Colonial Financial Services 10-Q 2011 Q3 Quarterly report

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, 2011

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)

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

The number of shares outstanding of Common Stock, par value $0.01 per share, of the Registrant as of November 14, 2011, was 4,055,468.

TABLE OF CONTENTS

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

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3	Defaults Upon Senior Securities	48
Item 4	[Removed and Reserved]	49
Item 5	Other Information	49
Item 6	Exhibits	49
	Signatures	50

1

PART I          FINANCIAL INFORMATION

Item 1.         Financial Statements

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

	September 30, 2011			December 31, 2010
	(Dollars in thousands, except share and per share data)
Assets
Cash and amounts due from banks	$	26,875		$	20,726
Investment securities available for sale		205,416			181,567
Investment securities held to maturity (fair value at September 30, 2011 - $27,059; at December 31, 2010 - $38,365)		26,470			38,214
Loans receivable, net of allowance for loan losses of $4,434 at September 30, 2011 and $3,543 at December 31, 2010		302,945			319,987
Loans available for sale		-			659
Real estate owned		834			276
Federal Home Loan Bank stock, at cost		909			1,120
Office properties and equipment, net		10,534			10,936
Bank-owned life insurance		10,205			9,943
Accrued interest receivable		1,893			2,025
Other assets		4,195			4,889
Total Assets	$	590,276		$	590,342
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	27,135		$	20,279
Interest-bearing		487,264			492,557
Total deposits		514,399			512,836
Federal Home Loan Bank long-term borrowings		2,000			7,000
Advances from borrowers for taxes and insurance		758			544
Accrued interest payable and other liabilities		902			550
Total Liabilities		518,059			520,930
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 4,103,456 shares at September 30, 2011 and 4,188,456 at December 31, 2010;		41			42
Additional paid-in capital		40,155			40,962
Unearned shares held by Employee Stock Ownership Plan (“ESOP”)		(1,794	)		(1,794	)
Retained earnings		30,127			27,749
Accumulated other comprehensive income		3,688			2,453
Total Stockholders’ Equity		72,217			69,412
Total Liabilities and Stockholders’ Equity	$	590,276		$	590,342

See notes to unaudited consolidated financial statements

2

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollars in thousands, except share and per share data)
Interest Income
Loans, including fees	$	4,649		$	4,839		$	13,577		$	14,607
Mortgage-backed securities		950			1,158			2,987			3,674
Investment securities:  Taxable		473			389			1,304			1,236
Investment securities:  Tax-exempt		151			153			477			493
Total Interest Income		6,223			6,539			18,345			20,010
Interest Expense
Deposits		1,708			2,182			5,443			6,780
Borrowings		16			97			106			348
Total Interest Expense		1,724			2,279			5,549			7,128
Net Interest Income		4,499			4,260			12,796			12,882
Provision for Loan Losses		398			29			1,194			531
Net Interest Income after Provision for Loan Losses		4,101			4,231			11,602			12,351
Non-Interest Income
Fees and service charges		310			324			891			948
Gain on sale of loans		1			46			40			116
Impairment charge on investment securities		-			(88	)		-			(109	)
Portion of loss recognized in other comprehensive income (before taxes)		-			-			-			-
Net impairment losses recognized in earnings		-			(88	)		-			(109	)
Net gain on sales and calls of investment securities		82			30			109			50
Net loss on sale of real estate owned		(4	)		-			(4	)		-
Earnings on life insurance		90			26			262			78
Other		2			2			5			3
Total Non-Interest Income		481			340			1,303			1,086
Non-Interest Expenses
Compensation and benefits		1,696			1,580			4,985			4,527
Occupancy and equipment		410			413			1,245			1,278
FDIC insurance premium		241			202			723			587
Data processing		215			213			706			678
Office supplies		38			51			121			119
Professional fees		225			170			712			421
Advertising and promotions		48			53			131			141
Other		302			277			961			894
Total Non-Interest Expenses		3,175			2,959			9,584			8,645
Income before Income Tax Expense		1,407			1,612			3,321			4,792
Income Tax expense		426			506			943			1,495
Net Income	$	981		$	1,106		$	2,378		$	3,297
Per Share Data (See Note 3):
Earnings per share – basic	$	0.24		$	0.28		$	0.59		$	0.82
Earnings per share – diluted	$	0.24		$	0.28		$	0.59		$	0.82
Weighted average number of shares outstanding – basic		4,002,642			3,984,038			4,010,750			4,009,301
Weighted average number of shares outstanding – diluted		4,002,642			3,984,038			4,010,750			4,009,301

See notes to unaudited consolidated financial statements

3

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		Treasury Stock			Accumu -lated Other Compre- hensive Income		Total Stock- holders’ Equity
				(Dollars in thousands, except share data)
Balance, January 1, 2011		4,188,456		$	42		$	40,962		$	(1,794	)	$	27,749	$	-		$	2,453	$	69,412
Comprehensive income:
Net income		-			-			-			-			2,378		-			-		2,378
Net change in unrealized gain on securities available for sale, net of tax effect of $656		-			-			-			-			-		-			1,235		1,235
Total Comprehensive income		-			-			-			-			-		-			-		3,613
Repurchase and retirement of common stock		(85,000	)		(1	)		(1,053	)												(1,054	)
Stock-based compensation expense (restricted stock awards)		-			-			138			-			-		-			-		138
Stock-based compensation expense (stock options)		-			-			108			-			-		-			-		108
Balance, September 30, 2011		4,103,456		$	41		$	40,155		$	(1,794	)	$	30,127	$	-		$	3,688	$	72,217
Balance, January 1, 2010		4,440,246		$	452		$	20,628		$	(1,084	)	$	23,879	$	(1,596	)	$	3,238	$	45,517
Comprehensive income:
Net income		-			-			-			-			3,297		-			-		3,297
Net change in unrealized gain on securities available for sale, net of tax effect of $407		-			-			-			-			-		-			756		756
Total Comprehensive income		-			-			-			-			-		-			-		4,053
Cancellation of common shares		(4,521,696	)		(452	)		452			-			-		-			-		-
Issuance of common stock, net		4,173,444			42			21,130			(918	)		-		-			-		20,254
Cancellation of treasury shares		81,450			-			(1,596	)		-			-		1,596			-		-
Stock-based compensation expense (restricted stock awards)		-			-			164			-			-		-			-		164
Stock-based compensation expense (stock options)		-			-			109			-			-		-			-		109
Balance, September 30, 2010		4,173,444		$	42		$	40,887		$	(2,002	)	$	27,176	$	-		$	3,994	$	70,097

See notes to unaudited consolidated financial statements

4

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	2011			2010
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	2,378		$	3,297
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,194			531
Depreciation expense		495			511
Stock-based compensation expense		246			273
Impairment charge on investment securities		-			109
Net earnings on bank-owned life insurance		(262	)		(78	)
Loans originated for sale		(1,205	)		(7,961	)
Proceeds from sale of loans		1,904			6,891
Gain on sale of loans		(40	)		(116	)
Net amortization of loan costs		(11	)		40
Net loss on sale of real estate owned		4			-
Net gain on sales and calls of investment securities		(109	)		(50	)
Accretion of premium and discount on investment securities, net		(183	)		(296	)
Decrease in accrued interest receivable		132			192
Decrease in other assets		694			852
Increase in accrued interest payable and other liabilities		352			61
Net cash provided by operating activities		5,589			4,256
Cash Flows from Investing Activities:
Proceeds from sales of investment securities available-for-sale		-			1,748
Proceeds from sales on investment securities held-to-maturity		-			739
Proceeds from sales of mortgage-backed securities available-for-sale		-			1,816
Proceeds from calls and maturities of investment securities available-for-sale		81,886			49,613
Proceeds from calls and maturities of investment securities held-to-maturity		32,325			33,293
Purchase of investment securities available-for-sale		(109,068	)		(52,404	)
Purchase of investment securities held-to-maturity		(21,348	)		(31,694	)
Purchase of mortgage-backed securities and collateralized mortgage obligations available-for-sale		(23,065	)		(27,664	)
Purchase of office properties and equipment		(93	)		(222	)
Principal repayments from investment securities		1,185			1,447
Principal repayments from mortgage-backed securities and collateralized mortgage obligations		27,507			25,101
Net decrease of Federal Home Loan Bank stock		211			431
Proceeds from sale of real estate owned		419			-
Net decrease (increase) in loans receivable		14,878			(5,669	)
Net cash provided by (used in) investing activities		4,837			(3,465	)
Cash Flows from Financing Activities:
Net increase in deposits		1,563			9,976
Repayment of Federal Home Loan Bank short-term borrowings		-			(7,300	)
Repayment of Federal Home Loan Bank long-term borrowings		(5,000	)		(3,000	)
Increase (decrease) in advances from borrowers for taxes and insurance		214			(5	)
Net proceeds from issuance of common stock		-			20,254
Common stock repurchased		(1,054	)		-
Net cash provided by (used in) financing activities		(4,277	)		19,925
Increase in cash and amounts due from banks		6,149			20,716
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		20,726			15,882
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	26,875		$	36,598

See notes to unaudited consolidated financial statements

5

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	2011		2010
	(Dollars in thousands)
Supplemental Cash Flow Disclosures:
Cash paid:
Interest	$	5,587	$	7,204
Income taxes	$	1,107	$	1,763
Supplemental Schedule of Noncash Investing and Financing Activities:
Other real estate acquired in settlement of loans	$	981	$	489

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.  Colonial Bank, FSB is now 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.

Colonial Bankshares, Inc. was the former mid-tier holding company for the Bank and was organized in conjunction with the Bank’s reorganization from the mutual savings bank to the mutual holding company structure in January 2003.  Colonial Bankshares, MHC, was the federally chartered mutual holding company parent of Colonial Bankshares, Inc. and originally owned 54% of Colonial Bankshares, Inc.’s outstanding stock.

The same directors and officers who manage Colonial Bank, FSB manage Colonial Financial Services, Inc.

The Company is subject to regulations of certain federal banking agencies.  Pursuant to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), effective July 21, 2011, the regulation and supervision of federal savings institutions, such as the Bank, was transferred from the Office of Thrift Supervision (“OTS”) to the Office of the Comptroller of the Currency (“OCC”), the agency that regulates national banks.  As a result, the OCC has assumed primary responsibility for examining the Bank and implementing and enforcing many of the laws and regulations applicable to federal savings associations as of July 21, 2011.  As a result of the elimination of the OTS, effective July 21, 2011, savings and loan holding companies, such as the Company, are now regulated by the Board of Governors of the Federal Reserve System.

7

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 Delaware corporation, CB Delaware Investments, Inc. (the “Operating Subsidiary”) whose purpose is to invest in and manage securities.

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.  The consolidated financial statements were prepared in accordance with instructions to Form 10-Q, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim information, and, therefore, they do not include all of the information and footnotes required by US GAAP for complete financial statements.  Operating results for the three months and nine months ended September 30, 2011 (unaudited) are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  The balance sheet at December 31, 2010 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.

The Company has evaluated subsequent events for potential recognition and/or disclosure in this Quarterly Report on Form 10-Q through the date these financial statements were issued.

8

2. Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which provides additional guidance related to determining whether a creditor has granted a concession, including factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant.  The guidance prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower and adds factors from creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in ASU 2011-02 ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU 2010-20.  The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption.  There was no significant impact to amounts reported in the consolidated financial position or results of operations from the adoption of ASU 2011-02.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U. S. GAAP and International Financial Reporting Standards (“IFRSs”)”.  The amendments in this update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements.  The amendments in this update result in common fair value measurement and disclosure requirements in U. S. GAAP and IFRSs.  Consequently, the amendments change the wording used to describe many of the requirements in U. S. GAAP for measuring fair value and for disclosing information about fair value measurements.  For many of the requirements, FASB does not intend for the amendments in this update to result in a change in the application of the requirements in Topic 820.  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements.  Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  The amendments in this update are effective during interim and annual periods beginning after December 15, 2011.  The Company does not anticipate the adoption of this FASB ASU will have a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income”.  The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The amendments do not affect how earnings per share is calculated or presented.  The amendments in this update are effective for fiscal years, and interim periods with those years, beginning after December 15, 2011.  The Company does not anticipate the adoption of this FASB ASU will have a material impact on the consolidated financial statements.

9

3. Earnings Per Share

Earnings per share (“EPS”) is presented in two ways, 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 for the three months ended September 30, 2011 and 2010 is $981,000 and $1,106,000, respectively, and the net income for the nine months ended September 30, 2011 and 2010 is $2,378,000 and $3,297,000, 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, 2011 and 2010, there were 202,967 and 206,384 anti-dilutive options and awards excluded from the computation of diluted earnings per share because the option price was greater than the average market price.  Earnings per share and average common shares outstanding have been adjusted to reflect the impact of the exchange ratio which was a result of the second-step conversion and reorganization of the Company, which occurred on July 13, 2010.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
Net Income	$	981,000		$	1,106,000		$	2,378,000		$	3,297,000
Weighted average common shares issued		4,188,456			4,183,422			4,188,456			4,227,525
Average unearned ESOP shares		(173,585	)		(181,696	)		(173,585	)		(128,770	)
Average treasury stock shares		-			(17,688	)		-			(89,454	)
Average shares repurchased and retired		(12,229	)		-			(4,121	)		-
Weighted average common shares outstanding-basic		4,002,642			3,984,038			4,010,750			4,009,301
Effect of dilutive non-vested shares and stock options outstanding		-			-			-			-
Weighted average common shares outstanding-diluted		4,002,642			3,984,038			4,010,750			4,009,301
Basic earnings per share	$	0.24		$	0.28		$	0.59		$	0.82
Diluted earnings per share	$	0.24		$	0.28		$	0.59		$	0.82

10

4. Stock-Based Compensation

At September 30, 2011, the Company has a share-based compensation plan under which grants have been made, the 2006 Stock-Based Incentive Plan of Colonial Bankshares, Inc. (the “2006 Plan”), which was assumed by the Company as part of the second-step conversion.  Shares of restricted stock and options were first issued under the plan in October 2006 and have been adjusted for the exchange ratio.  No grants have been made under the Company’s 2011 Equity Incentive Plan, which was approved by stockholders on August 18, 2011.

On October 19, 2006, 83,300 shares (as adjusted) of restricted stock were awarded.  The restricted shares awarded had a grant date fair value of $13.27 per share (as adjusted).  The restricted stock awarded vests 20% annually beginning October 19, 2007.

For the three and nine months ended September 30, 2011, $43,000 and $129,000 in compensation expense was recognized in regard to these restricted stock awards with a related tax benefit of $15,000 and $45,000, respectively.  For the three and nine months ended September 30, 2010, $53,000 and $164,000 in compensation expense was recognized in regard to these restricted stock awards with a related tax benefit of $18,000 and $56,000, respectively.  As of September 30, 2011, all of the compensation expense in regard to these restricted stock awards has been recognized.

On January 20, 2011, 3,268 shares of restricted stock were awarded.  The restricted shares awarded had a grant date fair value of $12.00 per share and vest 33% annually beginning January 20, 2012.

For the three and nine months ended September 30, 2011, $3,000 and $9,000 in compensation expense was recognized in regard to the stock awards given in 2011 with a related tax benefit of $1,000 and $3,000, respectively.  As of September 30, 2011, there was $30,000 of unrecognized compensation expense related to the restricted stock awards which is expected to be recognized over a period of 2.25 years.

A summary of the status of the shares under the 2006 Plan as of September 30, 2011 and changes during the nine months ended September 30, 2011 are presented below.  The number of shares and weighted average grant date fair value has been adjusted for the exchange ratio as a result of our second-step conversion:

Award Shares	Number of Shares		Weighted Average Grant Date Fair Value
Restricted, beginning of period		15,039	$	13.27
Granted		3,268		12.00
Forfeitures		-		-
Vested		-		-
Restricted stock, end of period		18,307	$	13.04

11

On October 19, 2006, options to purchase 184,660 shares (as adjusted) of common stock at $13.27 per share were awarded.  The options awarded vest 20% annually beginning October 19, 2007 and expire in 2016.

On January 20, 2011, 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.

A summary of the status of the Company’s stock options under the 2006 Plan as of September 30, 2011 and changes during the nine months ended September 30, 2011 are presented below.  The number of options and weighted average exercise price has been adjusted for the exchange ratio as a result of our second-step conversion:

	Options		Weighted Average Exercise Price
Options outstanding, beginning of period		176,332	$	13.27
Granted		8,328		12.00
Exercised		-		-
Forfeitures		-		-
Options outstanding, end of period		184,660	$	13.21
Exercisable at end of period		176,332	$	13.27

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 (as adjusted).  The weighted average contractual term of options outstanding and exercisable was 5.00 years at September 30, 2011 and 6.00 years at September 30, 2010.

Stock-based compensation expense related to stock options granted in 2006 for the three and nine months ended September 30, 2011, was $33,000 and $99,000 with a related tax benefit of $11,000 and $33,000, respectively.  For the three and nine months ended September 30, 2010, $35,000 and $109,000 in compensation expense was recognized in regard to these stock options with a related tax benefit of $12,000 and $38,000, respectively.  As of September 30, 2011, all of the compensation expense in regard to these stock options has been recognized.  At September 30, 2010, there was approximately $158,000 of unrecognized compensation cost related to unvested stock options granted in 2006.

The following weighted average assumptions were used for pricing the 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 9.25 years at September 30, 2011.

12

Stock-based compensation expense related to stock options awarded in 2011 for the three and nine months ended September 30, 2011, was $3,000 and $9,000 with a related tax benefit of $1,000 and $3,000, respectively.  As of September 30, 2011, there was approximately $31,000 of unrecognized compensation cost related to unvested stock options granted in 2011.  The cost will be recognized in a straight line method over a period of 2.25 years.

In 2005, the Bank established a leveraged Employee Stock Ownership Plan (“ESOP”) for substantially all of its full-time employees.  The ESOP trust initially purchased 156,399 shares (as adjusted for the exchange ratio as part of the July 2010 second-step conversion) of common stock.  The Bank will make 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 will make 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 3.25% 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 $62,000 and $68,000 for the three months ended September 30, 2011 and 2010, respectively.  The Company’s contribution expense for the ESOP was $186,000 and $118,000 for the nine months ended September 30, 2011 and 2010, respectively.

The following table presents the components of the ESOP shares (as adjusted for the exchange ratio):

	September 30, 2011		September 30, 2010
Shares released for allocation		74,614		54,529
Unreleased shares		173,585		193,670
Total ESOP shares		248,199		248,199

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5. Comprehensive Income

Comprehensive income for the Company consists of net income and unrealized gains and losses on available for sale securities.  Other comprehensive income for the three and nine months ended September 30, 2011 and 2010 is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Other comprehensive income:
Unrealized holding gains on available for sale securities	$	679		$	176		$	2,000		$	1,104
Reclassification for impairment charge on investment securities		-			88			-			109
Reclassification adjustment for net gains realized in net income		(82	)		(30	)		(109	)		(50	)
Net unrealized gains		597			234			1,891			1,163
Tax effect		212			79			656			407
Net of tax amount	$	385		$	155		$	1,235		$	756

6. 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 risk 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 $2.7 million of standby letters of credit outstanding as of September 30, 2011.  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.

The Bank entered into agreements to sponsor not-for-profit corporations for a Federal Home Loan Bank of New York Affordable Housing Program (“AHP”) Grant in the amount of $275,000 and $25,000.  If the not-for-profit corporations do not comply with terms of the agreements, 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 corporations to adhere to all requirements of the grants and does not expect to be required to repay any of the AHP grants.

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7. 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, 2011
U. S. Government obligations	$	59,098	$	374	$	(6	)	$	59,466
Corporate debt obligations		9,075		282		(187	)		9,170
Mutual funds		12,620		47		-			12,667
Municipal debt obligations		3,772		57		-			3,829
SBA pools		1,979		18		(5	)		1,992
Mortgage-backed securities		49,608		3,791		(41	)		53,358
Collateralized mortgage obligations		63,590		1,363		(19	)		64,934
	$	199,742	$	5,932	$	(258	)	$	205,416
December 31, 2010
U. S. Government obligations	$	42,653	$	124	$	(338	)	$	42,439
Corporate debt obligations		9,712		243		(43	)		9,912
Mutual fund		850		51		-			901
Municipal debt obligations		4,176		36		(58	)		4,154
SBA pools		3,252		8		(14	)		3,246
Mortgage-backed securities		60,799		3,727		(43	)		64,483
Collateralized mortgage obligations		56,342		574		(484	)		56,432
	$	177,784	$	4,763	$	(980	)	$	181,567
Held to Maturity:
September 30, 2011
Corporate debt obligations	$	1,191	$	299	$	-		$	1,490
Municipal debt obligations		24,430		215		(13	)		24,632
Mortgage-backed securities		849		88		-			937
	$	26,470	$	602	$	(13	)	$	27,059
December 31, 2010
Corporate debt obligations	$	1,190	$	212	$	-		$	1,402
Municipal debt obligations		35,284		96		(259	)		35,121
Mortgage-backed securities		1,740		102		-			1,842
	$	38,214	$	410	$	(259	)	$	38,365

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All of the Company’s mortgage-backed securities and collateralized mortgage obligations at September 30, 2011 and December 31, 2010 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, 2011, 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.

	Held to Maturity				Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	20,787	$	20,787	$	13,834	$	13,891
Due after one year through five years		455		512		52,343		52,538
Due after five years through ten years		2,611		2,922		17,368		17,666
Due thereafter		1,768		1,901		2,999		3,029
Sub-total		25,621		26,122		86,544		87,124
Mortgage-backed securities and collateralized mortgage obligations		849		937		113,198		118,292
Total	$	26,470	$	27,059	$	199,742	$	205,416

At September 30, 2011 and December 31, 2010, $72.5 million and $70.6 million, respectively, of securities were pledged as collateral to secure certain deposits and FHLB advances.

Gross realized gains on available-for-sale securities totaled $109,000 while gross realized gains on held-to-maturity securities totaled $0, for the nine months ended September 30, 2011.  There were no gross realized losses on available-for-sale or held-to-maturity securities for the nine months ended September 30, 2011.

Gross realized gains on available-for-sale securities totaled $106,000 while gross realized gains on held-to-maturity securities total $0, for the nine months ended September 30, 2010.  Gross realized losses on available-for-sale securities totaled $0 and gross realized losses on held-to-maturity securities total $56,000, for the nine months ended September 30, 2010.  The gross realized losses on held-to-maturity securities were on two corporate debt obligations that the Company identified in 2009 as impaired due to a downgrade by a credit rating agency to below investment grade.

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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, 2011	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	$	3,994	$	6	$	-	$	-	$	3,994	$	6
Corporate debt obligations		2,859		106		893		81		3,752		187
Municipal debt obligations		-		-		-		-		-		-
SBA pools		-		-		1,391		5		1,391		5
Mortgage-backed securities		1,536		40		38		1		1,574		41
Collateralized mortgage obligations		1,916		19		-		-		1,916		19
Total	$	10,305	$	171	$	2,322	$	87	$	12,627	$	258

At December 31, 2010	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	$	26,176	$	338	$	-	$	-	$	26,176	$	338
Corporate debt obligations		1,953		10		937		33		2,890		43
Municipal debt obligations		1,619		23		595		35		2,214		58
SBA pools		-		-		1,832		14		1,832		14
Mortgage-backed securities		1,620		42		115		1		1,735		43
Collateralized mortgage obligations		20,539		484		-		-		20,539		484
Total	$	51,907	$	897	$	3,479	$	83	$	55,386	$	980

At September 30, 2011, there were 11 securities in the less-than-twelve-month category and six securities in the twelve-month-or-more category for the available-for-sale portfolio.  Included in the 11 securities in the less-than-twelve-month position for the available-for-sale category are two U. S. government obligations, six corporate debt obligations, one mortgage-backed security and two collateralized mortgage obligations.  Included in the six securities in the twelve-month-or-more position for the available-for-sale category are one corporate debt security, one mortgage-backed security and four SBA pools.

The following table shows the Company’s held-to-maturity 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, 2011	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Municipal debt obligations	$	304	$	4	$	262	$	9	$	566	$	13
Total	$	304	$	4	$	262	$	9	$	566	$	13

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At December 31, 2010	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Municipal debt obligations	$	2,346	$	226	$	228	$	33	$	2,574	$	259
Total	$	2,346	$	226	$	228	$	33	$	2,574	$	259

At September 30, 2011, there was one security in the less-than-twelve month category and one security in the twelve-month-or-more category for the held-to-maturity portfolio.

The Company’s investment in U. S. Government agency securities and SBA loan pools consist of debt obligations of government sponsored enterprises 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 U. S. 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 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, 2011.

The Company’s investment in corporate bonds consists of debt obligations of corporations mostly in the financial, insurance and drug sectors of the economy.  All interest payments are current in regards to all the corporate investments.  There was a $109,000 other-than-temporary impairment writedown for the nine months ended September 30, 2010.  This writedown was on an AMBAC corporate bond due to its downgrade to below investment grade by rating companies, Moody’s and Standard and Poor’s.  During 2010, the Company sold this held-to-maturity corporate debt obligation.  In regards to the other corporate investments, as 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 and because the other corporate bonds are still rated investment grade by one of the rating companies, Moody’s and Standard and Poor’s, the Company does not consider the other corporate investments to be other-than-temporarily impaired at September 30, 2011.

The Company’s investment in municipal bonds consist 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, 2011.

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The Company’s investment in mortgage-backed securities and collateralized mortgage obligations consists of government sponsored enterprise 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, 2011.

8. Loans

The components of loans at September 30, 2011 and December 31, 2010 are as follows:

	At September 30, 2011						At December 31, 2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	139,530			45.3	%	$	140,244			43.3	%
Multi-family		1,075			0.4			3,124			1.0
Commercial		107,770			35.1			114,242			35.2
Construction		3,621			1.2			5,944			1.8
Home equity loans and lines of credit		33,039			10.7			35,373			10.9
Commercial		21,391			6.9			23,253			7.2
Consumer		1,375			0.4			1,783			0.6
Total loans receivable		307,801			100.0	%		323,963			100.0	%
Deferred loan fees		(422	)					(433	)
Allowance for loan losses		(4,434	)					(3,543	)
Total loans receivable, net	$	302,945					$	319,987

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 loans, home equity loans and lines of credit, commercial business loans and consumer loans.  We offer fixed-rate, adjustable-rate and balloon loans that amortize with monthly loan payments.

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.

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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.

Our board of directors grants lending authority to our 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 $300,000, and unsecured loans in amounts up to $100,000.

When a loan is more than 10 days delinquent, we generally contact the borrower by telephone to determine the reason for delinquency and arrange for payment, and accounts are monitored electronically for receipt of payments.  We also send a computer-generated late notice on the tenth day after the payment due date on a commercial loan (the 15th day for a consumer or residential loan), which requests the payment due plus any late charge that is assessed.  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.  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 between 90 to 120 days.  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 classify loans 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 monthly 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 1) a specific valuation allowance on identified problem loans; 2) a general valuation allowance on the remainder of the loan portfolio; 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.

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The following table sets forth the activity in the allowance for loan losses by portfolio class for the three months ended September 30, 2011 (in thousands):

	At or for the three months ended September 30, 2011
	Real Estate
	One-to four- family			Multi- family		Comm- ercial		Con- struc- tion		Home equity and credit lines		Comm- ercial			Con- sumer			Unallo -cated		Total
Balance at beginning of period	$	942		$	27	$	1,917	$	28	$	66	$	490		$	115		$	500	$	4,085
Charge-offs		(50	)		-		-		-		-		-			(8	)		-		(58	)
Recoveries		5			-		-		-		-		1			3			-		9
Provision		199			-		380		-		52		(145	)		(88	)		-		398
Balance at end of period	$	1,096		$	27	$	2,297	$	28	$	118	$	346		$	22		$	500	$	4,434

The following table sets forth the activity in the allowance for loan losses by portfolio class for the nine months ended September 30, 2011 and the composition of the allowance for loan losses at September 30, 2011 (in thousands):

	At or for the nine months ended September 30, 2011
	Real Estate
	One- to-four family			Multi- family		Comm- ercial			Con- struc- tion			Home equity and credit lines		Comm- ercial			Con- sumer			Unallo -cated		Total
Balance at beginning of period	$	580		$	27	$	1,800		$	65		$	35	$	406		$	130		$	500	$	3,543
Charge-offs		(189	)		-		(87	)		(33	)		-		-			(12	)		-		(321	)
Recoveries		7			-		-			-			-		5			6			-		18
Provision		698			-		584			(4	)		83		(65	)		(102	)		-		1,194
Balance at end of period	$	1,096		$	27	$	2,297		$	28		$	118	$	346		$	22		$	500	$	4,434
Allowance ending balance
Related to loans individually evaluated for impairment	$	745		$	-	$	1,372		$	-		$	68	$	69		$	-		$	-	$	2,254
Related to loans collectively evaluated for impairment		351			27		925			28			50		277			22			500		2,180
Total allowance	$	1,096		$	27	$	2,297		$	28		$	118	$	346		$	22		$	500	$	4,434

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The following table sets forth the activity in the allowance for loan losses by portfolio class for the year ended December 31, 2010 and the composition of the allowance for loan losses at December 31, 2010 (in thousands):

	At or for the year ended December 31, 2010
	Real Estate
	One-to four- family			Multi- family		Comm- ercial			Con- struc- tion			Home equity and credit lines			Comm- ercial			Con- sumer			Unallo -cated		Total
Balance at beginning of period	$	418		$	10	$	1,001		$	166		$	42		$	283		$	186		$	500	$	2,606
Charge-offs		(223	)		-		(144	)		(0	)		-			(15	)		(38	)		-		(420	)
Recoveries		-			-		-			-			-			5			12			-		17
Provision		385			17		943			(101	)		(7	)		133			(30	)		-		1,340
Balance at end of period	$	580		$	27	$	1,800		$	65		$	35		$	406		$	130		$	500	$	3,543
Allowance ending balance
Related to loans individually evaluated for impairment	$	287		$	-	$	698		$	-		$	-		$	-		$	-		$	-	$	985
Related to loans collectively evaluated for impairment		293			27		1,102			65			35			406			130			500		2,558
Total allowance	$	580		$	27	$	1,800		$	65		$	35		$	406		$	130		$	500	$	3,543

The following table sets forth the related recorded investment in loans receivable by portfolio class individually and collectively evaluated for impairment as of September 30, 2011 (in thousands):

	At September 30, 2011
	Real Estate
Loans Receivable	One-to four- family		Multi- family		Commer- cial		Con- struction		Home equity and credit lines		Commer- cial		Con- sumer		Unallo -cated		Total
Individually evaluated for impairment	$	9,451	$	520	$	17,930	$	1,736	$	1,229	$	101	$	30	$	-	$	30,997
Collectively evaluated for impairment		130,079		555		89,840		1,885		31,810		21,290		1,345		-		276,804
Ending Balance	$	139,530	$	1,075	$	107,770	$	3,621	$	33,039	$	21,391	$	1,375	$	-	$	307,801

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The following table sets forth the related recorded investment in loans receivable by portfolio class individually and collectively evaluated for impairment as of December 31, 2010 (in thousands):

	At December 31, 2010
	Real Estate
Loans Receivable	One-to four- family		Multi- family		Commer- cial		Con- struction		Home equity and credit lines		Commer- cial		Con- sumer		Unallo- cated		Total
Individually evaluated for impairment	$	6,429	$	645	$	17,388	$	1,753	$	106	$	288	$	40	$	-	$	26,649
Collectively evaluated for impairment		133,815		2,479		96,854		4,191		35,267		22,965		1,743		-		297,314
Ending Balance	$	140,244	$	3,124	$	114,242	$	5,944	$	35,373	$	23,253	$	1,783	$	-	$	323,963

The following is a summary of changes in the allowance for loan losses:

	Three months ended September 30,					Nine months ended September 30,
	2011			2010		2011			2010
	(In thousands)
Balance, beginning of period	$	4,085		$	2,771	$	3,543		$	2,606
Provision charged to operations		398			29		1,194			531
Charge-offs		(58	)		-		(321	)		(342	)
Recoveries		9			6		18			11
Balance, end of period	$	4,434		$	2,806	$	4,434		$	2,806

The provision for loan losses is charged to expense to maintain the allowance for loan losses at a level that management considers adequate to provide for losses based upon an evaluation of the loan portfolio.

Our loan credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss.  Loans criticized as special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses.  Loans not classified are rated pass.

23

The following table presents the classes of the loan portfolio summarized by the classification rating with the Company’s internal risk rating system as of September 30, 2011 and December 31, 2010:

At September 30, 2011	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate loans:
One- to-four family	$	129,367	$	1,326	$	8,837	$	-	$	139,530
Multi-family		-		555		520		-		1,075
Commercial		85,563		5,912		16,212		83		107,770
Construction		1,885		-		1,736		-		3,621
Home equity and credit lines		31,659		489		891		-		33,039
Commercial		18,613		2,677		101		-		21,391
Consumer		1,298		72		5		-		1,375
Total	$	268,385	$	11,031	$	28,302	$	83	$	307,801

At December 31, 2010	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate loans:
One- to-four family	$	131,773	$	2,306	$	6,165	$	-	$	140,244
Multi-family		3,124		-		-		-		3,124
Commercial		96,381		5,897		11,964		-		114,242
Construction		5,560		-		384		-		5,944
Home equity and credit lines		33,804		1,087		482		-		35,373
Commercial		22,919		46		288		-		23,253
Consumer		1,644		93		46		-		1,783
Total	$	295,205	$	9,429	$	19,329	$	-	$	323,963

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.

24

The following table summarizes information in regards to impaired loans by loan portfolio class as of September 30, 2011:

At or for the three and nine months ended September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average recorded investment for the nine months ended September 30, 2011		Interest income recognized for the nine months ended September 30, 2011		Average recorded investment for the three months ended September 30, 2011		Interest income recognized for the three months ended September 30, 2011
	(In thousands)
With an allowance recorded:
Real estate loans:
One- to-four family	$	4,524	$	4,524	$	745	$	4,551	$	206	$	4,536	$	59
Multi-family		-		-		-		-		-		-		-
Commercial		5,757		5,757		1,372		5,784		192		5,906		64
Construction		-		-		-		-		-		-		-
Home equity and credit lines		196		196		68		190		21		196		7
Commercial		101		101		69		110		6		104		2
Consumer		4		4		-		4		1		4		-
Total with an allowance recorded	$	10,582	$	10,582	$	2,254	$	10,639	$	426	$	10,746	$	132
With no related allowance recorded:
Real estate loans:
One- to-four family	$	4,927	$	4,927	$	-	$	4,594	$	203	$	4,760	$	66
Multi-family		520		520		-		628		14		596		5
Commercial		12,173		12,173		-		12,754		545		12,453		151
Construction		1,736		1,736		-		1,745		46		1,736		15
Home equity and credit lines		1,033		1,033		-		1,076		53		1,037		16
Commercial		-		-		-		-		-		-		-
Consumer		26		26		-		43		3		31		1
Total with no allowance recorded	$	20,415	$	20,415	$	-	$	20,840	$	864	$	20,613	$	254
Total
Real estate loans:
One- to-four family	$	9,451	$	9,451	$	745	$	9,145	$	409	$	9,296	$	125
Multi-family		520		520		-		628		14		596		5
Commercial		17,930		17,930		1,372		18,538		737		18,359		215
Construction		1,736		1,736		-		1,745		46		1,736		15
Home equity and credit lines		1,229		1,229		68		1,266		74		1,233		23
Commercial		101		101		69		110		6		104		2
Consumer		30		30		-		47		4		35		1
Total	$	30,997	$	30,997	$	2,254	$	31,479	$	1,290	$	31,359	$	386

25

The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2010:

At or for the year ended December 31, 2010	Recorded investment		Unpaid Principal Balance		Related Allowance		Average recorded investment		Interest income recognized
	(In thousands)
With an allowance recorded:
Real estate loans:
One-to-four family	$	2,500	$	2,500	$	287	$	627	$	92
Multi-family		-		-		-		-		-
Commercial		5,431		5,431		698		1,361		303
Construction		-		-		-		-		-
Home equity and credit lines		-		-		-		-		-
Commercial		-		-		-		-		-
Consumer		-		-		-		-		-
Total with an allowance recorded	$	7,931	$	7,931	$	985	$	1,988	$	395
With no related allowance recorded:
Real estate loans:
One-to-four family	$	3,929	$	3,929	$	-	$	1,370	$	150
Multi-family		645		645		-		689		21
Commercial		11,957		11,957		-		6,232		561
Construction		1,753		1,753		-		1,495		58
Home equity and credit lines		106		106		-		27		5
Commercial		288		288		-		292		8
Consumer		40		40		-		12		4
Total with no allowance recorded	$	18,718	$	18,718	$	-	$	10,117	$	807
Total
Real estate loans:
One-to-four family	$	6,429	$	6,429	$	287	$	1,997	$	242
Multi-family		645		645		-		689		21
Commercial		17,388		17,388		698		7,593		864
Construction		1,753		1,753		-		1,495		58
Home equity and credit lines		106		106		-		27		5
Commercial		288		288		-		292		8
Consumer		40		40		-		12		4
Total	$	26,649	$	26,649	$	985	$	12,105	$	1,202

Information on impaired loans for the three and nine months ended September 30, 2011 and September 30, 2010, respectively:

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
	(In thousands)
Average recorded investment of impaired loans	$	31,359	$	17,114	$	31,479	$	17,153
Interest income recognized during impairment	$	386	$	241	$	1,290	$	720
Cash basis interest income recognized	$	280	$	165	$	857	$	552

26

The performances 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, 2011
Real estate loans:
One- to four-family	$	-	$	1,770	$	3,774	$	5,544	$	133,986	$	139,530	$	-
Multi-family		-		-		-		-		1,075		1,075		-
Commercial		114		300		851		1,265		106,505		107,770		-
Construction		-		-		383		383		3,238		3,621		-
Home equity loans and lines of credit		323		356		523		1,202		31,837		33,039		-
Commercial		761		75		-		836		20,555		21,391		-
Consumer and other		115		4		-		119		1,256		1,375		-
Total	$	1,313	$	2,505	$	5,531	$	9,349	$	298.452	$	307,801	$	-

	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, 2010
Real estate loans:
One- to four-family	$	3,429	$	2,354	$	5,574	$	11,357	$	128,887	$	140,244	$	-
Multi-family		-		-		-		-		3,124		3,124		-
Commercial		124		1,899		4,337		6,360		107,882		114,242		-
Construction		-		-		384		384		5,560		5,944		-
Home equity loans and lines of credit		446		302		106		854		34,519		35,373		-
Commercial		-		-		288		288		22,965		23,253		-
Consumer and other		67		3		31		101		1,682		1,783		-
Total	$	4,066	$	4,558	$	10,720	$	19,344	$	304.619	$	323,963	$	-

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.  All appraisals are reviewed by our Chief Credit Officer, but we do not modify or adjust the value of appraisals we receive.

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Non-performing assets and troubled debt restructurings at September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011			December 31, 2010
	(In thousands)
Non-accrual loans:
Real estate loans:
One- to four-family	$	3,774		$	5,574
Multi-family		-			-
Commercial		851			4,337
Construction		383			384
Home equity loans and lines of credit		523			106
Commercial		-			288
Consumer		-			31
Total non-accrual loans		5,531			10,720
Accruing loans 90 days or more past due:
All loans		-			-
Total non-performing loans		5,531			10,720
Foreclosed real estate		834			276
Total non-performing assets	$	6,365		$	10,996
Troubled debt restructurings:
Real estate loans:
One- to four-family	$	3,648		$	855
Multi-family		520			645
Commercial		13,220			13,051
Construction		1,354			1,369
Home equity loans and lines of credit		368			-
Commercial		-			-
Consumer		8			9
Total troubled debt restructurings		19,118			15,929
Total non-performing assets and troubled debt restructurings	$	25,483		$	26,925
Ratios:
Total non-performing loans to total loans		1.80	%		3.31	%
Total non-performing loans to total assets		0.94	%		1.82	%
Total non-performing assets to total assets		1.08	%		1.86	%

At September 30, 2011, the nonaccrual loans consisted of 29 one-to four-family residential dwellings units, four commercial properties, two construction loans and eight home equity loans.  The foreclosed real estate consisted of one vacant lot, three one- to four-family dwelling units and two nonresidential properties.  The troubled debt restructurings consisted of 16 one- to four-family dwelling units, one multi-family loan, ten nonresidential properties, one construction loan, one home equity loan and one consumer loan.

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The following table summarizes information in regards to troubled debt restructurings at September 30, 2011:

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
	(Dollars in thousands)
Real estate loans:
One- to four-family		16	$	3,547	$	3,648
Multi-family		1		742		520
Commercial		10		13,388		13,220
Construction		1		1,384		1,354
Home equity loans and lines of credit		1		370		368
Commercial		-		-		-
Consumer		1		10		8
Total		30	$	19,441	$	19,118

For the three months ended September 30, 2011, two one-to four-family loans were restructured with pre-modification and post-modification recorded investment balances totaling $440,000 and $439,000, respectively.  For the nine months ended September 30, 2011, 14 one-to four-family loans with pre-modification and post-modification recorded investment balances totaling $3.2 million and $3.1 million, respectively, and one commercial real estate loan with a pre-modification and post-modification recorded investment balance of $285,000 were restructured.  All of the troubled debt that was restructured in 2011 was for changes in interest rates and no debt was forgiven.

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 month period ended September 30, 2011:

	Number of Contracts		Recorded Investment
	(Dollars in thousands)
Real estate loans:
One- to four-family		2	$	405
Multi-family		-		-
Commercial		2		519
Construction		-		-
Home equity loans and lines of credit		1		368
Commercial		-		-
Consumer		-		-
Total		5	$	1,292

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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.  Included in the allowance for loan losses at September 30, 2011 was specific valuation allowance for TDR’s in the amount of $1.6 million.

9. Deposits

Deposit accounts, by type, at September 30, 2011 and December 31, 2010 are summarized as follows:

	At September 30, 2011								At December 31, 2010
	Balance		Percent			Wtd. Avg. Rate			Balance		Percent			Wtd. Avg. Rate
	(Dollars in thousands)
Deposit type:
Non-interest bearing demand	$	27,135		5.27	%		-	%	$	20,279		3.95	%		-	%
Savings		105,605		20.53			1.26			106,367		20.74			1.52
NOW accounts		122,404		23.80			0.88			115,514		22.52			0.89
Super NOW accounts		37,996		7.39			0.97			34,182		6.67			1.16
Money market deposit		70,444		13.69			1.01			66,901		13.05			1.24
Total transaction accounts		363,584		70.68			0.96			343,243		66.93			1.13
Certificates of deposit		150,815		29.32			2.00			169,593		33.07			2.36
Total deposits	$	514,399		100.00	%		1.26	%	$	512,836		100.00	%		1.54	%

10. 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, 2011 and December 31, 2010:

Maturity	Interest Rate			September 30,  2011		December 31, 2010
				(Dollars in thousands)
April 20, 2011		1.22	%	$	-	$	2,000
June 23, 2011		4.31	%		-		3,000
October 22, 2012		2.12	%		2,000		2,000
				$	2,000	$	7,000

At September 30, 2011, the Bank had a borrowing capacity of 30% of assets or $177.1 million, available from the FHLB of New York (50% of assets with FHLB Board of Directors approval).  At September 30, 2011, the Bank had $2.0 million in outstanding borrowings from the FHLB of New York.

30

11. 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).

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, 2011 and December 31, 2010 are as follows:

	September 30, 2011		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(In thousands)
U. S. Government obligations	$	59,466	$	-	$	59,466	$	-
Corporate debt obligations		9,170		-		9,170		-
Mutual funds		12,667		12,667		-		-
Municipal debt obligations		3,829		-		3,829		-
SBA pools		1,992		-		1,992		-
Mortgage-backed securities		53,358		-		53,358		-
Collateralized mortgage obligations		64,934				64,934
Total investment securities available-for-sale	$	205,416	$	12,667	$	192,749	$	-

31

	December 31, 2010		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(In thousands)
U. S. Government obligations	$	42,439	$	-	$	42,439	$	-
Corporate debt obligations		9,912		-		9,912		-
Mutual fund		901		901		-		-
Municipal debt obligations		4,154		-		4,154		-
SBA pools		3,246		-		3,246		-
Mortgage-backed securities		64,483		-		64,483		-
Collateralized mortgage obligations		56,432				56,432
Total investment securities available-for-sale	$	181,567	$	901	$	180,666	$	-

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, 2011 and December 31, 2010 (in thousands):

	September 30, 2011		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	8,328	$	-	$	-	$	8,328
Real estate owned	$	293	$	-	$	-	$	293

	December 31, 2010		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	6,946	$	-	$	-	$	6,946
Real estate owned	$	276	$	-	$	-	$	276

The following methods and assumptions were used to estimate the fair values of certain Company assets and liabilities at September 30, 2011 and December 31, 2010:

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.

32

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.

Loans Available for Sale (Carried at Lower of Cost or Fair Value)

The fair value of loans available for sale is determined, when possible, using quoted secondary-market prices.  If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

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.

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.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

33

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).  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.

Short-Term Borrowings (Carried at Cost)

The carrying amounts of short-term borrowings approximate their fair values.

Long-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.

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 carrying amount and estimated fair value of the Company’s assets and liabilities at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Assets:
Cash and amounts due from banks	$	26,875	$	26,875	$	20,726	$	20,776
Investment securities available-for-sale		205,416		205,416		181,567		181,567
Corporate debt obligations held-to-maturity		1,191		1,490		1,190		1,402
Municipal debt obligations held-to-maturity		24,430		24,632		35,284		35,121
Mortgage-backed securities held-to-maturity		849		937		1,740		1,842
Federal Home Loan Bank stock		909		909		1,120		1,120
Loans receivable, net		302,945		321,468		319,987		340,423
Loans available for sale		-		-		659		659
Accrued interest receivable		1,893		1,893		2,025		2,025
Liabilities:
Deposits		514,399		518,769		512,836		517,364
Federal Home Loan Bank long-term borrowings		2,000		2,336		7,000		7,168
Accrued interest payable		37		37		75		75
Off-balance sheet financial instruments:
Commitments to extend credit and letters of credit		-		-		-		-

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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, 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 than those 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, competition, 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 under Part I, Item 1A-”Risk Factors” 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 content 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.

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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.

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 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, loans 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.

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.  With the recent downgrades of insurance companies, this is another factor management will review as it assesses its allowance for loan losses.

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.

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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 in (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.

Management’s determination of whether FHLB stock is impaired is based on our assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of the cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.  Management believes no impairment is necessary related to the FHLB stock at September 30, 2011.

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.

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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.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Total assets remained constant at $590.3 million at September 30, 2011 and December 31, 2010.

Net loans receivable decreased $17.1 million, or 5.3%, to $302.9 million at September 30, 2011 from $320.0 million at December 31, 2010.  Commercial real estate loans decreased $6.4 million to $107.8 million at September 30, 2011 from $114.2 million at December 31, 2010.  Construction loans decreased $2.3 million to $3.6 million at September 30, 2011 from $5.9 million at December 31, 2010.  One- to four-family residential real estate loans decreased $700,000 to $139.5 million at September 30, 2011 from $140.2 million at December 31, 2010.    Home equity loans and lines of credit decreased $2.4 million to $33.0 million at September 30, 2011 from $35.4 million at December 31, 2010.  Multi-family mortgage loans decreased $2.0 million to $1.1 million at September 30, 2011 from $3.1 million at December 31, 2010.    Commercial loans decreased by $1.9 million to $21.4 million at September 30, 2011 from $23.3 million at December 31, 2010.  We are controlling the growth of our commercial real estate portfolio and we intend to limit all loans (other than one- to four-family residential real estate loans) to 275% of the sum of core capital (generally common stockholders’ equity including retained earnings) and minority interests in equity accounts of consolidated subsidiaries, less certain intangible assets) plus our allowance for loan losses.  Included in the net loans receivable are nonaccrual loans which decreased to $5.5 million at September 30, 2011 from $10.7 million at December 31, 2010.  The total amount of loans past due decreased to $9.3 million at September 30, 2011 from $19.3 million at December 31, 2010.  There was a decrease in the 30 to 59 days past due category to $1.3 million at September 30, 2011 from $4.1 million at December 31, 2010 and a decrease in the 60 to 89 days past due category to $2.5 million at September 30, 2011 from $4.6 million at December 31, 2010.

Real estate owned increased $558,000 to $834,000 at September 30, 2011 as we completed the foreclosure process on one non-residential property and sold a foreclosed property during the three months ended September 30, 2011.

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Securities available-for-sale increased $23.8 million, or 13.1%, to $205.4 million at September 30, 2011 from $181.6 million at December 31, 2010.  This increase was the result of purchases in the amount of $132.2 million and a market value increase of $1.9 million offset by calls and maturities in the amount of $81.9 million and $28.3 million in principal amortization.  Securities held-to-maturity decreased by $11.7 million, to $26.5 million at September 30, 2011 from $38.2 million at December 31, 2010.  This decrease was the result of calls and maturities in the amount of $32.3 million and $893,000 in principal amortization offset by purchases in the amount of $21.3 million.

Deposits increased $1.6 million, or 0.3%, to $514.4 million at September 30, 2011 from $512.8 million at December 31, 2010.  The largest increase was in NOW accounts, which increased $6.9 million to $122.4 million at September 30, 2011 from $115.5 million at December 31, 2010.  Non-interest bearing demand accounts increased $6.8 million to $27.1 million at September 30, 2011 from $20.3 million at December 31, 2010.  Money market deposit accounts increased by $3.5 million to $70.4 million at September 30, 2011 from $66.9 million at December 31, 2010.  Super-NOW accounts increased by $3.8 million to $38.0 million at September 30, 2011 from $34.2 million at December 31, 2010.  Certificates of deposit decreased by $18.8 million to $150.8 million at September 30, 2011 from $169.6 million at December 31, 2010.  We did not aggressively price our certificates of deposit upon maturity, but some certificate of deposit customers remained with us by opening other types of deposit accounts.

Federal Home Loan Bank borrowings totaled $2.0 million at September 30, 2011 and $7.0 million at December 31, 2010.

Total stockholders’ equity increased $2.8 million to $72.2 million at September 30, 2011 from $69.4 million at December 31, 2010.  This increase was mainly attributable to $2.4 million in net income, an increase in additional paid-in-capital due to stock compensation expense in the amount of $246,000 and an increase in accumulated other comprehensive income of $1.2 million offset by a decrease in additional paid-in capital of $1.0 million due to stock repurchases.

Comparison of Operating Results for the Three Months Ended September 30, 2011 and September 30, 2010

General.  Net income decreased $125,000 to $981,000 for the three months ended September 30, 2011 from $1.1 million for the three months ended September 30, 2010.  The principal reasons for the decrease in net income were an increase in the provision for loan losses in the amount of $369,000 and an increase in non-interest expense of $216,000 offset by an increase in net interest income of $239,000, an increase in non-interest income of $141,000 and a decrease in income taxes of $80,000.

Interest Income.  Interest income decreased $316,000 to $6.2 million for the three months ended September 30, 2011 from $6.5 million for the three months ended September 30, 2010.  The decrease in interest income resulted from a decrease of $190,000 in interest income on loans and a decrease of $126,000 in interest income on securities.

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Interest income on loans decreased $190,000 to $4.6 million for the three months ended September 30, 2011 from $4.8 million for the three months ended September 30, 2010.  The average balance of loans decreased $21.2 million to $306.9 million for the three months ended September 30, 2011 from $328.1 million for the three months ended September 30, 2010, partially offset by the average yield increasing to 6.06% for the three months ended September 30, 2011 from 5.93% for the three months ended September 30, 2010.

Interest income on securities decreased by $126,000 to $1.6 million for the three months ended September 30, 2011 from $1.7 million for the three months ended September 30, 2010.  The decrease in interest income on securities was due to a decrease in the average yield on taxable and tax-exempt securities of 112 basis points to 2.54% for the three months ended September 30, 2011 from 3.66% for the three months ended September 30, 2010, partially offset by an increase in the average balance of taxable and tax-exempt securities to $247.4 million for the three months ended September 30, 2011 from $199.5 million for the three months ended September 30, 2010.  The yields on tax-exempt securities are not tax-affected.

Interest Expense.Interest expense decreased $555,000 to $1.7 million for the three months ended September 30, 2011 from $2.3 million for the three months ended September 30, 2010.

Interest expense on interest-bearing deposits decreased by $474,000 to $1.7 million for the three months ended September 30, 2011 from $2.2 million for the three months ended September 30, 2010.  The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 1.43% for the three months ended September 30, 2011 from 1.92% for the three months ended September 30, 2010, partially offset by an increase in the average balance of interest-bearing deposits to $478.2 million for the three months ended September 30, 2011 from $472.4 million for the three months ended September 30, 2010.  We experienced increases in the average balances of savings accounts, money market deposit accounts, NOW and Super-NOW accounts.  We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended September 30, 2011.

Interest expense on borrowings decreased $81,000 to $16,000 for the three months ended September 30, 2011 from $97,000 for the three months ended September 30, 2010.  This decrease was primarily due to a $3.0 million decrease in the average balance of borrowings to $8.0 million for the three months ended September 30, 2011 from $11.0 million for the three months ended September 30, 2010 and a decrease in the average rate paid on borrowings to 0.80% for the three months ended September 30, 2011 from 3.28% for the three months ended September 30, 2010.  We have decreased our outstanding borrowings because our net increase in deposits, and the proceeds received from the sales, calls, maturities and amortization of securities, discussed above, exceeded our cash needs to fund loan originations and investment securities purchases.

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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 monthly basis and make provisions for loan losses in order to maintain the allowance.

Based on our evaluation of the above factors, we recorded a provision for loan losses of $398,000 for the three months ended September 30, 2011 and a provision for loan losses of $29,000 for the three months ended September 30, 2010.  The allowance for loan losses was $4.4 million, or 1.44% of total loans, at September 30, 2011, compared to $2.8 million, or 0.85% of total loans, at September 30, 2010.  We increased the allowance for loan losses at September 30, 2011 due to increases in (i) general reserves for one- to four-family and commercial real estate loans, and (ii) specific allowances on loans individually evaluated for impairment, in each case where the recorded investment in the loan exceeds the estimated net realizable value of the collateral.  The estimated net realizable value of the collateral includes an increased amount for estimated selling expenses.   Our balance of loans we evaluated individually for impairment was $31.0 million at September 30, 2011 and $26.6 million at December 31, 2010, although we provided specific allowances on loans with principal balances of $10.6 million as of September 30, 2011 and $7.9 million as of December 31, 2010.  At September 30, 2011 and 2010, we maintained unallocated allowances for loan losses of $500,000.

To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate at September 30, 2011 and 2010.  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 $481,000 for the three months ended September 30, 2011 and $340,000 for the three months ended September 30, 2010.  Fees and service charges on deposit accounts decreased by $14,000 to $310,000 for the three months ended September 30, 2011 from $324,000 for the three months ended September 30, 2010.  Gains on the sale of loans totaled $1,000 for the three months ended September 30, 2011 and $46,000 for the three months ended September 30, 2010.  For the three months ended September 30, 2010, the other-than-temporary impairment of securities was $88,000 (pre-tax).  For the three months ended September 30, 2011, there was a net gain on the sale and call of investment securities in the amount of $82,000 compared to a net gain of $30,000 for the three months ended September 30, 2010.  Earnings on life insurance increased by $64,000 to $90,000 for the three months ended September 30, 2011 from $26,000 for the three months ended September 30, 2010.  This increase is due to additional insurance policies purchased in the fourth quarter of 2010.

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Non-interest Expense.  Non-interest expense increased $216,000 to $3.2 million for the three months ended September 30, 2011 from $3.0 million for the three months ended September 30, 2010.  Compensation and benefits expense increased by $116,000 to $1.7 million for the three months ended September 30, 2011 from $1.6 million for the three months ended September 30, 2010.  Normal salary increases, increases in payroll taxes, and an increase in the ESOP expense caused the increase in compensation and benefit expense.  Occupancy and equipment expense decreased $3,000 to $410,000 for the three months ended September 30, 2011 from $413,000 for the three months ended September 30, 2010.  Federal deposit insurance premiums increased $39,000 to $241,000 for the three months ended September 30, 2011 from $202,000 for the three months ended September 30, 2010.  Data processing fees increased by $2,000 to $215,000 for the three months ended September 30, 2011 from $213,000 for the three months ended September 30, 2010.  Professional fees increased $55,000 to $225,000 for the three months ended September 30, 2011 from $170,000 for the three months ended September 30, 2010 mainly due to an increase in legal fees due to increased collection efforts on loans.

Income Tax Expense.We recorded income tax expense of $426,000 for the three months ended September 30, 2011, compared to $506,000 for the three months ended September 30, 2010.  Our effective tax rates for the three months ended September 30, 2011 and 2010 were 30.3% and 31.4%, respectively.  The reason for the decrease in the effective tax rate is due to the increase in the percentage of tax-exempt income to net income for the three months ended September 30, 2011 as compared to the three months end September 30, 2010.

Comparison of Operating Results for the Nine Months ended September 30, 2011 and September 30, 2010

General.  Net income decreased $919,000 to $2.4 million for the nine months ended September 30, 2011 from $3.3 million for the nine months ended September 30, 2010.  The principal reasons for the decrease were a decrease of $86,000 in net interest income, an increase in the provision for loan losses of $663,000, and an increase in non-interest expense of $939,000 offset by a $217,000 increase in non-interest income and a decrease in income tax expense of $552,000.

Interest Income.  Interest income decreased $1.7 million to $18.3 million for the nine months ended September 30, 2011 from $20.0 million for the nine months ended September 30, 2010.  The decrease in interest income resulted from a $635,000 decrease in interest income on securities and a $1.0 million decrease in interest income on loans.

Interest income on loans decreased $1.0 million to $13.6 million for the nine months ended September 30, 2011 from $14.6 million for the nine months ended September 30, 2010.  The average balance of loans decreased by $14.4 million to $312.9 million for the nine months ended September 30, 2011 from $327.4 million for the nine months ended September 30, 2010 and the average yield decreased 16 basis points to 5.79% for the nine months ended September 30, 2011 from 5.95% for the nine months ended September 30, 2010.

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Interest income on securities decreased $635,000 to $4.8 million for the nine months ended September 30, 2011 from $5.4 million for the nine months ended September 30, 2010.  This decrease was due to a decrease in the average yield on investment securities to 2.66% for the nine months ended September 30, 2011 from 3.58% for the nine months ended September 30, 2010, which was partially offset by an increase in the average balance of investment securities to $239.5 million for the nine months ended September 30, 2011 from $202.6 million for the nine months ended September 30, 2010.

Interest Expense.Interest expense decreased $1.6 million to $5.5 million for the nine months ended September 30, 2011 from $7.1 million for the nine months ended September 30, 2010.

Interest expense on interest-bearing deposits decreased by $1.3 million to $5.4 million for the nine months ended September 30, 2011 from $6.8 million for the nine months ended September 30, 2010.  The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 1.50% for the nine months ended September 30, 2011 from 1.92% for the nine months ended September 30, 2010 which was partially offset by an increase in the average balance of interest-bearing deposits to $483.0 million for the nine months ended September 30, 2011 from $472.1 million for the nine months ended September 30, 2010.  We experienced increases in the average balances of each category of interest-bearing deposit: savings accounts, money market deposit accounts, and NOW and Super-NOW accounts.  The average cost of all deposit accounts decreased for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Interest expense on borrowings decreased $242,000 to $106,000 for the nine months ended September 30, 2011 from $348,000 for the nine months ended September 30, 2010.  This decrease was primarily due to a $7.2 million decrease in the average balance of borrowings to $7.2 million for the nine months ended September 30, 2011 from $14.4 million for the nine months ended September 30, 2010 and a decrease on the average rate paid on borrowings to 1.97% for the nine months ended September 30, 2011 from 3.23% for the nine months ended September 30, 2010.

Provision for Loan Losses.  We recorded a provision for loan losses in the amount of $1.2 million for the nine months ended September 30, 2011 while we recorded a provision for loan losses in the amount of $531,000 for the nine months ended September 30, 2010.  We had net charge-offs of $303,000 for the nine months ended September 30, 2011 and net charge-offs of $331,000 for the nine months ended September 30, 2010.  The allowance for loan losses as a percentage of total loans was 1.44% and 0.85% at September 30, 2011 and September 30, 2010, respectively.

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Non-interest Income.  Non-interest income was $1.3 million for the nine months ended September 30, 2011 and $1.1 million for the nine months ended September 30, 2010.  Fees and service charges on deposit accounts decreased by $57,000 to $891,000 for the nine months ended September 30, 2011 from $948,000 for the nine months ended September 30, 2010.  Gains on sales of loans totaled $40,000 for the nine months ended September 30, 2011 compared to $116,000 for the nine months ended September 30, 2010.  Non-interest income for the nine months ended September 30, 2010 was reduced by an other-than-temporary impairment of a corporate debt security in our investment security portfolio.  This charge totaled $109,000 (pre-tax) for the nine months ended September 30, 2010.

Non-interest Expense.  Non-interest expense increased $939,000 to $9.6 million for the nine months ended September 30, 2011 from $8.6 million for the nine months ended September 30, 2010.  Compensation and benefits expense increased $458,000 to $5.0 million for the nine months ended September 30, 2011 from $4.5 million for the nine months ended September 30, 2010.  Normal salary increases, increases in payroll taxes and an increase in the ESOP expense caused the increase in compensation and benefit expense.  Occupancy and equipment expense decreased $33,000 mainly due to decreases in repair and maintenance expense and depreciation expense.  Federal deposit insurance premiums increased to $723,000 for the nine months ended September 30, 2011 from $587,000 for the nine months ended September 30, 2010.  Data processing expense increased $28,000.  Professional fees increased $291,000 to $712,000 for the nine months ended September 30, 2011 from $421,000 for the nine months ended September 30, 2010.  This increase is due to the increased legal fees associated with our loan collection efforts.  Other miscellaneous non-interest expense increased $67,000 to $961,000 for the nine months ended September 30, 2011 from $894,000 for the nine months ended September 30, 2010.  This increase was mainly in employee training and education expense.

Income Tax Expense.We recorded income tax expense of $943,000 for the nine months ended September 30, 2011, compared to a tax expense of $1.5 million for the nine months ended September 30, 2010.  Our effective tax rates for the nine months ended September 30, 2011 and 2010 were 28.4% and 31.2%, respectively.  The reason for the decrease in the effective tax rate is due to the increase in the percentage of tax-exempt income to net income for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

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.

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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, 2011, cash and cash equivalents totaled $26.9 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $205.4 million at September 30, 2011.  In addition, at September 30, 2011, we had the ability to borrow a total of $295.1 million from the Federal Home Loan Bank of New York (50% of our assets at that date with FHLB-NY Board of Directors approval).  On that date, we had $2.0 million in advances outstanding.

At September 30, 2011, loan commitments outstanding totaled $3.2 million and we had a commitment to purchase an investment security in the amount of $2.5 million. In addition to commitments to originate loans and purchase securities, we had $16.2 million in unadvanced funds to borrowers.  Total certificates of deposit due within one year of September 30, 2011 totaled $80.2 million, or 15.6% 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, 2012.  We believe based on past experience that a significant portion of our certificates of deposit will remain with us. 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, 2011, we originated $26.8 million of loans and purchased $153.5 million of securities.  For the nine months ended September 30, 2010, we originated $41.6 million of loans and purchased $111.8 million of securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances.  We experienced net increase in total deposits of $1.6 million for the nine months ended September 30, 2011 and $10.0 million for the nine months ended September 30, 2010, 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.

Total borrowings, consisting solely of Federal Home Loan Bank advances, totaled $2.0 million at September 30, 2011.  Federal Home Loan Bank advances have primarily been used to fund loan demand and purchase securities.

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We have spent $361,000 for the acquisition and development of land in the Borough of Buena, New Jersey, $1.4 million for the acquisition and development of land in Harrison Township, New Jersey and $792,000 for the acquisition and development of land in Millville, New Jersey, in each case for the purpose of establishing a new full service branch office.  However, because building these offices is subject to state and local government approval, we cannot assure you that we will be able to open these facilities, or that we will be able to complete construction even if we expend significant funds on the construction projects.

Colonial Bank, FSB is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (and prior to its elimination on July 21, 2011, the Office of Thrift Supervision), 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.  At September 30, 2011, Colonial Bank, FSB’s capital ratios were as follows:

Tier I (Core) Capital ratio	10.91%
Tier I Risk-Based Capital ratio	19.01%
Total Risk-Based Capital ratio	19.67%

At September 30, 2011 Colonial Bank, FSB exceeded all of the regulatory capital requirements. Colonial Bank, FSB is considered “well capitalized” under regulatory guidelines.

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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

As of September 30, 2011, except as disclosed in previous SEC filings, we were not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involve amounts that we believe are immaterial to our consolidated financial condition, results of operations and cash flows.

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’s repurchases of its common stock made during the quarter are set forth in the following table:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May yet be Purchased Under the Plan or Programs (1)
July 1 – July 31		-	$	-		-		209,422
August 1 – August 31		20,000		12.05		20,000		189,422
									��
September 1 – September 30		65,000		12.52		65,000		124,422
Total		85,000	$	12.41		85,000		124,422

(1) On August 19, 2011, the Company announced a stock repurchase program to repurchase approximately 5%, or 209,422 shares of outstanding common stock.

Item 3.                   Defaults Upon Senior Securities

None

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Item 4.                   [Reserved]

Item 5.                   Other Information

None

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 Executive 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.DEF XBRL Taxonomy Extension Definition Linkbase Document*

Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document*

Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*

* These interactive files shall not be deemed filed for purposes of Section 11 or   12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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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 14, 2011	By:  /s/ Edward J. Geletka
	Edward J. Geletka President and Chief Executive Officer (Principal Executive Officer)

Date:  November 14, 2011	By:  /s/ L. Joseph Stella, III, CPA
	L. Joseph Stella, III, CPA
	Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

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