed on non-accrual all unpaid interest is reversed from interest income. Interest payments received on impaired nonaccrual loans are normally applied against principal. Excess proceeds received over the principal amounts due on impaired non-accrual loans are recognized as income on a cash basis. We recognize income under the accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, we do not recognize income. Generally, loans are restored to accrual status when the loan is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Impaired loans are measured based on the present value of expected future discounted cash flows, the market price of the loan, or the fair value of the underlying collateral if the loan is collateral dependent. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above. A loan modification is deemed a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) a concession is made by us that would not otherwise be considered for a borrower with similar credit risk characteristics. All loans classified as TDRs are considered to be impaired. TDRs are returned to an accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual restructured principal and interest is no longer in doubt. Our policy for TDRs is to recognize interest income on currently performing restructured loans under the accrual method. Allowance for Loan Losses Our loan portfolio is subject to varying degrees of credit risk. The allowance for loan losses (the “allowance”) represents management’s estimate of losses inherent in the loan portfolio as of the statement of financial condition date and is recorded as a reduction to loans. The allowance is increased by the provision for loan and losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment or collateral recovery of all, or part, of the principal balance is highly unlikely. The allowance represents an estimation made pursuant to FASB ASC Topic 450, “Contingencies” (“ASC Topic 450”) or FASB ASC Topic 310, “Receivables” (“ASC Topic 310”). The adequacy of the allowance is determined through evaluation of the loan portfolio, and involves consideration of a number of factors, as outlined below, to establish a prudent level. We consider that the determination of the allowance involves a higher degree of judgment and complexity than our other significant accounting policies. Our systematic methodology for assessing the appropriateness of the allowance includes: (1) general reserves reflecting historical loss rates by loan type, (2) specific reserves for risk-rated credits based on probable losses on an individual or portfolio basis and (3) qualitative reserves based upon current economic conditions and other risk factors. We also have a reserve for unfunded lending commitments, which represents management’s estimate of losses inherent in those commitments. 12 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The reserve for unfunded loan commitments is adjusted by a provision for credit losses on off-balance sheet credit exposures and is recorded in other liabilities on the consolidated statement of financial condition. The loan portfolio is stratified into loan classifications that have similar risk characteristics. The general allowance is based upon historical loss rates using a six-year rolling average of the historical loss experienced within each loan segment. The qualitative factors used to adjust the historical loss experience address various risk characteristics of the our loan portfolio include evaluating: (1) trends in delinquencies and other non-performing loans, (2) changes in the risk profile related to large loans in the portfolio, (3) changes in the growth trends of categories of loans comprising the loan portfolio, (4) concentrations of loans to specific industry segments, (5) changes in economic conditions on both a local and national level, (6) quality of loan review and board oversight, (7) changes in lending policies and procedures, and (8) changes in lending staff. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a report accompanying the allowance calculation. The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial and construction and development loans or when credit deficiencies arise, such as delinquent loan payments, for all loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance. Loans not classified as special mention, substandard, doubtful or loss are rated pass. The specific reserves are determined utilizing standards required under ASC Topic 310. We identify a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Non-accrual loans and loans restructured under a TDR are evaluated for impairment on an individual basis considering all known relevant factors that may affect loan collectability such as the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the sufficiency of current collateral values (current appraisals or rent rolls for income producing properties), and risks inherent in different kinds of lending (such as source of repayment, quality of borrower and concentration of credit quality). Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The estimated fair values of substantially all of our impaired loans are measured based on the estimated fair value of the loan’s collateral. We obtain third-party appraisals or valuations to establish the fair value of real estate collateral. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value less estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. A specific reserve is established for an impaired loan for the amount that the carrying value exceeds its estimated fair value. Once a loan 13 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements is determined to be impaired it will be deducted from the portfolio balance and the net remaining balance of the portfolio will be used in the general and qualitative analysis. Premises and Equipment Premises and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the expected useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the useful lives or the remaining lease term. Software costs, furniture, and equipment have depreciable lives of 3 to 10 years. Building and improvements have estimated useful lives of 5 to 35 years. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are capitalized. Leases Our leases are operating leases and are predominantly related to real estate. As a lessee we record, for all leases with a lease term of more than 12 months, an asset representing our right to use the underlying asset and a liability to make lease payments. The right-of-use (“ROU”) asset is included in other assets and the lease liability is included in other liabilities on the balance sheet. The amortization of operating lease ROU assets and the accretion of operating lease liabilities are reported together as fixed lease expense and are included in occupancy and equipment expense within other expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease. The Company has elected to exclude leases with original terms of less than one year from the operating lease ROU assets and lease liabilities. Other Real Estate Owned Other real estate owned (“OREO”) is comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real estate owned is recorded at the lower of the carrying value of the loan or the fair value of the property, net of estimated selling costs. Costs relating to the development or improvement of properties are capitalized, while expenses related to the operation and maintenance of properties are expensed as incurred. Gains or losses upon dispositions are reflected in earnings as realized. The Bank had no OREO as of December 31, 2022 and 2021. Bank-Owned Life Insurance We have bank-owned life insurance (“BOLI”) policies on certain officers and key employees. These policies are reflected on the consolidated statements of financial condition at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in non-interest income. During 2022, we received $3.1 million in insurance proceeds related to three former employees covered by BOLI policies and recorded $1.0 million in income from these proceeds. During 2021, we received $1.4 million in insurance proceeds related to one former employee and recorded $385 thousand in income from these proceeds. Income from the insurance proceeds is included in BOLI income on our Consolidated Statements of Operations. Earnings Per Share Basic earnings per share is calculated as net income divided by the weighted average number of shares outstanding, net of treasury stock, during the period. Dilutive earnings per share include dilutive common stock equivalents as computed under the treasury stock method using average common stock prices. 14 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Mortgage Banking Derivatives Commitments to fund mortgage loans (interest rate lock commitments) to be sold in the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as freestanding derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the change in interest rates resulting from its commitment to fund the loans, we enter into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into. We utilize a third-party model to determine the fair value of rate lock commitments or forward sale contracts. This model uses investor bids and the probability that the rate lock commitments will close. Net derivative assets and liabilities are recorded within other assets or other liabilities, respectively, on the consolidated balance sheets, with changes in fair value during the period recorded within net change in the fair value of derivative instruments on the consolidated statements of income. Income Taxes The Company and the Bank file a consolidated federal income tax return and a consolidated New Jersey income tax return. The Company and the Bank file separate Pennsylvania tax returns. Income taxes are allocated to the Company and the Bank based on the contribution of their income or use of their loss in the consolidated return. As of December 31, 2022, tax years 2019 through 2021 are subject to federal examination by the IRS and years 2018 through 2021 are subject to state examination by various state taxing authorities. Tax regulations are subject to interpretation of the related tax laws and regulations and require significant judgment to apply. 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 carry forwards. 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. We account for income taxes in accordance with FASB ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes”, (“ASC 740”) which includes guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. We had no unrecognized tax benefits or accrued interest and penalties as of December 31, 2022 and 2021. We classify interest and penalties as an element of tax expense. Share-Based Compensation The Company accounts for all share-based payments to be recognized as compensation expense in the consolidated financial statements based on their fair values at the grant date. That expense will be recognized on a straight-line basis over the period during which services are provided in exchange for the award, known as the requisite service period (usually, the vesting period). Recent Accounting Pronouncements In June 2016, FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect financial assets such as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in ASU 2016-13 require the measurement of expected credit losses to based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that 15 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The amendments in ASU 2016-13 will become effective for the Company for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. An entity will apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, modified-retrospective approach). As part of our implementation efforts, we have engaged a third-party vendor, reconciled historical loan, charge-off and recovery data and determined segmentation of the loan portfolio for application of the current expected credit losses calculation. We have also designed calculation methodologies under the new guidance and have engaged an external vendor to perform model validation. We are currently designing appropriate controls and management review prior to the adoption of the standard. We believe that expected credit losses under ASU 2016-13 will generally result in earlier loss recognition on our loan portfolio. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, we will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs. The ASU also requires companies to disclose current period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20. ASU 2022-02 is effective March 31, 2023, for entities that have adopted ASU 2016-13, otherwise the effective date is the same as ASU 2016-13. We plan to adopt ASU 2016-13 January 1, 2023 and will simultaneously implement ASU 2022-02. Note 3. Cash and Due from Banks The Bank was required to maintain certain daily average reserve balances in accordance with FRB requirements. On March 15, 2020, the FRB Board reduced reserve requirements to 0% effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. The Bank was required to maintain $50 thousand in cash reserves at its correspondent banks as of December 31, 2022 and 2021. 16 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Note 4. Investment Securities A comparison of amortized cost and fair value of investment securities held to maturity and securities available for sale as of December 31, 2022 and 2021 is as follows: HTM unrecognized/ AFS unrealized Amortized Cost Gross gains Gross losses Fair value $ $ $ $ 37,614 500 38,114 14,956 30,490 42,272 11,442 99,160 $ $ $ $ - - - - - 1 - 1 $ $ $ $ - - - (224) (2,889) (4,270) (761) (8,144) $ $ $ $ 37,614 500 38,114 14,732 27,601 38,003 10,681 91,017 HTM unrecognized/ AFS unrealized Amortized Cost Gross gains Gross losses Fair value As of December 31, 2022 (In thousands) Investments HTM : M unicipal securities Corporate bonds Total Investments AFS: U.S. Treasuries U.S. government securities Agency mortgage-backed securities Corporate bonds Total As of December 31, 2021 (In thousands) Investments HTM : M unicipal securities Corporate bonds Total Investments AFS: $ $ 17,976 500 18,476 $ $ $ U.S. government securities Agency mortgage-backed securities Corporate bonds $ 30,480 53,009 9,468 Total $ 92,957 $ - - - $ $ - - - $ $ 17,976 500 18,476 4 $ (325) $ 30,159 650 278 932 (233) - (558) 53,426 9,746 $ 93,331 $ 17 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The scheduled maturities of investment securities held to maturity and securities available for sale as of December 31, 2022 are as follows: (In thousands) HTM Investments AFS Investmemts Amortized Cost Fair value Amortized Cost Fair value Due in one year or less Due after one year up to five years Due after five years up to ten years Due after ten years Subtotal Agency mortgage-backed securities $ 36,601 1,013 500 - 38,114 - $ 36,601 1,013 500 - 38,114 - $ 14,949 30,497 10,470 972 56,888 42,272 $ 14,680 27,654 9,861 819 53,014 38,003 Total $ 38,114 $ 38,114 $ 99,160 $ 91,017 Proceeds from sales and maturities of securities available for sale totaled $0 and $1.1 million during 2022 and 2021, respectively. Gross gains realized from the sale of securities were $0 and $110 thousand in 2022 and 2021, respectively. There were no realized losses in 2022 and 2021. As of December 31, 2022 and 2021, investment securities with a market value of $74.9 million and $65.0 million, respectively, were pledged as collateral for uninsured municipal deposits, uninsured deposits underlying retail repurchase agreements, and the FHLB for potential borrowings. Gross unrecognized and unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrecognized and unrealized loss positions as of December 31, 2022 and 2021 are as follows: Less than 12 months Gross unrecognized/ unrealized losses Fair value Number of positions 12 months or longer Gross unrecognized/ unrealized losses Number of positions Total Gross unrecognized/ unrealized losses Number of positions As of December 31, 2022 (In thousands) Investments HTM : M unicipal securities Corporate bonds Total Investments AFS: U.S. Treasuries U.S. government securities Agency mortgage-backed securities Corporate bonds $ $ $ - - - 14,732 4,807 12,140 8,681 $ $ $ - - - (224) (183) (578) (761) Total $ 40,360 $ (1,746) Fair value $ $ $ - - - - 22,794 $ $ $ - - - - (2,706) 25,553 (3,692) - - - - - 3 1 46 10 60 Fair value $ $ $ - - - 14,732 27,601 37,693 8,681 - - - - 6 9 $ $ $ - - - (224) (2,889) (4,270) (761) - - - 3 7 55 10 75 $ 48,347 $ (6,398) 15 $ 88,707 $ (8,144) 18 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements As of December 31, 2021 Less than 12 months Gross unrecognized/ unrealized Number of 12 months or longer Gross unrecognized/ unrealized Number of Total Gross unrecognized/ unrealized Number of (In thousands) Fair value losses positions Fair value losses positions Fair value losses positions Investments HTM : M unicipal securities Total Investments AFS: $ $ - - $ $ - - - - $ $ - - $ $ - - U.S. government securities $ 21,270 $ (230) 5 $ 3,905 $ (95) Agency mortgage-backed securities Corporate bonds Total $ 34,138 - 55,408 (233) - (463) $ 9 - 14 - - 3,905 $ $ - - (95) - - 1 - - 1 $ $ - - $ $ - - $ 25,175 $ (325) 34,138 - 59,313 $ (233) - (558) $ - - 6 9 - 15 For debt securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a debt security in an unrealized loss position before recovery of it’s amortized cost basis. For all of the above investment securities, the unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary by the Company. The temporary impairment of fixed rate investments is likely to continue in a rising interest rate environment. Because we have the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other than temporarily impaired. All temporarily impaired investments are bank-qualified investments. There has been no significant change in the credit quality of issuers since the securities were purchased. Note 5. Loans Receivable Loans receivable consist of the following as of December 31, 2022 and 2021: (In thousands) December 31, December 31, 2022 2021 Commercial real estate Construction and land development Commercial $ Residential real estate Consumer Less allowance for loan losses $ 233,319 64,970 32,474 271,913 933 603,609 (8,331) 201,838 51,809 43,497 203,485 1,254 501,883 (6,906) $ 595,278 $ 494,977 The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. As of December 31, 2022, the loans-to-one-borrower limitation was $11.1 million compared to $9.7 million as of December 31, 2021. As of December 31, 2022 and 2021, there are no loans outstanding or committed to any one borrower that individually or in the aggregate exceed those limits. The Bank lends primarily to customers in its local market area. Most loans are mortgage loans. Mortgage loans include loans secured by commercial and residential real estate and construction loans. Accordingly, lending activities could be affected by changes in the general economy, the regional economy, or real estate values. As of December 31, 2022 19 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements and 2021, mortgage loans totaled $570.2 million and $457.1 million, respectively. Mortgage loans represent 94.5% and 91.1% of total gross loans as of December 31, 2022 and 2021, respectively. During 2021 and 2020 we participated in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) and originated a total of $95.4 million in PPP loans. The majority of these loans were to our existing customers or referrals. As of December 31, 2022, 100% of our PPP loans have been forgiven by the SBA and the outstanding balance was $0. During 2022, we recognized in interest income $548 thousand of net deferred SBA PPP fees compared to $2.4 million for 2021. As of December 31, 2021, PPP loans outstanding were $14.0 million. As part of the process of determining the allowance, management segments the loan portfolio by product type. For the commercial real estate, construction, and commercial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as third-party loan reviewers. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows: Pass – Loans considered to be satisfactory with no indications of deterioration. Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the bank’s credit position at some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified as doubtful have all weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable, and improbable. Non-accrual (substandard non-accrual, doubtful): includes credits that demonstrate serious problems to the point that it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. In addition, the remaining segments of the loan portfolio, which include residential real estate and consumer loans are allocated portions of the allowance based on their performance status. The following tables present risk ratings for each loan portfolio classification as of December 31, 2022 and December 31, 2021. December 31, 2022 (In thousands) Pass Commercial real estate Construction and land development Commercial $ 231,243 61,227 31,633 Special M ention $ 592 2,176 109 Total $ 324,103 $ 2,877 Substandard Doubtful Nonaccrual Total $ $ - - - - $ $ - - - - $ 1,484 1,567 732 $ 233,319 64,970 32,474 $ 3,783 $ 330,763 December 31, 2021 (In thousands) Pass Commercial real estate Construction and land development Commercial $ 199,102 47,787 42,623 Special M ention $ 1,227 2,130 234 Total $ 289,512 $ 3,591 Substandard Doubtful Nonaccrual Total 833 - - 833 $ $ - - - - $ 676 1,892 640 $ 201,838 51,809 43,497 $ 3,208 $ 297,144 $ $ 20 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The following tables present the recorded investment in residential and consumer loans based on payment activity: December 31, 2022 (In thousands) Residential real estate Consumer December 31, 2021 (In thousands) Residential real estate Consumer Performing 271,131 $ 933 272,064 $ Nonaccrual 782 $ - 782 $ Total 271,913 933 272,846 $ $ Total Performing 203,167 $ 1,254 204,421 $ Nonaccrual 318 $ - 318 $ Total 203,485 1,254 204,739 $ $ Total The following tables present an aging analysis of past due payments for each loan portfolio classification as of December 31, 2022 and December 31, 2021. December 31, 2022 (In thousands) Commercial real estate Construction and land development Commercial Residential real estate Consumer Total loans, net of unearned income 30-59 Days Past Due 290 $ - 150 196 - 636 $ 60-89 Days Past Due 2,394 $ - 261 - - 2,655 $ December 31, 2021 (In thousands) Commercial real estate Construction and land development Commercial Residential real estate Consumer Total loans, net of unearned income 30-59 Days Past Due - $ - 12 1,164 - 1,176 $ 60-89 Days Past Due - $ - - 177 - 177 $ 90+ Days Past Due - $ - - - - - $ 90+ Days Past Due - $ - - - - - $ Non-accrual $ 1,484 1,567 732 782 - 4,565 676 1,892 640 318 - 3,526 $ $ Non-accrual $ Current 229,151 63,403 31,331 270,935 933 595,753 $ $ Total 233,319 64,970 32,474 271,913 933 603,609 $ $ Current 201,162 49,917 42,845 201,826 1,254 497,004 $ $ Total 201,838 51,809 43,497 203,485 1,254 501,883 $ $ The Bank had 15 non-accrual loans as of December 31, 2022 in the amount of $4.6 million compared to 11 non- accrual loans in the amount of $3.5 million as of December 31, 2021. During 2022 we transferred $2.5 million to non- accrual, recorded $1.2 million in principal payments, transferred $39 thousand to OREO and charged-off $166 thousand. All of the non-accrual loans were impaired. If interest had accrued on these loans, such income would have been approximately $307 thousand and $281 thousand for the years ended December 31, 2022 and 2021, respectively. The specific reserves associated with the non-accrual loans were $1.2 million and $640 thousand as of December 31, 2022 and 2021, respectively. 21 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Troubled Debt Restructuring The following table details our TDRs that are on an accrual status and non-accrual status as of December 31, 2022 and December 31, 2021. (In thousands) Commercial real estate Commercial Residential real estate (In thousands) Commercial real estate Commercial Residential real estate As of December 31, 2022 Number of loans Accrual Status 2 1 1 4 $ $ 2,394 - 277 2,671 Non- Accrual Status $ $ 606 632 - 1,238 Total TDRs 3,000 $ 632 277 3,909 $ As of December 31, 2021 Number of loans Accrual Status 2 1 1 4 $ $ - - 283 283 Non- Accrual Status $ $ 403 640 - 1,043 Total TDRs 403 $ 640 283 1,326 $ Total Total The following tables present the new TDRs that occurred during the years ended December 31, 2022 and 2021. Modifications by type for the year ended December 31, 2022 (In thousands) Commercial real estate Total Number of loans 1 1 $ $ (In thousands) Residential real estate Total Number of loans Rate 1 1 $ $ Rate Term Payment of types Total Investment Investment Combination Recorded Recorded Pre- Post- Modification Modification Outstanding Outstanding - - - - $ $ $ $ - - $ $ 2,659 2,659 $ $ - - $ $ 2,659 2,659 $ $ 2,659 2,659 $ $ 2,659 2,659 Modifications by type for the year ended December 31, 2021 Pre- Post- Modification Modification Outstanding Outstanding Combination Recorded Recorded Term Payment of types Total Investment Investment - - $ $ 283 283 $ $ - - $ $ 283 283 $ $ 287 287 $ $ 287 287 22 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Allowance for Loan Losses The following table details the roll forward of the allowance and the loan portfolio disaggregated by loan portfolio classification for the twelve-months ended December 31, 2022 and 2021: December 31, 2022 (In thousands) Beginning balance Charge-offs Recoveries Provision (credit) Ending balance Ending balance: related to loans individually evaluated for impairment Ending balance: related to loans collectively evaluated for impairment Loan Balances Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Construction Commercial and land Commercial real estate development and industrial Residential real estate Consumer Total $ $ $ $ $ $ $ 2,808 $ (88) 177 506 3,403 452 2,951 233,319 1,484 231,835 $ $ $ $ $ $ 825 (78) 1 209 957 - 957 64,970 1,567 63,403 $ $ $ $ $ $ $ 1,387 $ 1,870 $ (18) 154 (154) 1,369 732 637 32,474 732 31,742 (20) 142 602 2,594 21 2,573 271,913 1,059 270,854 $ $ $ $ $ $ $ $ $ $ $ $ 16 (8) 13 (13) 8 - 8 933 - 933 $ $ $ $ $ $ $ 6,906 (212) 487 1,150 8,331 1,205 7,126 603,609 4,842 598,767 December 31, 2021 (In thousands) Beginning balance Charge-offs Recoveries Provision (credit) Ending balance Ending balance: related to loans individually evaluated for impairment Ending balance: related to loans collectively evaluated for impairment Loan Balances Ending balance Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Construction Commercial and land Commercial real estate development and industrial Residential real estate Consumer Total $ $ $ $ $ $ $ 2,999 $ (181) 184 (194) 2,808 - 2,808 201,838 675 201,163 $ $ $ $ $ $ 381 (491) - 935 825 - 825 51,809 1,892 49,917 $ $ $ $ $ $ $ 954 (85) 124 394 1,387 640 747 43,497 640 42,857 $ 1,268 $ - 15 587 1,870 - 1,870 203,485 602 202,883 $ $ $ $ $ $ $ $ $ $ $ $ 22 (6) 7 (7) 16 - 16 1,254 - 1,254 $ $ $ $ $ $ $ 5,624 (763) 330 1,715 6,906 640 6,266 501,883 3,809 498,074 The following tables details the impaired loans by loan classification as of December 31, 2022 and December 31, 2021. 23 (In thousands) With no related allowance recorded: Commercial real estate Construction Commercial Residential real estate Total: With an allowance recorded: Commercial real estate Construction and land development Commercial Residential real estate Total: (In thousands) With no related allowance recorded: Commercial real estate Construction Commercial Residential real estate Total: With an allowance recorded: Commercial real estate Construction and land development Commercial Residential real estate Total: $ $ $ $ $ $ $ 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements As of and for the year ended December 31, 2022 Unpaid principal balance Recorded investment Related allowance Average recorded Interest income investment recognized Interest income recognized cash basis $ $ $ 1,004 2,097 - 1,062 4,163 828 - 1,550 69 $ $ $ 656 1,567 - 990 3,213 828 - 732 69 $ $ $ - - - - - 452 - 732 21 2,447 $ 1,629 $ 1,205 $ 792 1,687 106 769 3,354 64 6 642 5 717 $ $ $ $ 53 $ - - 13 66 - - - - - $ $ $ 129 11 14 56 210 - - - - - As of and for the year ended December 31, 2021 Recorded Related Average recorded Interest income Interest income recognized investment allowance investment recognized cash basis - - - 21 21 - - - - - $ $ $ $ 15 - 2 38 55 - - - - - Unpaid principal balance 1,075 2,383 - 716 $ 675 $ 1,892 - 602 4,174 $ 3,169 $ $ - - 1,458 - $ - - 640 - - - - - - - - 640 - $ 989 $ $ $ 2,040 647 1,112 4,788 32 18 66 17 $ $ $ 1,458 $ 640 $ 640 $ 133 $ 24 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Note 6. Premises and Equipment, Net Premises and equipment as of December 31, 2022 and 2021 are summarized as follows (dollars in thousands): (In thousands) Land Buildings and leasehold improvements Furniture, fixtures and equipment Premises and equipment, gross Less accumulated depreciation and amortization Premises and equipment, net Estimated Useful Lives 5 - 35 years 3 - 10 years As of December 31, 2022 2021 $ 122 1,104 2,134 3,360 $ 122 1,215 1,990 3,327 (1,515) (2,255) $ 1,845 $ 1,072 Depreciation expense was $323 thousand and $351 thousand for the years ended December 31, 2022 and 2021, respectively, and is recorded in occupancy and equipment expenses. Note 7. Deposits Deposits consist of the following major classifications as of December 31, 2022 and 2021: (Dollars in thousand) Non-interest checking Interest checking Money market deposits Savings deposits Certificates of deposit ($250 and over) Certificates of deposit (less than $250) Brokered deposits Total deposits As of December 31, 2022 2021 $ 85,716 $ 92,924 332,032 256,490 49,952 68,987 25,518 61,397 47,450 42,791 90,971 40,352 86,290 658 $ 671,052 $ 610,476 The Bank has a concentration of deposits from local municipalities. Municipal deposits, which are mostly interest-checking accounts, were $298.7 million or 44.5% of total deposits as of December 31, 2022, and $233.7 million or 38.3% of total deposits as of December 31, 2021. Municipal deposit accounts in excess of $250 thousand are collateralized by investment securities with a market value of $74.9 million as of December 31, 2022 and a $165.0 million FHLB Municipal Letter of Credit. Interest expense on deposits consisted of the following for the years ended December 31, 2022 and 2021: (In thousands) Interest checking Money market deposits Savings deposits Certificates of deposit Total interest expense on deposits 2022 2021 $ $ 781 244 314 1,353 2,692 $ $ 432 89 251 1,476 2,248 25 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The following is a schedule of certificates of deposit, which includes the brokered deposits, by maturities as of December 31, 2022: (In thousands) 2023 2024 2025 2026 2027 As of December 31, 2022 $ 110,990 16,428 3,056 3,314 577 Total certificates of deposits $ 134,365 Note 8. Borrowing Availability Federal Home Loan Bank The Bank is a member of the FHLB of Pittsburgh and has access to overnight and term advances. As of December 31, 2022, we had $165.0 million in short-term municipal letters of credit outstanding and $33.5 million in additional borrowing capacity. The FHLB line of credit is secured with residential and commercial mortgage loans totaling $240.2 million. As of December 31, 2021, we had $120.0 million in municipal letters of credit outstanding and $66.7 million in additional borrowing capacity. The borrowing potential was secured with residential and commercial mortgage loans totaling $231.7 million and securities with an aggregate market value of $3 thousand. As of December 31, 2022, $33.0 million, with an interest rate of 4.61%, was outstanding against the FHLB line of credit compared to $0 as of December 31, 2021. The average balance of FHLB advances was $9.4 million and $27 thousand for 2022 and 2021, respectively, with average rates paid of 3.09% and 0.35% for the respective periods. Federal Reserve Bank As of December 31, 2022, we had $114.1 million in borrowing capacity at the FRB. The FRB line of credit is secured with commercial, construction and residential and commercial mortgage loans totaling $170.7 million. As of December 31, 2021, we had $98.1 million in borrowing capacity at the FRB. The FRB line of credit is secured with commercial, construction and residential and commercial mortgage loans totaling $144.1 million. As of December 31, 2022 and 2021, the Bank had no outstanding advances against the FRB line of credit. The average balance of FRB advances was $125 thousand and $0 for 2022 and 2021, respectively. For 2022 the average rate paid was 4.50%. Subordinated Debt On August 26, 2020, the Company issued $10.750 million of 7.00% fixed-to-floating rate subordinated notes with a maturity date of September 1, 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 7.00%, payable semi-annually in arrears and a floating rate of interest equivalent to the 3-month Secured Overnight Financing Rate (SOFR) plus 6.89% payable quarterly in arrears commencing on September 1, 2025. The subordinated debt issuance costs of approximately $359 thousand are being amortized over five years on a straight- line basis into interest expense. The carrying value of subordinated debt was $10.6 million as of December 31, 2022 and $10.4 million as of December 31, 2021. Other Lines of Credit As of December 31, 2022 and 2021, the Bank had an unsecured line of credit with Atlantic Community Bankers Bank (“ACBB”) in the aggregate amount of $8.0 million. As of December 31, 2022, $1.8 million, with an interest rate of 4.75% was outstanding against the ACBB line of credit compared to $0 as of December 31, 2021. The average balance 26 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements of the ACBB line was $146 thousand and $24 thousand for 2022 and 2021, respectively, with average rates paid of 1.48% and 0.41% for the respective periods.. As of December 31, 2022 and 2021, 1st Colonial Bancorp, Inc. had a secured line of credit with ACBB in the aggregate amount of $2.5 million. The ACBB line is secured with 100% of the voting stock of 1st Colonial Community Bank. As of December 31, 2022 and 2021, there were no outstanding balances against this line. Note 9. Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculation for the years ended December 31, 2022 and 2021: (In thousands, except for per share data) Income Net Average shares Per share Amount 2022: Basic earnings per share Effect of dilutive stock equivalents Diluted earnings per share 2021: Basic earnings per share Effect of dilutive stock equivalents Diluted earnings per share $ $ $ $ 8,498 4,681,122 - 110,452 8,498 4,791,574 7,258 4,861,992 - 91,199 7,258 4,953,191 $ $ $ $ 1.82 (0.05) 1.77 1.49 (0.02) 1.47 Basic earnings per share is calculated on the basis of weighted average number of shares outstanding. Diluted earnings per share is calculated on the basis of weighted average number of shares outstanding and common stock equivalents (“CSEs”) that would arise from the exercise of dilutive securities. For 2022, the Company granted a total of 32,500 restricted stock unit awards, which are considered CSEs. Options to purchase 373,132 and 407,592 shares of common stock were outstanding as of December 31, 2022 and 2021, respectively. Options to purchase 49,790 and 174,290 shares were antidilutive for 2022 and 2021, respectively, and excluded from the earnings per share calculations. Note 10. Derivative and Hedging Activity Commitments to fund certain fixed rate mortgage loans (interest rate lock commitments) to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. During 2022 we began the practice of entering into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitments to fund the loans. Interest rate lock commitments and forward sales commitments are recorded within other assets and/or other liabilities on the consolidated balance sheets, with changes in fair values recorded within gains on sale of mortgage loans on the consolidated statements of operations. The following table reflects the amount and fair value of mortgage banking derivatives included in the Consolidated Balance Sheet as of December 31, 2022. 27 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (In thousands) December 31, 2022 Amount Value Included in other assets Interest Rate Lock Commitments Forward commitments Total included in other assets $ $ 2,351 2,250 4,601 $ $ 54 10 64 Note 11. Fair Value of Financial Instruments Under FASB ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”), fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, management uses quoted market prices to determine fair value. If quoted prices are not available, fair value is based upon valuation techniques such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, we use unobservable inputs to determine appropriate valuation adjustments using discounted cash flow methodologies. Management uses its best judgment in estimating the fair value of our financial instruments; however, there are inherent weaknesses in any estimation technique. The estimated fair value amounts have been measured as of their respective period end and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. ASC Topic 820 provides guidance for estimating fair value when the volume and level of activity for an asset or liability has significantly declined and for identifying circumstances when a transaction is not orderly. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are as follows: Level 1: Level 2: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 includes debt securities with quoted prices that are traded less frequently then exchange-traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. We did not have transfers of financial instruments within the fair value hierarchy during the years ended December 31, 2022 and 2021. 28 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Items Measured on a Recurring Basis Fair value for Level 1 securities is determined by obtaining quoted market prices in active markets. U.S. Treasuries are classified as Level 1. Level 2 securities include obligations of U.S. government-sponsored agencies and debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The prices were obtained from third party vendors. This category generally includes our mortgage-backed securities and CMOs issued by U.S. government and government-sponsored agencies, and corporate bonds. Additionally, the fair value of our forward commitments is based on market pricing and is classified as Level 2. Level 3 includes our interest rate lock commitments. The determination of fair value of includes assumptions, that are significant and unobservable, about the probability that the loans behind the rate lock commitments will close. Items Measured on a Nonrecurring Basis Non-accrual loans and TDRs are evaluated for impairment on an individual basis under FASB ASC Topic 310 “Receivables”. The impairment analysis includes current collateral values, known relevant factors that may affect loan collectability, and risks inherent in different kinds of lending. When the collateral value less costs to sell is less than the carrying value of the loan a specific reserve (valuation allowance) is established. OREO is carried at the lower of cost or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the real estate. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. For financial assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used as of December 31, 2022 and December 31, 2021 are as follows: 29 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements As of December 31, 2022 (In thousands) Assets measured at fair value on a recurring basis Investment securities: U.S. Treasuries U.S. government agencies Agency mortgage-backed securities Corporate bonds Total investments AFS M ortgage loans held for sale Interest rate lock commitments Forward commitments Total assets measured at fair value on a recurring basis Assets measured at fair value on a non-recurring basis Impaired loans Total assets measured at fair value on a non-recurring basis As of December 31, 2021 (In thousands) Assets measured at fair value on a recurring basis Investment securities: U.S. government agencies Agency mortgage-backed securities Corporate bonds Total assets measured at fair value on a recurring basis Assets measured at fair value on a non-recurring basis Impaired loans Total assets measured at fair value on a non-recurring basis Fair Value M easurements Using: Quoted Prices in Active Significant M arkets for Other Significant Identical Observable Unobservable Assets Level 1 Inputs Level 2 Inputs Level 3 Total - - - - - 54 - 54 - - - - $ $ $ $ $ 14,732 27,601 38,003 10,681 91,017 6,710 54 10 6,774 4,842 4,842 Total 30,159 53,426 9,746 $ 93,331 3,809 3,809 $ $ 3,809 3,809 $ 14,732 $ - $ 27,601 38,003 10,681 76,285 6,710 - 10 6,720 $ - - - 14,732 - - - - - $ $ $ $ $ $ - - $ $ 4,842 4,842 Fair Value M easurements Using: Quoted Prices in Active Significant M arkets for Other Significant Identical Observable Unobservable Assets Level 1 Inputs Level 2 Inputs Level 3 - - - - - - $ 30,159 53,426 9,746 $ 93,331 $ $ - - $ $ $ $ $ $ $ $ 30 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value as of December 31, 2022 and December 31, 2021: As of December 31, 2022 Valuation Unobservable (Dollars in thousands) Fair Value Techniques Input Range of Inputs Weighted Average Impaired loans $ 4,842 Appraisal Liquidation expenses 0%-12.9% discount 6.82% Qualitative Information about Level 3 Fair Value M easurements of collateral As of December 31, 2021 Valuation Unobservable (Dollars in thousands) Fair Value Techniques Input Range of Inputs Weighted Average Impaired loans $ 3,809 Appraisal Liquidation expenses 0%-13.1% discount 6.81% Qualitative Information about Level 3 Fair Value M easurements of collateral The estimated fair value of the Company’s financial instruments as of December 31, 2022 and 2021 was as follows: 31 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Fair Value Measurements As of December 31, 2022 Quoted Prices (In thousands) Financial Assets: Cash and cash equivalents $ Investments held to maturity Investments available for sale Restricted bank stock, at cost Mortgage loans held for sale Carrying value Estimated fair value $ 20,399 38,114 91,017 2,894 6,710 20,399 38,114 91,017 NA 6,710 Loans receivable, net 595,278 548,529 Interest rate lock commitments Forward commitments Accrued interest receivable Financial liabilities: Demand deposits Money market deposits Savings deposits Certificates of deposit Subordinated debt, net Other borrowings Accrued interest payable 54 10 2,779 417,748 49,952 68,987 134,365 10,559 34,788 405 54 10 2,779 417,748 49,952 68,987 134,881 9,733 34,792 405 in Active Significant Markets for Other Significant Identical Assets Level 1 Observable Unobservable Inputs Level 2 Inputs Level 3 $ 20,399 $ - $ - - - - - - - - - - - - - 37,614 91,017 - 6,710 - - 10 - 417,748 49,952 68,987 134,881 9,733 34,792 405 - 500 - NA - 548,529 54 - 2,779 - - - - - - - 32 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Fair Value Measurements As of December 31, 2021 Quoted Prices in Active Significant Markets for Other Significant Identical Assets Level 1 Observable Unobservable Inputs Level 2 Inputs Level 3 $ 40,877 $ - $ - - - - - - - - - - - 17,976 93,331 - 9,957 - - 349,414 42,791 90,971 128,555 10,166 303 - 500 - NA - 498,109 1,664 - - - - - (In thousands) Financial Assets: Cash and cash equivalents $ Investments held to maturity Investments available for sale Restricted bank stock, at cost Mortgage loans held for sale Loans receivable, net Accrued interest receivable Financial liabilities: Demand deposits Money market deposits Savings deposits Certificates of deposit Subordinated debt, net Accrued interest payable Note 12. Income Taxes Carrying value Estimated fair value 40,877 18,476 93,331 1,474 9,957 494,977 1,664 349,414 42,791 90,971 127,300 10,440 303 $ 40,877 18,476 93,331 NA 9,957 498,109 1,664 349,414 42,791 90,971 128,555 10,166 303 The components of income tax expense (benefit) are stated below: (In thousands) Income tax expense (benefit) Federal Current Deferred State Current Deferred Total income tax expense $ For the years ended December 31, 2022 2021 $ 1,731 $ 1,777 (103) 1,674 1,044 78 1,122 2,796 57 1,788 1,098 9 1,107 2,895 $ 33 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The following is a reconciliation between expected tax expense at the statutory rate of 21% for 2022 and 2021 and actual tax expense: (In thousands) For the years ended December 31, 2022 2021 Computed tax expense at statutory rate $ 2,393 $ 2,112 Adjustments resulting from: State tax, net of federal benefit Tax-exempt interest income Bank owned life insurance Stock-based compensation Other Income tax expense 875 (97) (303) (3) 30 899 (77) (168) 5 25 $ 2,895 $ 2,796 Significant deferred tax assets and liabilities of the Bank as of December 31, 2022 and 2021 are as follows: (In thousands) Deferred tax assets: As of December 31, 2022 2021 Allowance for loan losses $ 2,304 $ 1,911 Security write-downs OREO write-downs Deferred rent - - 11 Unrealized losses on AFS debt securities 2,234 Share-based compensation cost PPP loan origination fees Unfunded loan commitments Non-accrual interest Other Deferred tax assets Deferred tax liabilities: Depreciation Unrealized gains on AFS debt securities Prepaid expenses Deferred loan costs Total deferred tax liabilities Net deferred tax asset, included in other assets - - 18 - 113 173 169 13 15 134 - 157 9 11 4,860 2,412 (459) - (31) (545) (1,035) (164) (102) (16) (575) (857) $ 3,825 $ 1,555 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. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating loss carryforwards are available and the temporary differences representing net future deductibles reverse. Based upon these and other factors 34 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements management has determined that it is more likely than not that the Company will realize the benefits of the deferred tax assets that exist as of December 31, 2022. As of December 31, 2022 and 2021, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. As of December 31, 2022, the years 2019 – 2021 are open for federal examination and years 2018-2021 are open for state examinations. Note 13. Leases The Company has operating leases for a retail branch, our operation and administration center (main office) and certain equipment. On commencement date of a new lease, the Company recognizes a ROU asset, which represents the right to use an underlying asset for the lease term, and a lease liability, which represents an obligation to make lease payments arising from the lease. The ROU assets are included in other assets and lease liabilities are included in other liabilities. During 2022 we executed a new lease for the main office and relocated to Mount Laurel, New Jersey in November. The new lease is for 92 months. Additionally, we extended the Collingswood location’s lease for another five years. The Company’s leases have remaining lease terms of one month to 7.5 years, some of which include options to extend the leases for up to five years. Because we may need to expand our office space, the extension options were excluded from the calculations of the ROU asset and lease liability. The following table presents the ROU assets and the lease liability for the years ended December 31, 2022 and 2021. (In thousands) ROU asset Lease liabilitity For the years ended December 31, 2022 2021 $ $ 1,971 2,011 $ $ 558 617 The following table presents operating lease costs for the years ended December 31, 2022 and 2021. (In thousands) Operating lease cost For the years ended December 31, 2022 2021 $ $ 323 323 $ $ 342 342 A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows: 35 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (In thousands) As of December 31, 2022 2021 $ 367 2023 2024 2025 2026 2027 Thereafter Total lease payments Less imputed interest $ 308 361 432 354 347 655 2,457 (438) Total $ 2,019 $ 90 92 93 6 - 648 (54) 594 Note 14. Commitments and Contingencies Financial Instruments with Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit to meet the financing needs of its customers. Such commitments have been made in the normal course of business and at current prevailing market terms. The commitments, once funded, are principally to originate commercial loans and other loans secured by real estate. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments issued to potential borrowers of the Bank as of December 31, 2022 and 2021 were as follows: (In thousands) As of December 31, 2022 2021 Fixed rate commitments $ 4,291 $ 4,864 Variable/adjustable rate commitments 133,994 111,698 Total commitments $ 138,285 $ 116,562 Legal Proceedings Within the normal course of business, the Company may be a party to various claims or legal proceedings. Management is not aware of any litigation that would have a material adverse effect on the consolidated financial statements. There are no proceedings pending other than routine litigation incident to the business of the Company. Note 15. Related-Party Transactions Directors and executive officers of the Company, including their immediate families and companies in which they have a direct or indirect material interest, are considered to be related parties. In the ordinary course of business, the Company engages in various related party transactions, including extending credit and deposit accounts. Federal banking regulations require that any extensions of credit to insiders and their related interests not be offered on terms more favorable than would be offered to non-related borrowers of similar creditworthiness. The Company relies on the directors and executive officers for the identification of their associates. The aggregate amount of loans to related parties was $1.0 million and $664 thousand as of December 31, 2022 and 2021, respectively. During 2022 and 2021, new loans and credit line advances to such related parties amounted to $355 thousand and $0, respectively, and repayments amounted to $13 thousand and $6 thousand, respectively. The aggregate amount of deposits from related parties was $51.1 million and $60.9 million as of December 31, 2022 and 2021, respectively. 36 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The Bank engaged in certain property inspection and construction services with an entity that is affiliated with a director of the Bank. Such aggregate services amounted to fees of $20 thousand for the years ended December 31, 2022 and 2021, respectively. In management’s opinion, the terms of the services provided were substantially equivalent to that which would have been obtained from unaffiliated parties. Note 16. Employee Benefits The Bank instituted a qualified defined contribution plan (‘the 401(K) Plan”) for all current employees in August 2005. All eligible employees are 100% vested in any required safe harbor contributions. The Bank made safe harbor contributions in the amount of $289 thousand and $253 thousand during 2022 and 2021, respectively. Note 17. Share-Based Compensation During 2020, the shareholders approved the 1st Colonial Bancorp, Inc. 2020 Equity Incentive Plan (“2020 Equity Plan”). The Board of Directors approved the 2020 Equity Plan for the purpose of enabling the Company to continue to recruit and retain highly qualified personnel, to provide those personnel with an incentive for productivity, and to provide those personnel with an opportunity to share in the growth and value of the Company. Accordingly, the board of directors has reserved 400,000 shares of our common stock for issuance upon the grant or exercise of awards pursuant to the 2020 Equity Plan. The Board of Directors believes that the shares authorized by the 2020 Equity Plan are needed to ensure the continued availability of equity-based compensation and that the 2020 Equity Plan will enhance the effectiveness of the Bank’s equity compensation program by authorizing the award of restricted stock and the use of other stock-based compensation techniques. The exercise price of options granted under this program is required to be equal to at least the fair market value of common stock as of the grant date. The 2020 Equity Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, vesting and restrictions on shares. As of December 31, 2022, 277,786 options and restricted stock units were outstanding under this plan. Compensation expense for equity grants is recognized over the requisite service period. During 2022 and 2021, we recognized $265 thousand and $122 thousand, respectively, in compensation expense for equity grants. As of December 31, 2022, approximately $1.0 million remained to be recognized in compensation expense over a weighted- average period of approximately four years. The authorization of the 2020 Equity Plan terminated two other stock option programs, the 2013 Outside Director Plan and the 2013 Employee Stock Option Plan. No new options or awards will be granted under the 2013 Plans. Under the 2013 Outside Director Plan, 117,785 options remain outstanding as of December 31, 2022 for nonemployee directors. The exercise price of options granted under this program was required to be equal to at least the fair market value of common stock as of the grant date. All options granted under this plan vest in five equal annual installments or upon retirement. These options expire 10 years from the grant date. Under the 2013 Employee Stock Option Plan, 55,347 options remain outstanding as of December 31, 2022 for key employees. The exercise price of options granted under this program was equal to at least the fair market value of common stock as of the grant date. All options granted under this plan vest in five equal annual installments, upon retirement or a change in control of the Company. These options expire 10 years from the grant date. The fair value of each stock option award is estimated on the date of the grant using the Black-Scholes option-pricing model. The risk-free interest rate for the expected term of the stock option awarded is based on the U.S. Treasury yield curve in effect at the time of the grant. The volatility of the Company’s stock is based on a combination of historical volatility and peer data over a span of time equal to the expected life of stock option awards, which is the period of time the Company estimates that stock options granted will remain outstanding. The simplified method averages an award’s weighted average vesting period and its contractual term. There were no stock option awards granted in 2022. The following assumptions were used to estimate the fair value of the options granted during 2021: 37 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Weighted average risk-free interest rate Weighted average volatility Expected dividend yield Weighted average expected life (years) 2021 0.83% 24.68% - 6.50 A summary status of the Company’s stock option plans as of December 31, 2022 and 2021, and the changes during the years then ended, is as follows: 2022 2021 Weighted Weighted (1) Average Exercise Price Options Average Aggregate Remaining Intrinsic Term (yrs) Value Options Weighted Average Exercise Price Options outstanding at beginning of year 407,592 $ 7.58 6.0 332,041 $ Granted Exercised Forfeited or expired Options outstanding at the end of the year Options exercisable at the end of the year - (18,160) (16,300) 373,132 220,432 $ $ - 5.77 9.33 7.60 7.01 124,500 (20,468) (28,481) 407,592 195,422 $ $ 5.7 4.0 $ $ 2,390 1,541 7.05 9.68 4.54 6.05 7.58 6.44 (1) The aggregate intrinsic value of a stock option in the table above (shown in thousands) represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on December 31, 2022. The intrinsic value varies based on the changes in the market value in the Company’s stock. The Company issues new shares upon the exercise of stock options. The following table provides detail for non-vested stock options under the 2020 Equity Plan and the 2013 Outside Director and Employee Stock Option Plans as of December 31, 2022: Weighted Average Exercise Price Options Non-vested options December 31, 2021 212,170 $ 8.63 Granted Forfeited Vested - (15,600) (43,870) Non-vested options December 31, 2022 152,700 $ - 9.31 9.07 8.44 38 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The following table summarizes the activity for the Company’s restricted stock unit awards as of December 31, 2022: Outstanding as of December 31, 2021 Granted Forfeited Vested Weighted Restricted Average stock units 55,016 32,500 - (9,730) Fair Value $ 9.31 12.32 - 9.26 Outstanding as of December 31, 2022 77,786 $ 10.58 Note 18. Shareholders’ Equity and Regulatory Capital Shareholders’ Equity During 2021, the Company announced and adopted two separate stock repurchase programs. The first repurchase program was completed in May 2021 with a total of 141,720 shares repurchased for a cost of $1.4 million or an average cost of $9.88 per share. The second repurchase program was completed in May 2022 with a total of 193,381 shares repurchased for a cost of $2.0 million, or an average cost of $10.30 per share. Under the second repurchase program 114,500 shares were purchased in 2021 and 78,881 shares were repurchased in 2022. Dividend Policy Company The Company has not paid a cash dividend since its inception in June 2000. Any payment of cash dividends to its shareholders would be dependent on the payment of a cash dividend from the Bank to the Company. The payment of cash dividends by the Bank to the Company is limited under federal banking law. The Company’s future dividend policy is subject to the discretion of its board of directors and will depend upon a number of factors, including future earnings, financial conditions, cash needs, and general business conditions. Holders of common stock will be entitled to receive dividends as and when declared by the board of directors out of funds legally available for that purpose. Bank The amount of dividends that may be paid by the Bank depends upon the Bank’s earnings and capital position, and is limited by New Jersey and federal law, regulations, and policies. As a state-chartered bank subject to New Jersey and FDIC regulations, the Bank cannot pay any dividend if the dividend would reduce the required surplus of the Bank as defined in New Jersey statutes. As a matter of policy, the FDIC expects state banks to follow the national bank dividend limits, which allow a bank to pay dividends up to the amount of net profits of the current year plus the retained net profits from the last two years. Amounts in excess of that would require prior approval of the FDIC. In addition, the FDIC and the state of New Jersey have authority to further limit any dividends to be paid by the Bank in a specific case. No specific dividend restrictions have been imposed on the Bank at this time. Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. The Bank’s capital amounts and involve quantitative measures of the Bank’s assets, 39 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. A banking organization must hold a capital conservation buffer comprised of Common Equity Tier 1 above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. As of December 31, 2021, the Bank met all capital adequacy requirements to which it is subject and met the criteria for a well-capitalized institution. At yearend 2022 and 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. The Bank’s actual capital amounts and ratios as of December 31, 2022 and 2021 are presented in the following table: (Dollars in thousands) Total risk-based capital As of December 31, 2022 As of December 31, 2021 Tier 1 risk-based capital As of December 31, 2022 As of December 31, 2021 Tier 1 leverage capital As of December 31, 2022 As of December 31, 2021 Tier 1 common equity risk-based capital As of December 31, 2022 As of December 31, 2021 Actual For capital adequacy purposes For capital adequacy purposes with capital conservation buffer To be well capitalized under prompt corrective action provision Amount Ratio Amount Ratio* Amount Ratio* Amount Ratio $ $ $ $ $ $ $ $ 82,086 70,954 74,817 65,168 74,817 65,168 74,817 65,168 14.141% 15.365% 12.889% 14.112% 9.742% 9.216% 12.889% 14.112% $ $ $ $ $ $ $ $ 46,439 36,943 34,829 27,707 30,718 28,284 26,122 20,780 8.00% 8.00% 6.00% 6.00% 4.00% 4.00% 4.50% 4.50% $ $ $ $ $ $ $ $ 60,951 48,488 49,342 39,252 30,718 28,284 40,634 32,325 10.500% 10.500% 8.500% 8.500% 4.000% 4.000% 7.000% 7.000% $ $ $ $ $ $ $ $ 58,049 46,179 46,439 36,943 38,398 35,356 37,732 30,016 10.00% 10.00% 8.00% 8.00% 5.00% 5.00% 6.50% 6.50% Note 19. Parent Company Financial Information A summary of the statements of financial condition as of December 31, 2022 and 2021 is as follows: (In thousands) Assets Cash in subsidiary Investment in subsidiary Deferred tax asset Other assets Total assets Liabilities and Shareholders’ Equity Subordinated debt, net of issuance costs Accrued interest payable Other liabilities Shareholders' equity Total liabilities and shareholders’ equity As of December 31, 2022 2021 $ $ $ $ 1,148 68,927 135 257 70,467 10,559 251 19 59,638 70,467 $ $ $ $ 2,768 65,440 113 201 68,522 10,440 251 14 57,817 68,522 40 1ST COLONIAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements A summary of the statements of operations for the years ended December 31, 2022 and 2021 is as follows: (In thousands) Equity income from subsidiary Dividend income Total income Other expenses: Interest on subordinated debt Other operating expenses Total other expenses Income before income tax expense (benefit) Income tax (benefit) expense Net income 2022 2021 $ $ 9,649 - 9,649 872 350 1,222 8,427 (71) 8,498 $ $ 3,706 4,400 8,106 786 182 968 7,138 (120) 7,258 A summary of the statements of cash flows for the years ended December 31, 2022 and 2021 is as follows: (In thousands) Cash flows from operating activities: 2022 2021 Net income Adjustments to reconcile net income to net cash (used in) $ 8,498 $ 7,258 provided by operating activities: Equity in income from subsidiary Stock-based compensation expense (Increase) decrease deferred income tax benefit Amortization of issuance costs on long-term debt (Increase) decrease in other assets (Decrease) increase in other liabilities Total adjustments Net cash used in operating activities Cash flows from investing activities: Investment in subsidiary Net cash used in investing activities Cash flows from financing activities: Acquisition of treasury stock Proceeds from sale of stock Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash paid during the year for: Interest Income taxes paid (9,649) 265 (21) 120 (56) 3 (9,338) (840) - - (884) 104 (780) (1,620) 2,768 1,148 3,726 2,782 $ $ (3,706) 122 (4) 36 (117) (5) (3,674) 3,584 - - (2,508) 93 (2,415) 1,169 1,599 2,768 3,063 3,957 $ $ Supplemental disclosures: Net change in unrealized gains on securities available for sale, net $ tax benefit of $2,355 for 2022 and $361 for 2021 (6,162) $ (834) 41 [THIS PAGE INTENTIONALLY LEFT BLANK] Administrative Offff iff ce 1000 Atrium Way Suite 200 Mount Laurel, NJ 08054 (856) 858-1100 Collingswood Branch 1040 Haddon Avenue Collingswood, NJ 08108 (856) 858-8604 Westville Branch 321 Broadwayaa Westville, NJ 08093 (856) 456-6544 Limerick Branch 440 Linfiff eld Trappe Road Limerick, PA 19456 (610) 226-3000 Stock Listing 1st Colonial's Common Stock is traded under the Symbm ol "FCOB" Board of Directors Linda M. Rohrer, Chairman Thomas A. Clark, III, Esquire Harvey Johnson, Esquire Thomas R. Brur gger John J. Donnelly, IV Stanley H. Molotsky Curt Byerley Michael C. Haydinger Shelley Y. Simms Executive Offff iff cers Robert B. White, President and Chief Executive Offff iff cer Anthony W. LaMarca, Executive Vice President and Chief Mary Kay Shea, Executive Vice President and Chief Financial Offff iff cer Senior Management 1st Colonial Community Bank Gino Brown, SVP Residential Mortgage Lending Matthew McGonigal, SVP Director of Digital Experience ana d Operations Randolph D. Wolfeff , SVP Chief Revenue Offff iff cer Auditors Counsel Crowe LLP 1455 Pennsylvania Avenue. NW #700 Washington, DC 20004 Stradley Ronon Stevens & Young LLP A Pennsylvania Limited Liability Partnership 2005 Mara ket Street, Suite 2600 Philadelphia, Pennsylvania 19103-7018 Registrar and Transfeff r Agent Pacififf c Stock Transfeff r Compana y 6725 Via Austi Parkway Suite 300 Las Vegas, Nevada 89119 Telephone (866) 223-0448 1000 Atrium Way Suite 200 Mt. Laurel, NJ 08054 877.785.8550 1 S T C O L O N I A L . C O M 

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