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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

o
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________  to  __________________
 
Commission file number 001-34817

COLONIAL FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
   
Maryland 90-0183739
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
2745 S. Delsea Drive, Vineland, NJ 08360
(Address of principal executive offices)  (Zip code)
 
(856) 205-0058
 (Registrant’s telephone number including area code)

N/A
 (Former name, former address, and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  x    Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
  Large accelerated filer o   Accelerated filer o
  Non-accelerated filer  o   Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).             o  Yes  x     No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

As of November 3, 2014, 3,860,209 shares of common stock, par value $0.01 per share

 
 

 


TABLE OF CONTENTS
       
      PAGE
PART I
  FINANCIAL INFORMATION  
       
Item 1
 
Consolidated Statements of Financial Condition (Unaudited)
2
   
Consolidated Statements of Operations (Unaudited)
3
   
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
4
   
Consolidated Statements of Stockholders’ Equity (Unaudited)
5
   
Consolidated Statements of Cash Flows (Unaudited)
6
   
Notes to Consolidated Financial Statements (Unaudited)
7

Item 2
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
       
Item 3
 
Quantitative and Qualitative Disclosures About Market Risk
50
       
Item 4.
 
Controls and Procedures
50
       
PART II
 
OTHER INFORMATION
 
       
Item 1
 
Legal Proceedings
51
       
Item 1A.
 
Risk Factors
51
       
Item 2
 
Unregistered Sales of Equity Securities and Use of Proceeds
51
       
Item 3
 
Defaults Upon Senior Securities
51
       
Item 4
 
Mine Safety Disclosures
51
       
Item 5
 
Other Information
51
       
Item 6
 
Exhibits
52
       
   
Signatures
53
 
 

 

 
 
Colonial Financial Services, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
 
   
September 30, 
2014
   
December 31,
2013
 
             
   
(Dollars in thousands, except per share data)
 
Assets
           
Cash and amounts due from banks
  $ 8,388     $ 23,404  
Investment securities available for sale
    235,395       227,126  
Investment securities held to maturity (fair value at September 30, 2014 - $0;
at December 31, 2013 - $17,882)
    -       17,291  
Loans receivable, net of allowance for loan losses of $4,417 at September 30, 2014
and $5,853 at December 31, 2013
    271,555       276,154  
Real estate owned, net
    3,223       3,258  
Federal Home Loan Bank stock, at cost
    938       702  
Office properties and equipment, net
    7,536       7,825  
Bank-owned life insurance
    14,926       14,607  
Accrued interest receivable
    1,381       1,530  
Other assets
    9,367       11,260  
Total Assets
  $ 552,709     $ 583,157  
                 
Liabilities and Stockholders’ Equity
               
Liabilities
               
Deposits:
               
     Noninterest-bearing
  $ 46,585     $ 42,739  
     Interest-bearing
    431,276       479,288  
Total deposits
    477,861       522,027  
Federal Home Loan Bank short-term borrowings
    9,670       -  
Advances from borrowers for taxes and insurance
    1,101       831  
Accrued interest payable and other liabilities
    1,266       1,136  
Total Liabilities
    489,898       523,994  
                 
Commitments and Contingencies
               
Stockholders’ Equity
               
Preferred stock, $0.01 par value; authorized 50,000,000 shares; none issued
    -       -  
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 3,860,209 shares at September 30, 2014 and 3,853,058 shares at December 31, 2013
    39       39  
Additional paid-in capital
    37,441       37,289  
Unearned shares held by Employee Stock Ownership Plan (“ESOP”)
    (1,170 )     (1,170 )
Retained earnings
    27,897       27,482  
Accumulated other comprehensive loss
    (1,396 )     (4,477 )
Total Stockholders’ Equity
    62,811       59,163  
Total Liabilities and Stockholders’ Equity
  $ 552,709     $ 583,157  
 
See notes to unaudited consolidated financial statements.
 
2
 

 

 
 
Colonial Financial Services, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
                         
   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
   
(Dollars in thousands, except per share data)
 
Interest Income
                       
Loans, including fees
  $ 2,978     $ 3,370     $ 9,087     $ 10,350  
Mortgage-backed securities
    405       489       1,256       1,540  
 Investment securities:  Taxable
    362       514       1,261       1,557  
 Investment securities:  Tax-exempt
    37       114       170       353  
Total Interest Income
    3,782       4,487       11,774       13,800  
                                 
Interest Expense
                               
Deposits
    646       892       1,993       3,003  
Borrowings
    8       15       16       27  
Total Interest Expense
    654       907       2,009       3,030  
Net Interest Income
    3,128       3,580       9,765       10,770  
                                 
Provision (CREDIT) for Loan Losses
    (258 )     2,831       290       5,540  
Net Interest Income after Provision (Credit)for Loan Losses
    3,386       749       9,475       5,230  
                                 
Non-Interest Income
                               
Fees and service charges
    286       303       853       904  
Net gain on sales and calls of investment securities
    4       4       500       1,064  
Earnings on bank-owned life insurance
    108       112       319       330  
Other
    9       10       33       32  
Total Non-Interest Income
    407       429       1,705       2,330  
                                 
Non-Interest Expenses
                               
Compensation and benefits
    1,411       1,802       4,297       5,177  
Occupancy and equipment
    394       416       1,238       1,202  
Data processing
    257       235       773       720  
FDIC insurance premium
    178       211       541       534  
Office supplies
    23       38       70       116  
Professional fees
    242       290       893       929  
Advertising and promotions
    15       35       41       91  
Real estate owned, net
    358       429       908       1,189  
Merger-related
    470       -       470       -  
Other
    331       367       986       1,147  
Total Non-Interest Expenses
    3,679       3,823       10,217       11,105  
Income (Loss) before Income Tax Expense (Benefit)
    114       (2,645 )     963       (3,545 )
                                 
Income Tax Expense (Benefit)
    285       (697 )     548       (1,114 )
Net Income (Loss)
  $ (171 )   $ (1,948 )   $ 415     $ (2,431 )
                                 
Per Share Data (See Note 3):
                               
Earnings (Loss) per share – basic
  $ (0.05 )   $ (0.52 )   $ 0.11     $ (0.65 )
Earnings (Loss) per share – diluted
  $ (0.05 )   $ (0.52 )   $ 0.11     $ (0.65 )
Weighted average number of shares outstanding – basic
    3,746,860       3,719,643       3,746,739       3,719,789  
Weighted average number of shares outstanding – diluted
    3,746,860       3,719,643       3,750,137       3,719,789  
 
See notes to unaudited consolidated financial statements.
 
3
 

 

 
 
Colonial Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
   
(Dollars in thousands)
 
                         
Net income (loss)
  $ (171 )   $ (1,948 )   $ 415     $ (2,431 )
                                 
Other Comprehensive Income (loss):
                               
Unrealized gain (loss) on securities net of tax expense (benefit)  – 2014, $(81) and $1,434; 2013, $136 and $(2,500)
    (124 )     215       2,920       (4,678 )
Unrealized gain on securities transferred from the held-to-maturity category into the available-for-sale category net of tax expense – 2014, $0 and $306; 2013, $0 and $0
    -       -       461       -  
Less reclassification adjustment for net realized gain on sale of securities included in net income (loss) net of tax expense   – 2014, $2 and $200; 2013, $1 and $425 (1)
    (2 )     (3 )     (300 )     (639 )
Total Other Comprehensive Income (loss)
    (126 )     212       3,081       (5,317 )
                                 
Comprehensive Income (loss)
  $ (297 )   $ (1,736 )   $ 3,496     $ (7,748 )
   
(1)
Gross amounts are included in Net gain on sales and calls of investment securities in the Consolidated Statements of Operations as a separate element within Total Non-Interest Income.  Tax expense amounts are included in Income Tax Expense (Benefit) in the Consolidated Statements of Operations.
 
See notes to unaudited consolidated financial statements.
 
4
 

 

 
 
Colonial Financial Services, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited)
 
   
Common
Stock
Shares
   
Common
Stock
   
Additional
Paid-in
Capital
   
Unearned
Shares
Held by
ESOP
   
Retained Earnings
   
Accumu-
lated
Other
Compre-
hensive
Income
(Loss)
   
Total
Stock-
holders’
Equity
 
   
(Dollars in thousands)
 
Balance, January 1, 2014
    3,853,058     $ 39     $ 37,289     $ (1,170 )   $ 27,482     $ (4,477 )   $ 59,163  
                                                         
Net income
    -       -       -       -       415       -       415  
                                                         
Other comprehensive income
    -       -       -       -       -       3,081       3,081  
                                                         
 
Stock-based compensation expense (restricted stock awards)
    7,082       -       62       -       -       -       62  
                                                         
Stock-based compensation expense (stock options)
    69       -       90       -       -       -       90  
Balance, September 30, 2014
    3,860,209     $ 39     $ 37,441     $ (1,170 )   $ 27,897     $ (1,396 )   $ 62,811  
                                                         
                                                         
Balance, January 1, 2013
    3,852,791     $ 39     $ 37,155     $ (1,378 )   $ 29,307     $ 2,914     $ 68,037  
                                                         
Net loss
    -       -       -       -       (2,431 )     -       (2,431 )
Other comprehensive loss
    -       -       -       -       -       (5,317 )     (5,317 )
                                                         
Repurchase and retirement of common stock
    (10,000 )     -       (134 )     -       -       -       (134 )
 
Stock-based compensation expense (restricted stock awards)
    10,267       -       59       -       -       -       59  
                                                         
Stock-based compensation expense (stock options)
    -       -       87       -       -       -       87  
Balance, September 30, 2013
    3,853,058     $ 39     $ 37,167     $ (1,378 )   $ 26,876     $ (2,403 )   $ 60,301  
 
See notes to unaudited consolidated financial statements.
 
5
 

 

 
 
Colonial Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
   
Nine Months Ended
September 30,
 
   
2014
   
2013
 
   
(Dollars in thousands)
 
Cash Flows from Operating Activities:
     
Net income (loss)
  $ 415     $ (2,431 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Provision for loan losses
    290       5,540  
Depreciation expense
    399       426  
Stock-based compensation expense
    152       146  
Net earnings on bank-owned life insurance
    (319 )     (330 )
Net (accretion) amortization of loan fees
    (337 )     260  
Net gain on sales and calls of investment securities
    (500 )     (1,064 )
Net gain on the sale of real estate owned
    (61 )     (149 )
Provision for real estate owned
    585       1,073  
Accretion of discount on investment securities, net
    (321 )     (183 )
Decrease in accrued interest receivable
    149       91  
Decrease (increase) in other assets
    1,893       (2,972 )
Increase in accrued interest payable and other liabilities
    130       478  
Net cash provided by operating activities
    2,475       885  
Cash Flows from Investing Activities:
               
Proceeds from sales of investment securities available-for-sale
    48,299       5,996  
Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations available-for-sale
    -       13,075  
Proceeds from calls and maturities of:
               
Investment securities held to maturity (HTM)
    7,299       21,126  
Investment securities available for sale (AFS)
    13,815       39,049  
Purchase of:
               
Investment securities HTM
    -       (15,625 )
Investment securities AFS
    (18,102 )     (61,309 )
Mortgage-backed securities and collateralized mortgage obligations AFS
    (52,345 )     (36,609 )
Purchase of office properties and equipment
    (110 )     (188 )
Principal repayments from:
               
Investment securities
    539       2,870  
Mortgage-backed securities and collateralized mortgage obligations
    13,419       24,611  
Net increase in Federal Home Loan Bank stock
    (236 )     (323 )
Proceeds from the sale of real estate owned
    640       1,085  
Net decrease in loans receivable
    3,517       6,185  
Net cash provided by (used in) investing activities
    16,735       (57 )
Cash Flows from Financing Activities:
               
Net decrease in deposits
    (44,166 )     (26,778 )
Proceeds from Federal Home Loan Bank short-term borrowings
    9,670       8,410  
Increase in advances from borrowers for taxes and insurance
    270       266  
Common stock repurchased and retired
    -       (134 )
Net cash used in financing activities
    (34,226 )     (18,236 )
Decrease in cash and cash equivalents
    (15,016 )     (17,408 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    23,404       26,418  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 8,388     $ 9,010  
                 
                 
Supplemental Cash Flow Disclosures:
               
Cash paid:
               
Interest
  $ 2,012     $ 3,039  
Income taxes
  $ -     $ -  
                 
Supplemental Schedule of Noncash Investing and Financing Activities:
               
Other real estate acquired in settlement of  loans
  $ 1,129     $ 810  
Transfer of held-to-maturity securities to available-for-sale
  $ 9,989     $ -  
 
See notes to unaudited consolidated financial statements.
 
6
 

 

 
COLONIAL FINANCIAL SERVICES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
 
1.
Organization and Basis of Presentation
 
Colonial Financial Services, Inc. (the “Company”), a Maryland corporation, was formed in March 2010, to serve as the stock holding company for Colonial Bank, FSB (the “Bank”) as part of the mutual-to-stock conversion of Colonial Bankshares, MHC.  On July 13, 2010, Colonial Financial Services, Inc. completed its second-step conversion and related public stock offering.  The Bank is 100% owned by Colonial Financial Services, Inc. and Colonial Financial Services, Inc. is 100% owned by public stockholders.  Colonial Financial Services, Inc. sold a total of 2,295,000 shares of common stock in the subscription, community and syndicated community offerings, including 91,800 shares to the Colonial Bank FSB employee stock ownership plan.  All shares were sold at a purchase price of $10.00 per share.  Concurrent with the completion of the offering, shares of common stock of Colonial Bankshares, Inc., a federal corporation, owned by public stockholders were converted into the right to receive 0.9399 shares of Colonial Financial Services, Inc. common stock.  Cash in lieu of fractional shares was paid at a rate of $10.00 per share.  As a result of the offering and the exchange, Colonial Financial Services, Inc. issued 4,173,444 shares of stock.
 
The same directors and officers who manage Colonial Bank, FSB manage Colonial Financial Services, Inc.  The Company, as a savings and loan holding company, is subject to regulation by the Board of Governors of the Federal Reserve System.  The Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency (“OCC”).
 
The Bank is a federally chartered capital stock savings bank.  The Bank maintains its executive office and main branch in Vineland, New Jersey with branches in Bridgeton, Mantua, Millville, Upper Deerfield, Vineland, Sewell and Cedarville, New Jersey.  The Bank’s principal business consists of attracting customer deposits and investing these deposits primarily in single-family residential, commercial and consumer loans and investments.
 
The Bank has established a New Jersey corporation, Cohansey Bridge, LLC, whose purpose is to hold foreclosed real estate (the “Operating Subsidiary”).  A Delaware corporation, COBK Investments, LLC, whose purpose was to invest in and mange securities, was dissolved in August 2014.
 
 
7
 

 

 
The consolidated financial statements include the accounts of the Company, the Bank and the Operating Subsidiary.  All material intercompany transactions and balances have been eliminated.  The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) as set by the Financial Accounting Standards Board (“FASB”).  The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  They do not include all of the information and footnotes required by US GAAP for complete financial statements.  Operating results for the three and nine months ended September 30, 2014 (unaudited) are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or for any other period.  The balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.
 
The preparation of financial statements in conformity with US 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 financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, evaluation of other-than-temporary impairment of investment securities, our ability to realize deferred tax assets, and measurements of fair value.
 
For comparative purposes, prior periods’ consolidated financial statements have been reclassified when necessary to conform to report classifications of the current year.  The reclassifications had no effect on net income (loss).
 
The Company has evaluated subsequent events for potential recognition and/or disclosure in this Quarterly Report on Form 10-Q through the date these consolidated financial statements were issued.
 
2.
Recent Accounting Pronouncements
 
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”.  The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  The Company does not expect the adoption of this FASB ASU to have a material impact on the consolidated financial statements.
 
 
8
 

 

 
In May 2014, the FASB issued ASU, 2014-09, “Revenue from Contracts with Customers”, which supersedes nearly all exiting revenue recognition guidance under U. S. GAAP.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U. S. GAAP.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
 
In June 2014, the FASB issued ASU, 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”.  The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period.  The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.  The Company does not expect the adoption of this FASB ASU to have a material impact on the consolidated financial statements.
 
 
9
 

 

 
In August 2014, the FASB issued ASU, 2014-14, “Receivables-Troubled Debt Restructurings by Creditors, Classification of Certain Government-guaranteed Mortgage Loans upon Foreclosure.”  The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.  The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  The Company does not expect the adoption of this FASB ASU to have a material impact on the consolidated financial statements.
 
3.
Earnings Per Share
 
Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS.  Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented.  Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”).  CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards.  CSEs which are considered antidilutive are not included for the purposes of this calculation. There are no convertible securities which would affect the net income (numerator) in calculating basic and diluted earnings per share; therefore, for these calculations, the net income (loss) for the three months ended September 30, 2014 and 2013 is $(171,000) and $(1,948,000), respectively.  Net income (loss) for the nine months ended September 30, 2014 and 2013 is $415,000 and $(2,431,000), respectively.  The dilutive effect of potential common shares is computed using the treasury stock method.  The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and diluted earnings per share computation.  At September 30, 2014 and 2013, there were 115,283 and 346,175 anti-dilutive options and awards excluded from the computation of diluted earnings per share.
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net income (loss)
  $ (171,000 )   $ (1,948,000 )   $ 415,000     $ (2,431,000 )
                                 
Weighted average common shares issued
    3,860,190       3,853,058       3,860,069       3,853,204  
Average unearned ESOP shares
    (113,330 )     (133,415 )     (113,330 )     (133,415 )
Weighted average common shares outstanding-basic
    3,746,860       3,719,643       3,746,739       3,719,789  
Effect of dilutive non-vested shares and stock options outstanding
    -       -       3,398       -  
Weighted average common shares outstanding-diluted
    3,746,860       3,719,643       3,750,137       3,719,789  
Basic income (loss) per share
  $ (0.05 )   $ (0.52 )   $ 0.11     $ (0.65 )
Diluted income (loss) per share
  $ (0.05 )   $ (0.52 )   $ 0.11     $ (0.65 )
 
 
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4.            Stock-Based Compensation
 
At September 30, 2014, the Company has two share-based compensation plans under which grants have been made, the 2006 Stock-Based Incentive Plan (the “2006 Plan”) and the 2011 Equity Incentive Plan (the “2011 Plan”).  Under the 2006 Plan, the total number of shares that could be granted as awards was 83,300 and the total amount of shares that could be granted as options was 208,247.  Under the 2011 Plan, the total number of shares that could be granted as awards was 91,800 and the total amount of shares that could be granted as options was 229,500.
 
On October 19, 2006, for the 2006 Plan, 83,300 shares of restricted stock were awarded.  The restricted shares awarded had a grant date fair value of $13.27 per share.  The restricted stock awarded was fully vested as of October 19, 2011 and the total expense and related tax effect has been fully recorded.
 
On January 20, 2011, for the 2006 Plan, 3,268 shares of restricted stock were awarded.  The restricted shares awarded had a grant date fair value of $12.00 per share.  The restricted stock awarded vests 33% annually beginning January 20, 2012.  The restricted stock awarded on January 20, 2011 is fully vested and the total expense and related tax effect has been fully recorded.  For the three and nine months ended September 30, 2013, $(1,000) and $5,000 in compensation expense was recognized in regard to the stock awards given in January 2011 with a related tax benefit of $0 and $2,000,  respectively.  The negative amount was due to reversing the previously recognized expense for awards that were forfeited during the quarter.
 
On January 2, 2012, 45,895 shares of restricted time-based stock grants were awarded.  The restricted time-based stock grants had a grant date fair value of $12.46 per share and vest 20% annually beginning January 2, 2013.  Also, on January 2, 2012, 45,895 shares of restricted performance-based stock grants were awarded.  The restricted performance-based stock grants had a grant date fair value of $12.46 and vest 20% annually with the attainment of the performance goal.  If the goal is not attained for the year, the stock grants are forfeited.  For the three and nine months ended September 30, 2014, $20,000 and $62,000 in compensation expense was recognized in regard to the time-based restricted stock awards, with a related tax benefit of $7,000 and $21,000, respectively.  For the three and nine months ended September 30, 2014, there was no expense recorded for the performance-based awards.  For the three and nine months ended September 30, 2013, $(4,000) and $54,000 in compensation expense was recognized in regard to these restricted stock awards, with a related tax benefit of $0 and $18,000, respectively.  The negative amount was due to reversing the previously recognized expense for awards that were forfeited during the quarter.  For the three and nine months ended September 30, 2013, there was no expense recorded for the performance-based awards.  As of September 30, 2014, there was $427,000 of unrecognized compensation expense related to the restricted stock awards which is expected to be recognized over a period of 2.25 years.
 
 
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A summary of the status of the shares under the two Plans as of September 30, 2014 and changes during the three and nine months ended September 30, 2014 are presented below.
 
   
For the Three Months Ended
September 30, 2014
   
For the Nine Months Ended
September 30, 2014
 
Award Shares
 
Number
of
Shares
   
Weighted Average
Grant Date
Fair Value
   
Number
of
Shares
   
Weighted Average
Grant Date
Fair Value
 
Restricted, beginning of period
    39,214     $ 12.46       52,832     $ 12.46  
Granted
    -       -       -       -  
Forfeitures
    -       -       6,536       12.46  
Vested
    -       -       7,082       12.43  
Restricted stock, end of period
    39,214     $ 12.46       39,214     $ 12.46  
 
On October 19, 2006, for the 2006 Plan, options to purchase 184,660 shares of common stock at $13.27 per share were awarded.  The options awarded fully vested in October 2011 and expire in 2016.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2006:  dividend yield of 0%, risk-free interest rate of 4.79%, expected life of 6.5 years, and expected volatility of 15.00%.  The calculated fair value of options granted in 2006 was $4.03 per option.  The weighted average contractual term of options outstanding and exercisable was 2.00 years at September 30, 2014 and 3.00 years at September 30, 2013.  The total expense and related tax effect has been fully recorded for these options.
 
On January 20, 2011, for the 2006 Plan, options to purchase 8,328 shares of common stock at $12.00 per share were awarded.  The options awarded vest 33% annually beginning January 20, 2012 and expire in 2021.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2011:  dividend yield of 0%, risk-free interest rate of 3.47%, expected life of 6.5 years, and expected volatility of 33.00%.  The calculated fair value of options granted in 2011 was $4.84 per option.  The weighted average contractual term of options outstanding and exercisable was 6.25 years at September 30, 2014 and 7.25 years at September 30, 2013.  The total expense and related tax effect has been fully recorded for these options.   Stock-based compensation expense related to stock options awarded in 2011 for the three and nine months ended September 30, 2013, was $(1,000) and $5,000 with a related tax benefit of $0 and $2,000, respectively.  The negative amount was due to reversing the previously recognized expense for options that were forfeited during the quarter.
 
On January 2, 2012, for the 2011 Plan, options to purchase 194,600 shares of common stock at $12.46 were awarded.  The options awarded vest 20% annually beginning January 20, 2013 and expire in 2022.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2012:  dividend yield of 0%, risk-free interest rate of 1.41%, expected life of 6.5 years, and expected volatility of 32.00%.  The calculated fair value of options granted in 2012 was $4.34 per option.  The weighted average contractual term of options outstanding and exercisable was 7.25 years at September 30, 2014.  Stock-based compensation expense related to stock options granted in 2012 for the three and nine months ended September 30, 2014, was $30,000 and $90,000 with a related tax benefit of $10,000 and $30,000, respectively.  For the three and nine months ended September 30, 2013, there was $(3,000) and $82,000 with a related tax benefit of $0 and $28,000 of stock based compensation expense, respectively.  The negative amount was due to reversing the previously recognized expense for options that were forfeited during the quarter.  As of September 30, 2014, there was approximately $272,000 of unrecognized compensation cost related to unvested stock options granted in 2012.  The cost will be recognized in a straight line method over a period of 2.25 years.
 
 
12
 

 

 
A summary of the status of the Company’s stock options under the two plans as of September 30, 2014 and changes during the three and nine months ended September 30, 2014 are presented below.
 
   
For the Three Months Ended
September 30, 2014
   
For the Nine Months Ended
September 30, 2014
 
   
Options
   
Weighted Average Exercise
Price
   
Options
   
Weighted Average Exercise
Price
 
Options outstanding, beginning of period
    279,343     $ 12.87       291,343     $ 12.87  
Granted
    -       -       -       -  
Exercised
    2,295       12.46       2,295       12.46  
Forfeitures
    18,451       12.95       30,451       12.95  
Options outstanding, end of period
    258,597     $ 12.86       258,597     $ 12.86  
Exercisable at end of period
    175,107     $ 13.01       175,107     $ 13.01  
 
In 2005, the Bank established a leveraged Employee Stock Ownership Plan (“ESOP”) for full-time employees who satisfy eligibility criteria.  The ESOP trust initially purchased 156,399 shares of common stock.  The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company.  The loan bears an interest rate of 6.00% with principal and interest payable annually in equal installments over 15 years.  The loan is secured by the shares of the common stock purchased.
 
In July 2010, the ESOP acquired an additional 91,800 shares of the Company’s common stock with a loan from the Company in the amount of $918,000, at a price of $10.00 per share.  The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company.  The loan bears an interest rate of 4.25% with principal and interest payable annually in equal installments over 10 years.  The loan is secured by the shares of the common stock purchased.
 
As the debt is repaid, shares are released from the collateral and allocated to qualified employees.  Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Statements of Financial Condition.  As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.  The compensation expense is recorded on a monthly basis.  The Company’s contribution expense for the ESOP was $65,000 and $183,000 for the three and nine months ended September 30, 2014 and $71,000 and $206,000 for the three and nine months ended September 30, 2013, respectively.
 
 
13
 

 

 
The following table presents the components of the ESOP shares:
 
   
September 30,
2014
   
September 30,
2013
 
Shares released for allocation
    134,869       114,784  
Unreleased shares
    113,330       133,415  
Total ESOP shares
    248,199       248,199  
 
5.            Contingent Liabilities and Guarantees
 
In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit that are not reflected in the accompanying financial statements.  No material losses are anticipated as a result of those transactions on either a completed or uncompleted basis. The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risks involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Company generally holds collateral and/or personal guarantees supporting those commitments.  The Company had $3.2 million of standby letters of credit outstanding as of September 30, 2014.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees.
 
In October 2009, the Bank entered into an agreement to sponsor a not-for-profit corporation for a Federal Home Loan Bank of New York Affordable Housing Program (“AHP”) Grant in the amount of $275,000.  If the non-for-profit corporation does not comply with terms of the agreement, the Bank may be required to repay the grant to the Federal Home Loan Bank of New York.  The term of the recapture agreement is 15 years.  The Bank expects the not-for-profit corporation to adhere to all requirements of the grant and does not expect to be required to repay any of the AHP grant.
 
 
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6.           Investment Securities
 
Investment securities are summarized as follows:
 
   
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In thousands)
 
Available for Sale:
                       
September 30, 2014
                       
U. S. Government obligations
  $ 97,301     $ 21     $ (2,076 )   $ 95,246  
Corporate debt obligations
    -       -       -       -  
Mutual fund
    851       41       -       892  
Municipal debt obligations
    7,168       140       (30 )     7,278  
SBA pools
    15,278       30       (66 )     15,242  
Government-sponsored enterprise (“GSE”) mortgage-backed securities
    56,662       892       (96 )     57,458  
GSE collateralized mortgage obligations
    60,459       179       (1,359 )     59,279  
    $ 237,719     $ 1,303     $ (3,627 )   $ 235,395  
 
December 31, 2013
                       
U. S. Government obligations
  $ 141,836     $ 16     $ (5,069 )   $ 136,783  
Corporate debt obligations
    4,493       12       (4 )     4,501  
Mutual fund
    903       42       -       945  
Municipal debt obligations
    6,828       35       (144 )     6,719  
SBA pools
    1,097       -       (4 )     1,093  
GSE mortgage-backed securities
    14,794       752       (83 )     15,463  
GSE collateralized mortgage obligations
    64,120       190       (2,688 )     61,622  
    $ 234,071     $ 1,047     $ (7,992 )   $ 227,126  
 
Held to Maturity:
                       
December 31, 2013
                       
Corporate debt obligations
  $ 1,193     $ 203     $ -     $ 1,396  
Municipal debt obligations
    15,910       368       -       16,278  
GSE mortgage-backed securities
    188       20       -       208  
    $ 17,291     $ 591     $ -     $ 17,882  
 
The Company had no investment securities classified as held-to-maturity at September 30, 2014.
 
At March 31, 2014, the Company reclassified its $10.0 million held-to-maturity portfolio as available for sale.  The Company made this reclassification to ease the facilitation of security replacement to mitigate interest rate risk and to shift to mortgage related securities.  The securities reclassified included: $8.6 million in municipal debt securities with an unrealized gain of $522,000, $1.2 million in corporate debt securities with an unrealized gain of $228,000 and $155,000 in GSE mortgage-backed securities with an unrealized gain of $17,000.  In accordance with regulatory and accounting requirements, the Company is prohibited from classifying security purchases as held-to-maturity for a period of two years.
 
 
15
 

 

 
All of the Company’s mortgage-backed securities and collateralized mortgage obligations at September 30, 2014 and December 31, 2013 have been issued by U. S. government agencies or government sponsored enterprises and the collateral is predominantly one- to four-family mortgages.
 
The amortized cost and estimated fair value of investment securities at September 30, 2014, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Available for Sale
 
   
Amortized Cost
   
Fair Value
 
   
(In thousands)
 
Due in one year or less
  $ 851     $ 892  
Due after one year through five years
    49,125       48,624  
Due after five years through ten years
    55,533       54,089  
Due thereafter
    15,089       15,053  
Sub-total
    120,598       118,658  
GSE mortgage-backed securities and  GSE collateralized mortgage obligations
    117,121       116,737  
Total
  $ 237,719     $ 235,395  
 
At September 30, 2014 and December 31, 2013, $134.6 million and $139.0 million, respectively, of securities were pledged as collateral to secure certain deposits and FHLB advances.
 
Gross realized gains on available-for-sale securities totaled $718,000 while gross realized losses on available-for-sale securities totaled $218,000, for the nine months ended September 30, 2014.  There were no gross realized gains or losses on held-to-maturity securities for the nine months ended September 30, 2014.
 
Gross realized gains on available-for-sale securities totaled $4,000 while gross realized losses on available-for-sale securities totaled $0, for the three months ended September 30, 2014.
 
Gross realized gains on available-for-sale securities totaled $1.1 million while gross realized losses on available-for-sale securities totaled $18,000, for the nine months ended September 30, 2013.  There were no gross realized gains or losses on held-to-maturity securities for the nine months ended September 30, 2013.
 
Gross realized gains on available-for-sale securities totaled $22,000 while gross realized losses on available-for-sale securities totaled $18,000, for the three months ended September 30, 2013.  There were no gross realized gains or losses on held-to-maturity securities for the three months ended September 30, 2013.
 
 
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The following table shows the Company’s available-for-sale investment securities gross unrealized losses and fair value, and length of time that individual securities have been in a continuous unrealized loss position:
 
At September 30, 2014
 
Less than 12 months
   
12 months or more
   
Total
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(In thousands)
 
U. S. government obligations
  $ 45,145     $ 811     $ 45,089     $ 1,265     $ 90,234     $ 2,076  
Corporate debt obligations
    -       -       -       -       -       -  
Municipal debt obligations
    205       1       1,518       29       1,723       30  
SBA pools
    4,506       66       -       -       4,506       66  
GSE mortgage-backed securities
    23,095       95       98       1       23,193       96  
GSE collateralized mortgage obligations
    9,404       133       32,742       1,226       42,146       1,359  
Total
  $ 82,355     $ 1,106     $ 79,447     $ 2,521     $ 161,802     $ 3,627  
 
 
At December 31, 2013
 
Less than 12 months
   
12 months or more
   
Total
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(In thousands)
 
U. S. government obligations
  $ 126,055     $ 4,590     $ 8,006     $ 479     $ 134,061     $ 5,069  
Corporate debt obligations
    1,497       4       -       -       1,497       4  
Municipal debt obligations
    3,319       123       565       21       3,884       144  
SBA pools
    1,093       4       -       -       1,093       4  
GSE mortgage-backed securities
    1,629       82       33       1       1,662       83  
GSE collateralized mortgage obligations
    46,346       2,628       781       60       47,127       2,688  
Total
  $ 179,939     $ 7,431     $ 9,385     $ 561     $ 189,324     $ 7,992  
 
At September 30, 2014, there were 50 securities in the less-than-twelve-month category and 49 securities in the twelve-month-or-more category for the available-for-sale portfolio.  Included in the 50 securities in the less-than-twelve-month category are (a) 23 U.S government obligations, (b) eight collateralized mortgage obligations, (c) four SBA pools, (d) fourteen mortgage-backed securities and (e) one municipal debt obligation.  Included in the 49 securities in the twelve-month-or-more category are (a) 24 U.S government obligations, (b) 19 collateralized mortgage obligations, (c) one mortgage-backed security and (d) five municipal debt obligations.
 
At December 31, 2013, there were 120 securities in the less-than-twelve-months category and eight securities in the twelve-months-or-more category for the available-for-sale portfolio.  Included in the 120 securities in the less-than-twelve months category for available-for-sale securities are (a) 68 U. S. government securities; (b) two corporate debt obligations of which one has been in a loss position for two months and one has been in a loss position for one month; (c) twelve municipal debt obligations, of which five have been in a loss position for eight months, five have been in a loss position for seven months and two of which have been in a loss position for two months; (d) three SBA pools, two of which have been in a loss position for 10 months and one has been in a loss position for one month; (e) two mortgage-backed securities, one of which has been in a loss position for eight months and one of which has been in a loss position for five months and (f) 33 collateralized mortgage obligations.  Included in the eight securities in the twelve-months-or-more category are (a) four U. S. government securities; (b) two municipal debt obligations; (c) one mortgage-backed security and (d) one collateralized mortgage obligation.
 
 
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At December 31, 2013, there were no held to maturity investments in an unrealized loss position.
 
The Company’s investment in U. S. Government agency securities and SBA loan pools consist of debt obligations of government sponsored enterprises (“GSE”) and pools of loans from the Small Business Administration.  All principal and interest payments are current in regards to the investments.  The contractual cash flows of these investments are guaranteed by an agency of the United States government.  The change in market value is attributable to current interest rate levels relative to the Company’s cost and not credit quality.  As the change in market value is attributable to changes in interest rates and not necessarily underlying credit deterioration, and because the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the securities before recovery occurs, the Company does not consider the investments to be other-than-temporarily impaired at September 30, 2014.
 
The Company’s investment in municipal bonds consists of general obligations and revenue obligations of municipalities in the United States and bond anticipation notes of entities located in New Jersey.  The change in market value is attributable to the changes in interest rates relative to the Company’s cost and because the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the securities before recovery occurs, the Company does not consider the investments to be other-than-temporarily impaired at September 30, 2014.
 
The Company’s investment in mortgage-backed securities and collateralized mortgage obligations consists of GSE securities.  The change in market value is attributable to changes in interest rates and widening credit spreads, and not due to underlying credit deterioration.  The contractual cash flows for the investments are performing as expected.  As the change in market value is attributable to changes in interest rates and credit spread and not underlying credit deterioration, and because the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the securities before recovery occurs, the Company does not consider the investments to be other-than-temporarily impaired at September 30, 2014.
 
 
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7.            Loans and Allowance for Loan Losses

The components of loans at September 30, 2014 and December 31, 2013 are as follows:

   
At September 30, 2014
   
At December 31, 2013
 
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Real estate loans:
                       
One- to four-family
  $ 153,276       55.4 %   $ 149,726       52.9 %
Multi-family
    4,154       1.5       284       0.1  
Commercial
    63,421       23.0       79,601       28.1  
Construction and land
    7,309       2.6       8,665       3.1  
Home equity loans and lines of credit
    25,011       9.1       26,442       9.4  
Commercial
    21,276       7.7       17,302       6.1  
Consumer
    2,035       0.7       834       0.3  
Total loans receivable
  $ 276,482       100.0 %   $ 282,854       100.0 %
Deferred loan fees
    (510 )             (847 )        
Allowance for loan losses
    (4,417 )             (5,853 )        
Total loans receivable, net
  $ 271,555             $ 276,154          

Our loans are originated and administered through our loan policies.  We originate one- to four-family residential real estate loans, multi-family loans, commercial real estate loans, construction and land loans, home equity loans and lines of credit, commercial business loans and consumer loans.  Our one- to four-family residential loans also include loans to businesses for a commercial purpose, which are secured by liens on the borrower’s residence.  We offer fixed-rate, adjustable-rate and balloon loans that amortize with monthly loan payments.  We also originate or purchase SBA, USDA and other government insured loan products.

We have not originated or purchased any sub-prime or Alt-A loans.  We have not originated or purchased payment-option ARMs or negative amortizing loans.

While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed- versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders competing in our market area.  Loan originations are derived from a number of sources, including branch office personnel, existing customers, borrowers, builders, attorneys, accountants and other professionals, real estate broker referrals and walk-in customers.

Our loan origination activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand, while declining interest rates may stimulate increased loan demand. Accordingly, the volume of loan originations, the mix of fixed and adjustable-rate loans, and the profitability of this activity can vary from period to period.  One- to four-family residential mortgage loans are generally underwritten to current Fannie Mae seller/servicer guidelines, and are closed on documents that conform to Fannie Mae guidelines.
 
 
19
 

 

 
Our board of directors grants lending authority to our Board Loan Committee, Management Loan Committee and to individual executive officers and loan officers.  Our lending activities are subject to written policies established by the board of directors.  These policies are reviewed periodically.  The Management Loan Committee may approve loans in accordance with applicable loan policies, including our policy governing loans to one borrower.  This policy limits the aggregate dollar amount of credit that may be extended to any one borrower and related entities.  The Management Loan Committee may approve secured loans in amounts up to $750,000, and unsecured loans in amounts up to $300,000 with an aggregate exposure not to exceed $1.5 million.  The Board Loan Committee may approve secured and unsecured loans in amounts up to the legal lending limit provided that unanimous approval is obtained.  If unanimous approval is not obtained, the request must go to the full Board.

When a loan is more than 10 days delinquent, we generally send a computer-generated notice of delinquency to the borrower to remit the delinquent payment or contact the Bank.  When the computer-generated notice does not cause the loan to be brought current, a telephone call is the next step in the process.  If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued.    By the 36th day of delinquency, good faith efforts to establish live contact with the borrower is made to inform them that loss mitigation options may be available.  In addition, written notice with information about loss mitigation options is provided to the borrower by the 45th day of delinquency.  If payment is not received within 60 days of the due date, we accelerate loans and demand payment in full.  Failure to pay within 90 days of the original due date may result in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are charged-off when they are between 90 to 120 days delinquent.  For commercial loans, procedures with respect to demand letters and legal action may vary depending upon individual circumstances.

Loans are reviewed on a regular basis, and are placed on nonaccrual status when either principal or interest is 90 days or more past due.  In addition, we place loans on nonaccrual status when we believe that there is sufficient reason to question the borrower’s ability to continue to meet contractual principal or interest payment obligations.  Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income.  Interest payments received on nonaccrual loans are not recognized as income unless warranted based on the borrower’s financial condition and payment record.

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  We evaluate the adequacy of the allowances for loan losses on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings.  The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of a 1) a general valuation allowance on homogeneous credits in the loan portfolio; 2) a valuation allowance of loans reviewed for impairment and 3) an unallocated component.  Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available to absorb losses in the loan portfolio.  We periodically evaluate the carrying value of loans and the factors used in our evaluation of our allowance for loan losses.  While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations or if we adjust the factors we use in our methodology.  This may reduce our net income by increasing our provision for loan losses.
 
 
20
 

 


The following table sets forth the activity in the allowance for loan losses and the related recorded investment in loans receivable by portfolio class at and for the three and nine months ended September 30, 2014 (in thousands):
       
   
Real Estate
                               
   
One-to
four-
family
   
Multi-
family
   
Commer-
cial
   
Con-
struction
and land
   
Home
equity
and
credit
lines
   
Commer-
cial
   
Con-
sumer
   
Unallo-
cated
   
Total
 
Allowance for loan losses for the three months ended September 30, 2014:
                               
Beginning balance
  $ 1,270     $ 40     $ 524     $ 105     $ 280     $ 1,025     $ 20     $ 1,800     $ 5,064  
Charge-offs
    (279 )     -       (54 )     -       -       (101 )     -       -       (434 )
Recoveries
    5       -       6       -       30       4       -       -       45  
Provision (Credit)
    (356 )     10       (210 )     (29 )     (134 )     869       67       (475 )     (258 )
Ending balance
  $ 640     $ 50     $ 266     $ 76     $ 176     $ 1,797     $ 87     $ 1,325     $ 4,417  
                                                                         
Allowance for loan losses for the nine months ended September 30, 2014:
                                         
Beginning balance
  $ 1,650     $ 3     $ 1,222     $ 90     $ 275     $ 1,843     $ 20     $ 750     $ 5,853  
Charge-offs
    (470 )     -       (199 )     (76 )     (100 )     (2,388 )     -       -       (3,233 )
Recoveries
    69       -       909       -       30       445       54       -       1,507  
Provision
    (609 )     47       (1,666 )     62       (29 )     1,897       13       575       290  
Ending balance
  $ 640     $ 50     $ 266     $ 76     $ 176     $ 1,797     $ 87     $ 1,325     $ 4,417  
                                                                         
Allowance ending balance:
                                                                       
Related to loans individually evaluated for impairment
  $ 79     $ -     $ -     $ -     $ 36     $ -     $ -     $ -     $ 115  
Related to loans collectively evaluated for impairment
    561       50       266       76       140       1,797       87       1,325       4,302  
Total balance
  $ 640     $ 50     $ 266     $ 76     $ 176     $ 1,797     $ 87     $ 1,325     $ 4,417  
                                                                         
Loans receivable:
                                                                       
 individually evaluated for impairment
  $ 9,387     $ -     $ 2,888     $ 3,106     $ 984     $ 989     $ -     $ -     $ 17,354  
  collectively evaluated for impairment
    143,889       4,154       60,533       4,203       24,027       20,287       2,035       -       259,128  
Ending balance
  $ 153,276     $ 4,154     $ 63,421     $ 7,309     $ 25,011     $ 21,276     $ 2,035     $ -     $ 276,482  
 
 
21
 

 

 
The following table sets forth the activity in the allowance for loan losses by portfolio class for the three and nine months ended September 30, 2013 (in thousands):
 
       
   
Real Estate
                               
   
One-to
four-
family
   
Multi-
family
   
Commer-
cial
   
Con-
struction
and land
   
Home
equity
and
credit
lines
   
Commer-
cial
   
Con-
sumer
   
Unallo-
cated
   
Total
 
Allowance for loan losses for the three months ended September 30, 2013:
                               
Beginning balance
  $ 1,361     $ 15     $ 660     $ 105     $ 239     $ 703     $ 22     $ 1,500     $ 4,605  
Charge-offs
    (50 )     -       (866 )     -       (59 )     (954 )     -       -       (1,929 )
Recoveries
    1       -       -       -       -       167       5       -       173  
Provision
    166       (11 )     1,471       124       98       985       (2 )     -       2,831  
Ending balance
  $ 1,478     $ 4     $ 1,265     $ 229     $ 278     $ 901     $ 25     $ 1,500     $ 5,680  
                                                                         
Allowance for loan losses for the nine months ended September 30, 2013:
                                         
Beginning balance
  $ 692     $ 6     $ 1,107     $ 138     $ 277     $ 405     $ 21     $ 1,500     $ 4,146  
Charge-offs
    (209 )     -       (1,813 )     (37 )     (210 )     (1,961 )     (7 )     -       (4,237 )
Recoveries
    1       -       -       54       -       167       9       -       231  
Provision
    994       (2 )     1,971       74       211       2,290       2       -       5,540  
Ending balance
  $ 1,478     $ 4     $ 1,265     $ 229     $ 278     $ 901     $ 25     $ 1,500     $ 5,680  

The following table sets forth the allowance for loan losses and the recorded investment in loans receivable by portfolio class as of December 31, 2013 (in thousands):

   
Real Estate
                               
   
One- to
four-
family
   
Multi-
family
   
Commer-
cial
   
Con-
struction
and land
   
Home
equity
and
credit
lines
   
Commer-
cial
   
Con-
sumer
   
Unallo-
cated
   
Total
 
Allowance ending balance:
                                                     
  Related to loans individually evaluated for impairment
  $ 210     $ -     $ 9     $ -     $ 8     $ 1,550     $ -     $ -     $ 1,777  
  Related to loans collectively evaluated for impairment
    1,440       3       1,213       90       267       293       20       750       4,076  
Total allowance
  $ 1,650     $ 3     $ 1,222     $ 90     $ 275     $ 1,843     $ 20     $ 750     $ 5,853  
                                                                         
Loans receivable:
                                                                       
  Individually evaluated for impairment
  $ 8,933     $ -     $ 9,452     $ 3,323     $ 778     $ 2,784     $ -     $ -     $ 25,270  
  Collectively evaluated for impairment
    140,793       284       70,149       5,342       25,664       14,518       834       -       257,584  
Ending balance
  $ 149,726     $ 284     $ 79,601     $ 8,665     $ 26,442     $ 17,302     $ 834     $ -     $ 282,854  
 
 
22
 

 

 
The following tables present the classes of the loan portfolio summarized by the classification rating with the Company’s internal risk rating system as of September 30, 2014 and December 31, 2013:

September 30, 2014
 
Pass
   
Watch
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
   
(In thousands)
 
Real estate loans:
                                   
   One- to four-family
  $ 138,867     $ 8,708     $ -     $ 5,701     $ -     $ 153,276  
   Multi-family
    4,154       -       -       -       -       4,154  
   Commercial
    41,756       16,368       836       4,461       -       63,421  
   Construction and land
    6,247       -       -       1,062       -       7,309  
 Home equity and credit lines
    23,013       976       -       1,022       -       25,011  
Commercial
    18,042       2,245       -       989       -       21,276  
Consumer
    780       89       1,166       -       -       2,035  
Total
  $ 232,859     $ 28,386     $ 2,002     $ 13,235     $ -     $ 276,482  

December 31, 2013
 
Pass
   
Watch
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
   
(In thousands)
 
Real estate loans:
                                   
   One- to four-family
  $ 130,862     $ 7,712     $ 1,783     $ 9,369     $ -     $ 149,726  
   Multi-family
    -       284       -       -       -       284  
   Commercial
    45,181       22,851       3,739       7,830       -       79,601  
   Construction and land
    4,060       1,140       -       3,465       -       8,665  
 Home equity and credit lines
    24,891       597       108       846       -       26,442  
Commercial
    9,325       1,519       3,674       340       2,444       17,302  
Consumer
    731       83       20       -       -       834  
Total
  $ 215,050     $ 34,186     $ 9,324     $ 21,850     $ 2,444     $ 282,854  

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan.  An insignificant delay or shortfall in the amount of payments does not necessarily result in the loan being identified as impaired.  For this purpose, delays less than 90 days are generally considered to be insignificant.

Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable.  Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.  Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.  Loans classified as watch exhibit some of the following risk traits, such as having policy exceptions, documentation concerns, lack of financial statements or declining financial ratios, or pay slowly but never delinquent more than 30 days; however at the time of the classification no loss is expected.
 
 
23
 

 


The following table summarizes information in regards to impaired loans by loan portfolio class as of September 30, 2014 and December 31, 2013:

   
September 30, 2014
   
December 31, 2013
 
(Dollars in thousands)
 
Recorded investment
   
Unpaid
Principal
Balance
   
Related Allowance
   
Recorded investment
   
Unpaid
Principal
Balance
   
Related Allowance
 
                                     
With an allowance recorded:
                                   
   Real estate loans:
                                   
      One- to four-family
  $ 3,217     $ 3,522     $ 79     $ 2,728     $ 2,870     $ 210  
      Multi-family
    -       -       -       -       -       -  
      Commercial
    -       -       -       66       66       9  
      Construction and land
    -       -       -       -       -       -  
      Home equity and credit lines
    148       157       36       60       61       8  
   Commercial
    -       -       -       2,784       3,178       1,550  
   Consumer
    -       -       -       -       -       -  
    $ 3,365     $ 3,679     $ 115     $ 5,638     $ 6,175     $ 1,777  
                                                 
With no related allowance recorded:
                                               
   Real estate loans:
                                               
      One- to four-family
  $ 6,170     $ 7,537     $ -     $ 6,205     $ 7,297     $ -  
      Multi-family
    -       -       -       -       -       -  
      Commercial
    2,888       3,107       -       9,386       12,709       -  
  Construction and land
    3,106       3,183       -       3,323       3,325       -  
  Home equity and credit lines
    836       1,064       -       718       946       -  
   Commercial
    989       2,316       -       -       -       -  
   Consumer
    -       -       -       -       3       -  
    $ 13,989     $ 17,207     $ -     $ 19,632     $ 24,280     $ -  
                                                 
Total
                                               
   Real estate loans:
                                               
      One- to four-family
  $ 9,387     $ 11,059     $ 79     $ 8,933     $ 10,167     $ 210  
      Multi-family
    -       -       -       -       -       -  
      Commercial
    2,888       3,107       -       9,452       12,775       9  
      Construction and land
    3,106       3,183       -       3,323       3,325       -  
      Home equity and credit lines
    984       1,221       36       778       1,007       8  
   Commercial
    989       2,316       -       2,784       3,178       1,550  
   Consumer
    -       -       -       -       3       -  
    $ 17,354     $ 20,886     $ 115     $ 25,270     $ 30,455     $ 1,777  
 
 
24
 

 

 
The following table presents additional information regarding the Company’s impaired loans for the nine months ended September 30, 2014 and September 30, 2013:

For the Nine months ended:
 
September 30, 2014
   
September 30, 2013
 
(Dollars in thousands)
 
Average Recorded Investment
   
Interest
Income Recognized While
Impaired
   
Average Recorded Investment
   
Interest
Income Recognized While
Impaired
 
                         
With an allowance recorded:
                       
   Real estate loans:
                       
      One-to four-family
  $ 3,171     $ 52     $ 2,393     $ 57  
      Multi-family
    -       -       -       -  
      Commercial
    -       3       2,253       30  
      Construction and land
    -       -       1,612       12  
      Home equity and credit lines
    145       1       147       3  
   Commercial
    -       46       474       3  
   Consumer
    -       -       -       -  
    $ 3,316     $ 102     $ 6,879     $ 105  
                                 
With no related allowance recorded:
                               
   Real estate loans:
                               
       One-to four-family
  $ 6,369     $ 109     $ 6,225     $ 157  
      Multi-family
    -       -       -       -  
      Commercial
    2,965       109       9,108       303  
      Construction and land
    3,155       36       1,901       25  
      Home equity and credit lines
    889       7       603       21  
   Commercial
    1,148       19       2,512       42  
   Consumer
    -       -       2       -  
    $ 14,526     $ 280     $ 20,351     $ 548  
                                 
Total
                               
   Real estate loans:
                               
      One-to four-family
  $ 9,540     $ 161     $ 8,618     $ 214  
      Multi-family
    -       -       -       -  
      Commercial
    2,965       112       11,361       333  
      Construction and land
    3,155       36       3,513       37  
      Home equity and credit lines
    1,034       8       750       24  
   Commercial
    1,148       65       2,986       45  
   Consumer
    -       -       2       -  
    $ 17,842     $ 382     $ 27,230     $ 653  

If these loans made all the required principal and interest payments under their original contractual rate or the restructured rate, interest income on such loans would have increased by approximately $426,000 and $328,000 for the nine months ended September 30, 2014 and 2013, respectively.
 
 
25
 

 


The following table presents additional information regarding the Company’s impaired loans for the three months ended September 30, 2014 and September 30, 2013:

For the Three Months Ended:
 
September 30, 2014
   
September 30, 2013
 
(Dollars in thousands)
 
Average Recorded Investment
   
Interest
Income Recognized
While
Impaired
   
Average Recorded Investment
   
Interest
Income Recognized
While
Impaired
 
                         
With an allowance recorded:
                       
   Real estate loans:
                       
      One-to four-family
  $ 3,303     $ 15     $ 2,375     $ 27  
      Multi-family
    -       -       -       -  
      Commercial
    -       -       2,238       28  
      Construction and land
    -       -       1,612       12  
      Home equity and credit lines
    158       -       146       3  
   Commercial
    -       -       464       3  
   Consumer
    -       -       -       -  
    $ 3,461     $ 15     $ 6,835     $ 73  
                                 
With no related allowance recorded:
                               
   Real estate loans:
                               
      One-to four-family
  $ 6,439     $ 25     $ 6,155     $ 63  
      Multi-family
    -       -       -       -  
      Commercial
    2,942       27       8,998       139  
      Construction and land
    3,121       12       1,826       -  
      Home equity and credit lines
    888       -       597       10  
   Commercial
    1,127       -       2,486       14  
   Consumer
    -       -       2       -  
    $ 14,517     $ 64     $ 20,064     $ 226  
                                 
Total
                               
   Real estate loans:
                               
      One-to four-family
  $ 9,742     $ 40     $ 8,530     $ 90  
      Multi-family
    -       -       -       -  
      Commercial
    2,942       27       11,236       161  
      Construction and land
    3,121       12       3,438       12  
      Home equity and credit lines
    1,046       -       743       13  
   Commercial
    1,127       -       2,950       17  
   Consumer
    -       -       2       -  
    $ 17,978     $ 79     $ 26,899     $ 299  

If these loans made all the required principal and interest payments under their original contractual rate or the restructured rate, interest income on such loans would have increased by approximately $136,000 and $59,000 for the three months ended September 30, 2014 and 2013, respectively.
 
 
26
 

 


The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status at the dates indicated.
 
   
30-59
Days Past
Due
   
60-89
Days Past
Due
   
90 or More
Days Past
Due
   
Total
Past
Due
   
Current
   
Total
Loans
Receivable
   
Loans
Receivable >
90 Days and Accruing
    (In thousands)
At September 30, 2014
   
Real estate loans:
                                       
One- to four-family
  $ -     $ 1,047     $ 3,086     $ 4,133     $ 149,143     $ 153,276     $ -  
Multi-family
    -       -       -       -       4,154       4,154       -  
Commercial
    -       -       201       201       63,220       63,421       -  
Construction and land
    -       -       -       -       7,309       7,309       -  
Home equity loans and lines of credit
    56       18       484       558       24,453       25,011       -  
Commercial
    998       -       -       998       20,278       21,276       -  
Consumer and other
    -       -       -       -       2,035       2,035       -  
Total
  $ 1,054     $ 1,065     $ 3,771     $ 5,890     $ 270,592     $ 276,482     $ -  
 
   
30-59
Days Past
Due
   
60-89
Days Past
Due
   
90 or More
Days Past
Due
   
Total
Past
Due
   
Current
   
Total
Loans
Receivable
   
Loans
Receivable >
90 Days and Accruing
 
   
(In thousands)
 
At December 31, 2013
                                         
Real estate loans:
                                         
One- to four-family
  $ 3,393     $ 2,422     $ 3,399     $ 9,214     $ 140,512     $ 149,726     $ -  
Multi-family
    -       -       -       -       284       284       -  
Commercial
    62       403       1,054       1,519       78,082       79,601       -  
Construction and land
    -       -       -       -       8,665       8,665       -  
Home equity loans and lines of credit
    356       15       464       835       25,607       26,442       -  
Commercial
    -       340       -       340       16,962       17,302       -  
Consumer and other
    -       -       -       -       834       834       -  
Total
  $ 3,811     $ 3,180     $ 4,917     $ 11,908     $ 270,946     $ 282,854     $ -  

Loans are reviewed on a regular basis, and generally are placed on nonaccrual status when either principal or interest is 90 days or more past due or if we believe that there is sufficient reason to question the borrower’s ability to continue to meet contractual principal or interest payment obligations.  We currently obtain updated appraisals and title searches on all collateral-dependent loans secured by real estate that are 90 days or more past due and placed on non-accrual status.
 
 
27
 

 


Non-performing assets at September 30, 2014 and December 31, 2013 are as follows:

   
September 30,
2014
   
December 31, 2013
 
   
(In thousands)
 
Non-accrual loans:
           
Real estate loans:
           
One- to four-family
  $ 5,667     $ 5,162  
Multi-family
    -       -  
Commercial
    748       5,215  
Construction and land
    1,062       1,233  
Home equity loans and lines of credit
    940       715  
Commercial
    989       1,235  
Consumer
    -       -  
Total non-accrual loans
    9,406       13,560  
                 
Accruing loans 90 days or more past due:
               
All loans
  $ -     $ -  
                 
Total non-performing loans
  $ 9,406     $ 13,560  
                 
Real estate owned
    3,223       3,258  
                 
Total non-performing assets
  $ 12,629     $ 16,818  
                 
                 
Ratios:
               
Total non-performing loans to total loans
    3.40 %     4.79 %
Total non-performing loans to total assets
    1.70 %     2.33 %
Total non-performing assets to total assets
    2.28 %     2.88 %

At September 30, 2014, the non-accrual loans consisted of 49 one- to four-family real estate loans, five commercial real estate loans, two construction and land loans, 15 home equity loans, and one commercial loan.  Included in non-accrual loans are 14 troubled debt restructurings in the amount of $3.3 million.  The Company had 13 properties in real estate owned totaling $3.2 million consisting of five one- to four-family dwelling units, three non-residential properties and five parcels which had secured construction and land loans.  Included in real estate owned at September 30, 2014 and December 31, 2013 are three possible branch locations in the amount of $2.4 million that were transferred from office properties and equipment during 2012.

At September 30, 2014, in addition to the troubled debt restructurings included in the non-accrual loan totals, the Company had 27 loans totaling $7.8 million that were considered troubled debt restructurings and classified as impaired.  Twenty-three of the troubled debt restructurings (TDRs) are one- to four-family real estate loans with a net loan balance of $3.6 million, two of the TDRs are commercial real estate loans with a net loan balance of $2.1 million, one of the TDRs is a construction and land loan with a net loan balance of $2.0 million, and one of the TDRs is a home equity loan with a net loan balance of $45,000.
 
 
 
28
 

 

 
The following table summarizes information in regards to troubled debt restructurings for the three months ended September 30, 2014 and 2013 (of which there were none)
                   
September 30, 2014
 
Number of
Contracts
   
Pre-Modification Outstanding
Recorded
Investments
   
Post-Modification Outstanding
Recorded
Investments
 
   
(Dollars in thousands)
 
Real estate loans:
                 
One- to four-family
    1     $ 115     $ 115  
Total
    1     $ 115     $ 115  

The troubled debt that was restructured during the three months ended September 30, 2014 consisted of an interest rate modification and no debt was forgiven.

The following tables summarize information in regards to troubled debt restructurings for the nine months ended September 30, 2014 and 2013:
                   
September 30, 2014
 
Number of
Contracts
   
Pre-Modification Outstanding
Recorded
Investments
   
Post-Modification Outstanding
Recorded
Investments
 
   
(Dollars in thousands)
 
Real estate loans:
                 
One- to four-family
    2     $ 258     $ 258  
Total
    2     $ 258     $ 258  
                         
                         
September 30, 2013
 
Number of
Contracts
   
Pre-Modification Outstanding
Recorded
Investments
   
Post-Modification Outstanding
Recorded
Investments
 
   
(Dollars in thousands)
 
Real estate loans:
                       
One- to four-family
    3     $ 458     $ 458  
Total
    3     $ 458     $ 458  
                         

All of the troubled debt that was restructured during the nine months ended September 30, 2014 and 2013 consisted of interest rate modifications and no debt was forgiven.

There were no troubled debt restructurings with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the three months ended September 30, 2014 and September 30, 2013.

The following table presents troubled debt restructurings with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the nine months ended September 30, 2014 (of which there were none) and September 30, 2013:
             
That Subsequently Defaulted For the Nine months ended September 30, 2013
 
Number of contracts
   
Recorded Investment
 
   
(Dollars in thousands)
 
One-to-four family
    1     $ 111  
Commercial
    2       2,982  
Total
    3     $ 3,093  
 
 
 
29
 

 

 
Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses.  These potential incremental losses have been factored into our overall allowance for loan losses estimate.

8.            Deposits

Deposit accounts, by type, at September 30, 2014 and December 31, 2013 are summarized as follows:
             
   
At September 30, 2014
   
At December 31, 2013
 
   
Balance
   
Percent
   
Wtd.
Avg.
Rate
   
Balance
   
Percent
   
Wtd.
Avg.
Rate
 
   
(Dollars in thousands)
 
                                     
Deposit type:
                                   
Non-interest bearing demand
  $ 46,585       9.75 %     - %   $ 42,739       8.19 %     - %
Savings
    85,990       18.00       0.33       111,219       21.31       0.56  
NOW accounts
    153,018       32.02       0.41       152,279       29.17       0.42  
Super NOW accounts
    37,772       7.90       0.26       43,740       8.38       0.35  
Money market deposit
    52,979       11.09       0.30       63,811       12.22       0.40  
                                                 
Total transaction accounts
    376,344       78.76       0.31       413,788       79.27       0.40  
                                                 
Certificates of deposit
    101,517       21.24       1.41       108,239       20.73       1.45  
                                                 
Total deposits
  $ 477,861       100.00 %     0.54 %   $ 522,027       100.00 %     0.62 %
 
9.
Federal Home Loan Bank Borrowings

The following table sets forth information concerning advances from the Federal Home Loan Bank (“FHLB”) of New York, at September 30, 2014 and December 31, 2013:
                   
Maturity
 
Interest
Rate
   
September 30,
 2014
   
December 31,
2013
 
         
(Dollars in thousands)
 
October 1, 2014
    0.30 %   $ 9,670     $ -  
            $ 9,670     $ -  

At September 30, 2014, the Bank had a borrowing capacity of 30% of assets, or $165.8 million, available from the FHLB of New York, of which $9.7 million was outstanding.
 
10.
Fair Value Measurements

FASB 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).
 
 
 
30
 

 

 
The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices for similar 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 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).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2014 and December 31, 2013 are as follows:
                         
   
September 30,
2014
   
(Level 1)
Quoted
Prices in
Active
Markets for Identical
Assets
   
(Level 2) Significant Observable
Other Inputs
   
(Level 3) Significant Unobservable Inputs
 
   
(Dollars in thousands)
 
U. S. Government obligations
  $ 95,246     $ -     $ 95,246     $ -  
Mutual fund
    892       892       -       -  
Municipal debt obligations
    7,278       -       7,278       -  
SBA pools
    15,242       -       15,242       -  
GSE mortgage-backed securities
    57,458       -       57,458       -  
GSE collateralized mortgage obligations
    59,279       -       59,279       -  
Total investment securities available-for-sale
  $ 235,395     $ 892     $ 234,503     $ -  
 
   
December 31, 2013
   
(Level 1)
Quoted
Prices in
Active
Markets for Identical
Assets
   
(Level 2) Significant Observable
Other Inputs
   
(Level 3) Significant Unobservable Inputs
 
   
(Dollars in thousands)
 
U. S. Government obligations
  $ 136,783     $ -     $ 136,783     $ -  
Corporate debt obligations
    4,501       -       4,501       -  
Mutual fund
    945       945       -       -  
Municipal debt obligations
    6,719       -       6,719       -  
SBA pools
    1,093       -       1,093       -  
GSE mortgage-backed securities
    15,463       -       15,463       -  
GSE collateralized mortgage obligations
    61,622       -       61,622       -  
Total investment securities available-for-sale
  $ 227,126     $ 945     $ 226,181     $ -  
 
 
 
31
 

 

 
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2014 and December 31, 2013 are as follows:
                         
   
September 30, 2014
   
(Level 1)
Quoted
Prices in
Active
Markets for Identical
Assets
   
(Level 2) Significant Observable
Other Inputs
   
(Level 3) Significant Unobservable Inputs
 
   
(In thousands)
 
Impaired loans
  $ 10,201     $ -     $ -     $ 10,201  
Real estate owned
  $ 3,223     $ -     $ -     $ 3,223  
 
                         
   
December 31,
2013
   
(Level 1)
Quoted
Prices in
Active
Markets for Identical
Assets
   
(Level 2) Significant Observable
Other Inputs
   
(Level 3) Significant Unobservable Inputs
 
   
(In thousands)
 
Impaired loans
  $ 13,531     $ -     $ -     $ 13,531  
Real estate owned
  $ 2,600     $ -     $ -     $ 2,600  
 
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value at September 30, 2014:

   
Quantitative Information About Level 3 Fair Value Measurements
Description
 
Fair Value
Estimate
 
Valuation
Techniques
 
Unobservable
Input
 
Range (Weighted Average)
   
(In thousands)
                 
Impaired loans
  $ 10,201  
Appraisal of
collateral (1)
 
Liquidation
expenses (2)
 
-10.0% to -35.0% (-30.0%)
                   
Real estate owned
  $ 3,223  
Appraisal of
collateral (1)
 
Liquidation
expenses (2)
 
-10.0% to -25.0% (-15.0%)

 
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include level 3 inputs which are not identifiable.
 
(2)
Appraisals may be adjusted by management for qualitative factors including estimated liquidation expenses. The range of adjustments including liquidation expenses is presented as a percent of the appraisal.
 
 
 
32
 

 


The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value at December 31, 2013:

   
Quantitative Information About Level 3 Fair Value Measurements
Description
 
Fair Value
Estimate
 
Valuation
Techniques
 
Unobservable
Input
 
Range (Weighted Average)
   
(In thousands)
                 
Impaired loans
  $ 13,531  
Appraisal of
collateral (1)
 
Liquidation
expenses (2)
 
-10.0% to -35.0% (-30.0%)
                   
Real estate owned
  $ 2,600  
Appraisal of
collateral (1)
 
Liquidation
expenses (2)
 
-10.0% to -25.0% (-15.0%)

 
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include level 3 inputs which are not identifiable.
 
(2)
Appraisals may be adjusted by management for qualitative factors including estimated liquidation expenses. The range of adjustments including liquidation expenses is presented as a percent of the appraisal.
 
The following methods and assumptions were used to estimate the fair values of certain Company assets and liabilities at September 30, 2014 and December 31, 2013:

Cash and Amounts Due From Banks (Carried at Cost)
The carrying amounts reported in the balance sheet for cash and amounts due from banks approximate those assets’ fair values (Level 1).

Investment Securities
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), 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.

Loans Receivable (Carried at Cost)
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values (Level 3).

Impaired Loans (Generally Carried at Fair Value)
Impaired loans are those in which the Company has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  At September 30, 2014 and December 31, 2013, the fair value consists of loan balances of $3.4 million and $5.6 million, respectively, net of valuation allowances of $115,000 and $1.8 million, respectively, and loan balances of $9.7 million and $14.0 million, respectively, net of partial charge-offs of $2.7 million and $4.3 million, respectively.
 
 
 
33
 

 


Real Estate Owned (Carried at Lower of Cost or Fair Value)
Real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned.  Subsequently, real estate owned assets are carried at the lower of carrying value or fair value less estimated selling costs.  Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral.  These assets are included as Level 3 fair values.

Federal Home Loan Bank Stock (Carried at Cost)
The carrying amount of restricted investment in Company stock approximates fair value, and considers the limited marketability of such securities (Level 1).

Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value (Level 1).

Deposit Liabilities (Carried at Cost)
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) (Level 2).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 2).

Short-Term Borrowings (Carried at Cost)
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party (Level 2).

Off-Balance Sheet Financial Instruments (Disclosed at Cost)
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.  The fair value of commitments is not material.
 
 
 
34
 

 


The carrying amount and estimated fair value of the Company’s financial assets and liabilities at September 30, 2014 and December 31, 2013 are as follows:

   
September 30, 2014
 
   
Carrying
amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(In thousands)
 
Financial assets:
                             
Cash and amounts due from banks
  $ 8,388     $ 8,388     $ -     $ -     $ 8,388  
Investment securities available-for-sale
    235,395       892       234,503       -       235,395  
Federal Home Loan Bank stock
    938       938       -       -       938  
Loans receivable, net
    271,555       -       -       270,567       270,567  
Accrued interest receivable
    1,381       -       1,381       -       1,381  
                                         
Financial liabilities:
                                       
Deposits
    477,861       -       479,436       -        479,436  
Federal Home Loan Bank short-term borrowings
    9,670               9,670               9,670  
Accrued interest payable
    13       -       13       -       13  
                                         
Off-balance sheet financial instruments:
                                       
Commitments to extend credit and letters of credit
    -       -       -       -       -  
 
   
December 31, 2013
 
   
Carrying
amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(In thousands)
 
Financial assets:
                             
Cash and amounts due from banks
  $ 23,404     $ 23,404     $ -     $ -     $ 23,404  
Investment securities available-for-sale
    227,126       945       226,181       -       227,126  
Corporate debt obligations held-to-maturity
    1,193       -       1,396       -       1,396  
Municipal debt obligations held-to-maturity
    15,910       -       16,278       -       16,278  
GSE mortgage-backed securities held-to-maturity
    188       -       208       -       208  
Federal Home Loan Bank stock
    702       702       -       -       702  
Loans receivable, net
    276,154       -       -       276,861       276,861  
Accrued interest receivable
    1,530       -       1,530       -       1,530  
                                         
Financial liabilities:
                                       
Deposits
    522,027       -       524,104       -       524,104  
Accrued interest payable
    16       -       16       -       16  
                                         
Off-balance sheet financial instruments:
                                       
Commitments to extend credit and letters of credit
    -       -       -       -       -  
 
 
 
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11.
Regulatory Matters and Capital Requirements

As previously disclosed, on May 30, 2013, the Bank entered into an agreement with the Office of the Comptroller of the Currency (the “OCC”). The agreement provides, among other things, that within specified time frames:

 
the Bank must establish a Compliance Committee to monitor and coordinate the Bank’s adherence to the agreement and submit reports to the OCC;

 
the Bank must hire an independent consultant to review the Bank’s lending function, and the Bank must implement a written plan to correct deficiencies noted by the consultant;

 
the Bank must submit for review and non-objection by the OCC a three-year written capital plan;

 
the Bank must submit for review and non-objection by the OCC a three-year strategic plan;

 
the Bank must implement a profit plan to improve and sustain the Bank’s earnings;

 
the Bank must take immediate and continuing action to protect its interest in criticized assets, and must implement a written program to eliminate the basis of criticism of criticized, classified and certain other assets;

 
the Bank must review the adequacy of the Bank’s allowance for loan losses and establish a program for the maintenance of an adequate allowance for loan losses;

 
the Bank must implement a written program to improve credit risk management; and

 
the Bank must implement a policy to ensure that other real estate owned is managed in accordance with applicable federal regulations.

On May 30, 2013, the Bank was notified by the OCC that it established minimum capital ratios for the Bank requiring it to maintain a Tier 1 capital to adjusted total assets ratio of 9.50%, a Tier 1 capital to risk-weighted assets ratio of 11.00%, and a Total risk-based capital to risk-weighted assets ratio of 13.00%.  As of September 30, 2014, the Bank’s ratios for these items were 10.63%, 22.35% and 23.62%, respectively.
 
 
 
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12.
Entry into a Material Definitive Agreement

On September 10, 2014, Colonial Financial Services, Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and between the Company and Cape Bancorp, Inc. (“Cape Bancorp”).  Pursuant to the Merger Agreement, the Company will merge with and into the Cape Bancorp, with Cape Bancorp as the surviving entity. Immediately thereafter, Colonial Bank, FSB, a federal thrift and the Company’s wholly owned subsidiary, will merge with and into Cape Bank, a New Jersey chartered savings bank, with Cape Bank as the surviving entity.

Under the terms of the Merger Agreement, 50% of the Company’s common shares will be converted into Cape Bancorp common stock and the remaining 50% will be exchanged for cash.  The Company’s stockholders will have the option to elect to receive either 1.412 shares of the Company’s common stock or $14.50 in cash for each common share of the Company, subject to proration to ensure that, in the aggregate, 50% of the Company’s common shares will be converted into Cape Bancorp stock. In the event that the Company’s consolidated net book value at the month-end prior to the closing date is less than $63.1 million, the cash consideration will be reduced by an amount as determined by a formula included in the Merger Agreement.

The transaction has been approved by the Boards of Directors of the Company and Cape Bancorp. Completion of the transaction is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of the Company’s stockholders.

The Merger Agreement includes customary representations, warranties and covenants of the Company and Cape Bancorp made to each other as of specific dates.  The Company has agreed to operate its business in the ordinary course consistent with past practice until the closing of the transaction and not to engage in certain kinds of transactions during such period (without the prior written consent of the Cape Bancorp).

The Company has also agreed not to (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions, enter into discussions or an agreement concerning, or to provide confidential information in connection with, any proposals for alternative business combination transactions.

Through September 30, 2014, $470,000 in merger-related expenses have been incurred.
 
 
 
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provision, growth opportunities, regulatory compliance, interest rates and deposit growth.  Words such as “may,” “could,” “should,” “would,” “will,” “will likely result,” “believe,” “expect,” “plan,” “will continue,” “is anticipated,” “estimate,” “intend,” “project,” and similar expressions are intended to identify these forward-looking statements.  We wish to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings more than presently anticipated or projected.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U. S. Government, including policies of the U. S. Treasury and the Federal Reserve Board, the quality and composition of our loan or investment portfolios, demand for our loan products, deposit flows, competitive products and pricing, demand for financial services in our market area, changes in real estate values in our area, and changes in relevant accounting principles and guidelines.  Additional factors that could affect our results may be discussed in our Form 10-K for the year ended December 31, 2013 and in other reports filed with the Securities and Exchange Commission.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, the evaluation of other-than-temporary impairment of investments securities, the valuation of and our ability to realize deferred tax assets and the measurement of fair value.

           Allowance for Loan Losses.  The allowance for loan losses is calculated with the objective of maintaining an allowance sufficient to absorb estimated probable loan losses inherent in the loan portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral.

We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish the allowance for loan losses. The allowance for loan losses is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision for loan losses based on our evaluation of the losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date.
 
 
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The allowance for loan losses consists of specific, general and unallocated components. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses.  The fair value of impaired collateral dependent loans is estimated using an appraisal of the collateral less estimated liquidation expenses or discounted cash flows for non-collateral dependent loans.  Those impaired loans not requiring a write-down represent loans for which the fair value of the collateral or expected repayments exceeds the recorded investment in such loans.  Impaired loans are charged off to the estimated fair value.

The allowance for losses on loans is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio.  The allowance is adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.  These significant factors may include changes in our lending policies and procedures, changes in current general economic conditions and business conditions affecting our primary lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, loss experience, and duration of the current business cycle.  The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.

In March 2013, in an effort to enhance the allowance for loan loss methodology, the Bank instituted a migration analysis process in determining the allowance.  Migration analysis uses loan level attributes to track the movement of loans through the various loan classifications in order to estimate the percentage of losses likely to be incurred in a financial institution’s current portfolio. The purpose of migration analysis is to determine what rate of loss an institution has incurred on similarly criticized or past due loans. This purpose is the same as that of historical loss rate analysis, but it is more granular and therefore can give a truer reflection of the losses inherent in the current portfolio.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.  Future provisions for loan losses may include an unallocated component as we re-evaluate our estimates including, but not limited to changes in economic conditions in our market area, declines in local property values and concentrations of risk.  Included in our estimate and evaluation is an analysis of our mortgage loans, both current and delinquent, that may have private mortgage insurance.

Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters. Historically, we believe our estimates and assumptions have proven to be relatively accurate.  Nevertheless, because a small number of non-performing loans could result in net charge-offs significantly in excess of the estimated losses inherent in our loan portfolio, additional provisions to the allowance for loan losses may be required that would adversely impact earnings for future periods.  In addition, the OCC and the Board of Governors of the Federal Reserve System, as an integral part of their examination processes, periodically review our allowance for loan losses.  They may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations.  To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
 
 
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Other-Than-Temporary Impairment.  Investment securities are evaluated on at least a quarterly basis, to determine whether a decline in their value is other-than-temporary.  In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment security prior to an anticipated recovery in fair value.  Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings.  The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).  For equity securities, the full amount of the other-than-temporary impairment is recognized in earnings.
 
Valuation of Deferred Tax Assets.  In evaluating our ability to realize deferred tax assets, management considers all positive and negative information, including our past operating results and our forecast of future taxable income.  In determining future taxable income, management utilizes a budget process that makes business assumptions and the implementation of feasible and prudent tax planning strategies.  These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business.  Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets which would result in additional income tax expense in the period.

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  We estimate the fair value of financial instruments using a variety of valuation methods.  Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value.  When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value.  When observable market prices do not exist, we estimate fair value.  Other factors such as model assumptions and market dislocations can affect estimates of fair value.  Differences in the fair value and carrying value of certain financial instruments (including changes in the differences between the fair value and the carrying value from period to period), such as loans, securities held to maturity, deposits and borrowings do not affect our reported financial condition or results of operations, as such financial instruments are carried at cost.
 
 
40
 

 

 
Comparison of Financial Condition at September 30, 2014 and December 31, 2013

Total assets decreased $30.5 million, or 5.2%, to $552.7 million at September 30, 2014, from $583.2 million at December 31, 2013.  The decrease was mainly the result of decreases in cash and amounts due from banks, investment securities held-to-maturity, and net loans receivable offset by an increase in investment securities available-for-sale.

Net loans receivable decreased $4.6 million, or 1.7%, to $271.6 million at September 30, 2014 from $276.2 million at December 31, 2013.  One- to four-family residential real estate loans increased $3.6 million to $153.3 million at September 30, 2014 from $149.7 at December 31, 2013.  Commercial real estate loans decreased $16.2 million to $63.4 million at September 30, 2014 from $79.6 million at December 31, 2013.  Construction and land loans decreased $1.4 million to $7.3 million at September 30, 2014 from $8.7 million at December 31, 2013.  Home equity loans and lines of credit decreased $1.4 million to $25.0 million at September 30, 2014 from $26.4 million at December 31, 2013.  Commercial loans increased by $4.0 million to $21.3 million at September 30, 2014 from $17.3 million at December 31, 2013.  Included in the net loans receivable are nonaccrual loans which decreased to $9.4 million at September 30, 2014 from $13.6 million at December 31, 2013.

Real estate owned decreased to $3.2 million at September 30, 2014 from $3.3 million at December 31, 2013.  We currently hold through the foreclosure process or deed-in-lieu of foreclosure 13 properties, five of which are residential one- to four-family properties, three of which are nonresidential properties and five of which are construction and land loans.

Securities available-for-sale increased $8.3 million, or 3.7%, to $235.4 million at September 30, 2014 from $227.1 million at December 31, 2013.  This increase was the result of purchases in the amount of $70.4 million and transfers from the held-to-maturity portfolio in the amount of $10.0 million and a market value increase of $4.6 million offset by calls, maturities and sales in the amount of $69.4 million and $14.3 million in principal amortization.  Securities held-to-maturity decreased by $17.3 million as the entire held-to-maturity portfolio was transferred to the available-for-sale portfolio.

Deposits decreased $44.1 million, or 8.4%, to $477.9 million at September 30, 2014 from $522.0 million at December 31, 2013.  NOW accounts increased $700,000 to $153.0 million at September 30, 2014 from $152.3 million at December 31, 2013.  Savings accounts decreased $25.2 million to $86.0 million at September 30, 2014 from $111.2 million at December 31, 2013.  Super NOW accounts decreased by $5.9 million to $37.8 million at September 30, 2014 from $43.7 million at December 31, 2013.  Non-interest bearing demand accounts increased by $3.9 million to $46.6 million at September 30, 2014 from $42.7 million at December 31, 2013.  Certificates of deposit decreased by $6.7 million to $101.5 million at September 30, 2014 from $108.2 million at December 31, 2013.  Money market deposit accounts decreased $10.9 million, or 16.9%, to $52.9 million at September 30, 2014 from $63.8 million at December 31, 2014.

Federal Home Loan Bank borrowings totaled $9.7 million at September 30, 2014.  There were no Federal Home Loan Bank borrowings outstanding at December 31, 2013.

Total stockholders’ equity increased $3.6 million to $62.8 million at September 30, 2014 from $59.2 million at December 31, 2013.  This increase was mainly attributable to net income of $415,000 and an increase in the market value of available for sale securities of $3.1 million.
 
 
41
 

 

 
Comparison of Operating Results for the Three Months Ended September 30, 2014 and September 30, 2013

General.  We experienced a net loss of $171,000 for the three months ended September 30, 2014 compared to a net loss of $1.9 million for the three months ended September 30, 2013.  The principal reasons for the decrease in the net loss were a decrease in the provision for loan losses in the amount of $3.1 million and a decrease in total non-interest expense of $144,000, offset by a decrease in net interest income of $452,000, a decrease in non-interest income of $22,000 and an increase in income tax expense of $982,000.

Interest Income.  Interest income decreased $705,000 to $3.8 million for the three months ended September 30, 2014 from $4.5 million for the three months ended September 30, 2013.  The decrease in interest income resulted from a decrease of $392,000 in interest income on loans and a decrease of $313,000 in interest income on securities.

Interest income on loans decreased $392,000 to $3.0 million for the three months ended September 30, 2014 from $3.4 million for the three months ended September 30, 2013.  This decrease was caused by a decrease in the average yield on loans to 4.44% for the three months ended September 30, 2014 from 4.65% for the three months ended September 30, 2013 along with a decrease in the average balance of loans of $27.9 million to $268.1 million for the three months ended September 30, 2014 from $296.0 million for the three months ended September 30, 2013.

Interest income on securities decreased by $313,000 to $804,000 for the three months ended September 30, 2014 from $1.1 million for the three months ended September 30, 2013.  The decrease in interest income on securities was due to a decrease in the average balance of taxable and tax-exempt securities to $238.5 million for the three months ended September 30, 2014 from $273.5 million for the three months ended September 30, 2013 along with a decrease in the average yield of 28 basis points to 1.35% from 1.63% for the three months ended September 30, 2014 and 2013.  The yields on tax-exempt securities are not tax-affected.

Interest Expense. Interest expense decreased $253,000 to $654,000 for the three months ended September 30, 2014 from $907,000 for the three months ended September 30, 2013.

Interest expense on interest-bearing deposits decreased by $246,000 to $646,000 for the three months ended September 30, 2014 from $892,000 for the three months ended September 30, 2013.  The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 0.60% for the three months ended September 30, 2014 from 0.74% for the three months ended September 30, 2013, and a decrease in the average balance of interest-bearing deposits to $429.9 million for the three months ended September 30, 2014 from $483.2 million for the three months ended September 30, 2013.  We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended September 30, 2014, reflecting lower market rates.

Interest expense on borrowings decreased $7,000 to $8,000 for the three months ended September 30, 2014 from $15,000 for the three months ended September 30, 2013.  This decrease was primarily due to a $7.4 million decrease in the average balance of borrowings to $8.2 million for the three months ended September 30, 2014 from $15.6 million for the three months ended September 30, 2013 offset by an increase in the average rate paid on borrowings to 0.39% for the three months ended September 30, 2014 from 0.38% for the three months ended September 30, 2013.
 
 
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 Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable credit losses inherent in the loan portfolio.  In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluation of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans.  The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events change.  We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

During the three months ended September 30, 2014, the Company charged off $434,000 in loans, which included $279,000 on one- to four-family real estate loans, $54,000 on commercial real estate loans, and $101,000 on commercial loans.  As part of the Bank’s loan collection process, we re-appraise loans that are 90 days delinquent or impaired.  The reasons for the charge-offs in the three months ended September 30, 2014 were the cash flow analysis that we completed on non-collateral based impaired loans and the reduced appraisals that we received on collateral-based impaired loans we were monitoring.  The charge-offs during this quarter are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan.  The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

During the three months ended September 30, 2013, the Company charged off $1.9 million in loans, which included $50,000 on one- to four-family real estate loans, $867,000 on commercial real estate loans, $59,000 on home equity and lines of credit, and $954,000 on commercial loans.  As part of the Bank’s loan collection process, we re-appraise loans that are delinquent or impaired.  The reason for the charge-offs in the three months ended September 30, 2013 were partially due to the reduced appraisals that we received on the impaired loans we were monitoring.  The charge-offs during this quarter are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan.  The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

Based on our evaluation of the above factors, we recorded a negative provision for loan losses of $258,000 for the three months ended September 30, 2014 (i.e., a credit to earnings) and we recorded a provision for loan losses of $2.8 million for the three months ended September 30, 2013.  The allowance for loan losses was $4.4 million, or 1.60% of total loans, at September 30, 2014, compared to $5.7 million, or 1.95% of total loans, at September 30, 2013.  Our balance of loans we evaluated individually for impairment was $17.4 million at September 30, 2014 and $25.3 million at December 31, 2013.  At September 30, 2014, December 31, 2013 and September 30, 2013, we maintained unallocated allowances for loan losses of $1.3 million, $750,000 and $1.5 million respectively.  The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio, as well as a Company-specific, industry-wide reluctance and a regulatory reluctance to reduce further allowances at this time.  The Company believes that the amount of provision in 2014 and the resulting allowance at September 30, 2014, are appropriate given the continuing level of risk in the loan portfolio, including the overall level of non-performing loans.
 
 
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To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate at September 30, 2014 and 2013.  However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio (including residential and commercial real estate loans) could result in material increases in our provisions for loan losses.

Non-interest Income.  Non-interest income was $407,000 for the three months ended September 30, 2014 and $429,000 for the three months ended September 30, 2013.  For the three months ended September 30, 2014, there was a net gain on the sale and call of investment securities in the amount of $4,000 compared to a net gain of $4,000 for the three months ended September 30, 2013.  Fees and service charges on deposit accounts decreased by $17,000 to $286,000 for the three months ended September 30, 2014 from $303,000 for the three months ended September 30, 2013.    Earnings on bank owned life insurance totaled $108,000 for the three months ended September 30, 2014 and $112,000 for the three months ended September 30, 2013.

Non-interest Expense.  Non-interest expense decreased $144,000 to $3.7 million for the three months ended September 30, 2014 from $3.8 million for the three months ended September 30, 2013.  Compensation and benefits expense decreased by $391,000 to $1.4 million for the three months ended September 30, 2014 compared to $1.8 million for the three months ended September 30, 2013.  The decrease in compensation and benefit expense was due to the elimination of director fees for the three months ended September 30, 2014 as the director’s suspended payment of their fees.  The decline was also due to reduced employee hours as branch staffing was matched to customer activity for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, and reduced ESOP expense.  Occupancy and equipment expense decreased $22,000 to $394,000 for the three months ended September 30, 2014 from $416,000 for the three months ended September 30, 2013.  Federal deposit insurance premiums decreased $33,000 to $178,000 for the three months ended September 30, 2014 from $211,000 for the three months ended September 30, 2013.  The decrease in federal deposit insurance premiums was due to reduced deposit balances.  Data processing fees increased by $22,000 to $257,000 for the three months ended September 30, 2014 from $235,000 for the three months ended September 30, 2013.  Professional fees decreased $48,000 due to decreased costs associated with loan collection, regulatory consulting and strategic planning services.  Net real estate owned expense decreased $71,000 to $358,000 for the three months ended September 30, 2014 from $429,000 for the three months ended September 30, 2013.  This decrease was due to reduced write-downs on REO properties and reduced REO expenses offset by a loss in the amount of $9,000 on real estate owned sold for the three months ended September 30, 2014.  Merger-related expenses of $470,000 were incurred during the three months ended September 30, 2014.  Other expenses decreased to $331,000 for the three months ended September 30, 2014 from $367,000 for the three months ended September 30, 2103.

Income Tax Expense/Benefit. We recorded an income tax expense of $285,000 for the three months ended September 30, 2014, compared to an income tax benefit of $697,000 for the three months ended September 30, 2013.  The effective tax rates for the three months ended September 30, 2014 and 2013 were 250.0% and (26.4%).  The effective tax rate for the three months ended September 30, 2014 was adversely impacted by our payment of merger-related expenses of $470,000 which the Company has treated as non-deductible, but will be re-evaluated for potential deductibility in relation to all other expenses incurred in regards to the merger in the fourth quarter of 2014 and beyond.
 
 
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Comparison of Operating Results for the Nine Months ended September 30, 2014 and September 30, 2013

General.  We experienced net income of $415,000 for the nine months ended September 30, 2014 compared to a net loss of $2.4 million for the nine months ended September 30, 2013.  The principal reasons for the increase in net income were a decrease in the provision for loan losses in the amount of $5.3 million and a decrease in total non-interest expense of $888,000 offset by a decrease in net interest income of $1.0 million, a decrease in total non-interest income of $625,000 and an increase in income tax expense of $1.6 million.

Interest Income.  Interest income decreased $2.0 million to $11.8 million for the nine months ended September 30, 2014 from $13.8 million for the nine months ended September 30, 2013.  The decrease in interest income resulted from a decrease of $1.3 million in interest income on loans and a decrease of $763,000 in interest income on securities.

Interest income on loans decreased $1.3 million to $9.1 million for the nine months ended September 30, 2014 from $10.4 million for the nine months ended September 30, 2013.  The average balance of loans decreased $24.0 million to $270.0 million for the nine months ended September 30, 2014 from $294.0 million for the nine months ended September 30, 2013 along with a decrease in the average yield to 4.48% for the nine months ended September 30, 2014 from 4.69% for the nine months ended September 30, 2013.

Interest income on securities decreased by $763,000 to $2.7 million for the nine months ended September 30, 2014 from $3.5 million for the nine months ended September 30, 2013.  The decrease in interest income on securities was due to a decrease in the average yield on taxable and tax-exempt securities of 16 basis points to 1.50% for the nine months ended September 30, 2014 from 1.66% for the nine months ended September 30, 2013 along with a decrease in the average balance of taxable and tax-exempt securities to $239.1 million for the nine months ended September 30, 2014 from $277.7 million for the nine months ended September 30, 2013.  The yields on tax-exempt securities are not tax-affected.

Interest Expense. Interest expense decreased $1.0 million to $2.0 million for the nine months ended September 30, 2014 from $3.0 million for the nine months ended September 30, 2013.

Interest expense on interest-bearing deposits decreased by $1.0 million to $2.0 million for the nine months ended September 30, 2014 from $3.0 million for the nine months ended September 30, 2013.  The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 0.60% for the nine months ended September 30, 2014 from 0.80% for the nine months ended September 30, 2013 along with a decrease in the average balance of interest-bearing deposits to $441.6 million for the nine months ended September 30, 2014 from $501.7 million for the nine months ended September 30, 2013.  We experienced decreases in the average balances and average costs across all categories of interest-bearing deposits for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.

Interest expense on borrowings decreased $11,000 to $16,000 for the nine months ended September 30, 2014 from $27,000 for the nine months ended September 30, 2013.  This decrease was primarily due to a $4.0 million decrease in the average balance of borrowings to $5.6 million for the nine months ended September 30, 2014 from $9.6 million for the nine months ended September 30, 2013, partially offset by an increase in the average rate paid on borrowings to 0.39% for the nine months ended September 30, 2014 from 0.38% for the nine months ended September 30, 2013.
 
 
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 Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable credit losses inherent in the loan portfolio.  In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluation of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans.  The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events change.  We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

During the nine months ended September 30, 2014, the Company charged off $3.2 million in loans, which included $470,000 on one- to four-family loans, $199,000 on commercial real estate loans, $76,000 on construction and land loans, $100,000 on home equity and lines of credit and $2.4 million on commercial loans.  As part of the Bank’s loan collection process, we re-appraise loans that are delinquent or impaired.  The reasons for the charge-offs in the nine months ended September 30, 2014 were the cash flow analysis that we completed on non-collateral based impaired loans and the reduced appraisals that we received on collateral-based impaired loans we were monitoring.  The charge-offs during this period are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan.  The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

During the nine months ended September 30, 2013, the Company charged off $4.2 million in loans, which included $209,000 on one- to four-family loans, $1.8 million on commercial real estate loans, $37,000 on construction and land loans, $210,000 on home equity and lines of credit, $2.0 million on commercial loans, and $7,000 on consumer loans.  As part of the Bank’s loan collection process, we re-appraise loans that are delinquent or impaired.  The reason for the charge-offs in the nine months ended September 30, 2013 were the reduced appraisals that we received on impaired loans we were monitoring.  The charge-offs during this period are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan.  The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

Based on our evaluation of the above factors, we recorded a provision for loan losses of $290,000 for the nine months ended September 30, 2014 and a provision for loan losses of $5.5 million for the nine months ended September 30, 2013.  The allowance for loan losses was $4.4 million, or 1.60% of total loans, at September 30, 2014, compared to $5.6 million, or 1.95% of total loans, at September 30, 2013.  Our balance of loans we evaluated individually for impairment was $17.4 million at September 30, 2014 and $25.3 million at December 31, 2013.  At September 30, 2014, December 31, 2013 and September 30, 2013, we maintained unallocated allowances for loan losses of $1.3 million, $750,000 and $1.5 million respectively.  The main reason for the increase in the unallocated portion of the allowance for loan losses is the amount of recoveries we received on loans that were previously charged off against earnings.  The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio, as well as a Company-specific, industry-wide reluctance and a regulatory reluctance to reduce allowances at this time.  The Company believes that the amount of provision in 2014 and the resulting allowance at September 30, 2014, are appropriate given the continuing level of risk in the loan portfolio, including the overall level of non-performing loans.
 
 
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To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate at September 30, 2014 and 2013.  However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio (including residential and commercial real estate loans) could result in material increases in our provisions for loan losses.

Non-interest Income.  Non-interest income was $1.7 million for the nine months ended September 30, 2014 and $2.3 million for the nine months ended September 30, 2013.  Fees and service charges on deposit accounts decreased by $51,000 to $853,000 for the nine months ended September 30, 2014 from $904,000 for the nine months ended September 30, 2013.  For the nine months ended September 30, 2014, there was a net gain on the sale and call of investment securities in the amount of $500,000 compared to a net gain of $1.1 million for the nine months ended September 30, 2013.  Earnings on bank owned life insurance totaled $319,000 for the nine months ended September 30, 2014 and $330,000 for the nine months ended September 30, 2013.

Non-interest Expense.  Non-interest expense decreased $888,000 to $10.2 million for the nine months ended September 30, 2014 from $11.1 million for the nine months ended September 30, 2013.  Compensation and benefits expense decreased by $880,000 to $4.3 million for the nine months ended September 30, 2014 from $5.2 million for the nine months ended September 30, 2013.  The decrease in compensation and benefit expense was due to the elimination of director fees for the nine months ended September 30, 2014 as the director’s suspended payment of their fees.  The decline was also due to reduced employee hours as branch staffing was matched to customer activity for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, and reduced ESOP expense.  Occupancy and equipment expense increased $36,000 to $1.2 million for the nine months ended September 30, 2014 from $1.2 million for the nine months ended September 30, 2013.  Federal deposit insurance premiums increased $7,000 to $541,000 for the nine months ended September 30, 2014 from $534,000 for the nine months ended September 30, 2013 due to increased premiums.  Data processing fees increased by $53,000 to $773,000 for the nine months ended September 30, 2014 from $720,000 for the nine months ended September 30, 2013. This increase was due to costs associated with item processing.  Professional fees decreased $36,000 to $893,000 for the nine months ended September 30, 2014 from $929,000 for the nine months ended September 30, 2013.  Net real estate owned expense decreased $281,000 to $908,000 for the nine months ended September 30, 2014 from $1.2 million for the nine months ended September 30, 2013 due to reduced allowances for REO properties and reduced REO expenses.  Merger-related expenses of $470,000 were incurred during the nine months ended September 30, 2104.  Other expenses decreased to $1.0 million for the nine months ended September 30, 2014 from $1.1 million for the three months ended September 30, 2013.

Income Tax Benefit. We recorded an income tax expense of $548,000 for the nine months ended September 30, 2014, compared to an income tax benefit of $1.1 million for the nine months ended September 30, 2013.  The effective tax rates are 56.9% and (31.4%), respectively.  The effective tax rate for the nine months ended September 30, 2014 was adversely impacted by our payment of merger-related expenses of $470,000 which the Company has treated as non-deductible, but will be re-evaluated for potential deductibility in relation to all other expenses incurred in regards to the merger in the fourth quarter of 2014 and beyond.
 
 
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Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature.  Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program.  Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2014, cash and cash equivalents totaled $8.4 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $235.4 million at September 30, 2014.  In addition, at September 30, 2014, we had the ability to borrow a total of $165.8 million from the Federal Home Loan Bank of New York (30% of our assets at that date).  On that date, there were $9.7 million in Federal Home Loan Bank advances outstanding.

At September 30, 2014, loan commitments outstanding totaled $6.0 million. In addition to commitments to originate loans, we had $25.2 million in unadvanced funds to borrowers.  We had commitments to purchase SBA/USDA loans in the amount of $1.8 million and a FNMA MBS security in the amount of $1.0 million.  Total certificates of deposit due within one year of September 30, 2014 totaled $51.9 million.  Total certificates of deposit due within one year of September 30, 2014 represent 10.9% of total deposits.  If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2015.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

We have no material commitments or demands that are likely to affect our liquidity other than set forth above. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of New York or increase deposit rates to attract additional deposits.

Our primary investing activities are the origination of loans and the purchase of securities.  For the nine months ended September 30, 2014, we originated $52.7 million of loans and purchased $70.4 million of securities.  For the nine months ended September 30, 2013, we originated $40.2 million of loans and purchased $113.5 million of securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances.  We experienced a net decrease of $44.2 million and a net decrease of $26.8 million in total deposits for the nine months ended September 30, 2014 and 2013, respectively.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.  We generally manage the pricing of our deposits to be competitive in our local markets.
 
 
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There were $9.7 million in Federal Home Loan Bank short-term borrowings outstanding at September 30, 2014.  Federal Home Loan Bank advances have primarily been used to fund loan demand and purchase securities.

Colonial Bank, FSB is subject to various regulatory capital requirements administered by the Office of Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  Please see Note 11, Regulatory Matters and Capital Requirements, for minimal capital requirements imposed on the Bank by the Office of Comptroller of the Currency.

In July 2013, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.  Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised.  The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule becomes effective for Colonial Bank FSB on January 1, 2015.  The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.  The final rule also implements consolidated capital requirements for savings and loan holding companies, such as Colonial Financial Services, Inc., effective January 1, 2015.
 
 
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Item 3.                 Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Company is a Smaller Reporting Company.

Item 4.                 Controls and Procedures

(a)           Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.   Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely discussions regarding required disclosures.

(b)           Changes in internal control over financial reporting.

There were no changes made in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION

Item 1.                 Legal Proceedings

The Company is not engaged in any legal proceedings of a material nature at September 30, 2014. In the ordinary course of business, the Company is from time to time party to legal proceedings incident to its business.  While the ultimate outcome of these proceedings cannot be predicted with certainty, management, after consultation with counsel representing the Company in these proceedings, does not expect that the resolution of these proceedings will have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

Subsequent to September 30, 2014, on October 14, 2014, a complaint was filed against the Company and the members of its Board of Directors in the Circuit Court for Baltimore City, Maryland, seeking class action status and asserting that the Company and the members of its Board had violated their duties to the Company’s shareholders in connection with the proposed merger with Cape Bancorp, Inc.  The litigation is in its very early stages, and the Company’s time to answer has not yet run.  The Company believes these complaints are without merit, and intends to vigorously defend these complaints.
 
Item 1A.              Risk Factors
 
Not applicable, as Colonial Financial Services, Inc. is a “Smaller Reporting Company”.

Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds

 
(a)
Not applicable.
 
(b)
Not applicable.
 
(c)
Purchases of Equity Securities.

The Company does not have any stock repurchase programs active as of September 30, 2014.

Item 3.                 Defaults Upon Senior Securities

None

Item 4.                 Safety Disclosures

Not applicable

Item 5.                 Other Information

None
 
 
 
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Item 6.             Exhibits

 
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
 
 
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

 
Exhibit 101.INS
XBRL Instance Document.

 
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document.

 
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.

 
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase Document.

 
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.

 
Exhibit 101.DEF
XBRL Taxonomy Extension Definitions Linkbase Document.
 
 
 
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SIGNATURES

In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
COLONIAL FINANCIAL SERVICES, INC.  
Registrant
 
     
     
Date:  November 3, 2014 
By:  /s/ Edward J. Geletka  
  Edward J. Geletka  
  President and Chief Executive Officer  
  (Principal Executive Officer)  
 
 
Date:  November 3, 2014
By:  /s/ L. Joseph Stella, III, CPA, CGMA  
  L. Joseph Stella, III, CPA, CGMA  
  Executive Vice President and Chief Financial Officer  
  (Principal Accounting and Financial Officer)  
 
 
 
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