Colonial Financial Services 10-Q 2013 Q1 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 March 31, 2013

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

For the transition period from _____________________________________ to _____________________________________                                          

Commission file number 001-34817

COLONIAL FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

Maryland	90-0183739
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2745 S. Delsea Drive, Vineland, NJ	08360
(Address of principal executive offices)	(Zip code)

(856) 205-0058

 (Registrant’s telephone number including area code)

N/A

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

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

x           Yes           o           No

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

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

Large accelerated filer   o	Accelerated filer	o
Non-accelerated filer     o	Smaller reporting company	x

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

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

As of May 13, 2013, 3,853,058 shares of common stock, par value $0.01 per share

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION		PAGE
Item 1	Consolidated Statements of Financial Condition (Unaudited)	2
	Consolidated Statements of Income (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	4
	Consolidated Statements of Stockholders’ Equity (Unaudited)	5
	Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3	Defaults Upon Senior Securities	45
Item 4	Mine Safety Disclosures	46
Item 5	Other Information	46
Item 6	Exhibits	46
	Signatures	47

1

PART I            FINANCIAL INFORMATION

Item 1.Financial Statements

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

	March 31,  2013			December 31, 2012
	(Dollars in thousands, except per share data)
Assets
Cash and amounts due from banks	$	6,569		$	26,418
Investment securities available for sale		264,538			233,304
Investment securities held to maturity (fair value at March 31, 2013 - $28,514; at December 31, 2012 - $30,924)		27,467			29,939
Loans receivable, net of allowance for loan losses of $4,079 at March 31, 2013 and $4,146 at December 31, 2012		297,479			297,182
Real estate owned		5,379			5,347
Federal Home Loan Bank stock, at cost		1,138			758
Office properties and equipment, net		8,127			8,195
Bank-owned life insurance		14,275			14,168
Accrued interest receivable		1,756			1,650
Other assets		6,489			6,635
Total Assets	$	633,217		$	623,596
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	41,762		$	39,301
Interest-bearing		513,174			514,789
Total deposits		554,936			554,090
Federal Home Loan Bank short-term borrowings		8,460			-
Advances from borrowers for taxes and insurance		714			661
Accrued interest payable and other liabilities		1,075			808
Total Liabilities		565,185			555,559
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value; authorized 50,000,000 shares; none issued		-			-
Common stock, $0.01 par value; authorized 100,000,000 shares;   issued and outstanding 3,853,058 shares at March 31, 2013 and 3,852,791 shares at   December 31, 2012		39			39
Additional paid-in capital		37,099			37,155
Unearned shares held by Employee Stock Ownership Plan (“ESOP”)		(1,378	)		(1,378	)
Retained earnings		29,804			29,307
Accumulated other comprehensive income		2,468			2,914
Total Stockholders’ Equity		68,032			68,037
Total Liabilities and Stockholders’ Equity	$	633,217		$	623,596

See notes to unaudited consolidated financial statements.

2

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended March 31,
	2013		2012
	(Dollars in thousands, except  per share data)
Interest Income
Loans, including fees	$	3,588	$	4,074
Mortgage-backed securities		504		849
Investment securities:  Taxable		505		495
Investment securities:  Tax-exempt		116		167
Total Interest Income		4,713		5,585
Interest Expense
Deposits		1,078		1,455
Borrowings		-		11
Total Interest Expense		1,078		1,466
Net Interest Income		3,635		4,119
Provision for Loan Losses		42		1,248
Net Interest Income after Provision for Loan Losses		3,593		2,871
Non-Interest Income
Fees and service charges		348		291
Net gain on sales and calls of investment securities		51		166
Earnings on life insurance		107		86
Other		9		3
Total Non-Interest Income		515		546
Non-Interest Expenses
Compensation and benefits		1,764		1,715
Occupancy and equipment		406		376
Data processing		237		198
FDIC insurance premium		131		110
Office supplies		45		41
Professional fees		215		227
Advertising and promotions		33		43
Real estate owned, net		213		34
Other		388		347
Total Non-Interest Expenses		3,432		3,091
Income before Income Tax Expense		676		326
Income Tax expense		179		78
Net Income	$	497	$	248
Per Share Data (See Note 3):
Earnings per share – basic	$	0.13	$	0.06
Earnings per share – diluted	$	0.13	$	0.06
Weighted average number of shares outstanding – basic		3,720,086		3,825,534
Weighted average number of shares outstanding – diluted		3,744,024		3,825,534

See notes to unaudited consolidated financial statements.

3

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

	Three Months Ended March 31,
	2013			2012
	(Dollars in thousands)
Net income	$	497	��	$	248
Other Comprehensive Income (Loss):
Unrealized loss on securities net of tax (benefit)  – 2013, (219) ; 2012, (226)		(415	)		(415	)
Less reclassification adjustment for realized gain on sale of securities (net) included in net income net of tax expense  – 2013, (20); 2012, (68)		(31	)		(98	)
Total Other Comprehensive (Loss)		(446	)		(513	)
Comprehensive Income (Loss)	$	51		$	(265	)

See notes to unaudited consolidated financial statements.

4

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) 

	Common Stock Shares			Common Stock		Additional Paid-in Capital			Unearned Shares Held by ESOP			Retained Earnings		Accumu -lated Other Compre- hensive Income			Total Stock- holders’ Equity
	(Dollars in thousands)
Balance, January 1, 2013		3,852,791		$	39	$	37,155		$	(1,378	)	$	29,307	$	2,914		$	68,037
Net income		-			-		-			-			497		-			497
Other comprehensive loss		-			-		-			-			-		(446	)		(446	)
Repurchase and retirement of common stock		(10,000	)		-		(134	)		-			-		-			(134	)
Stock-based compensation expense (restricted stock awards)		10,267			-		32			-			-		-			32
Stock-based compensation expense (stock options)		-			-		46			-			-		-			46
Balance, March 31, 2013		3,853,058		$	39	$	37,099		$	(1,378	)	$	29,804	$	2,468		$	68,032
Balance, January 1, 2012		3,994,073		$	40	$	38,660		$	(1,586	)	$	31,056	$	3,515		$	71,685
Net income		-			-		-			-			248		-			248
Other comprehensive loss		-			-		-			-			-		(513	)		(513	)
Stock-based compensation expense (restricted stock awards)		1,088			-		60			-			-		-			60
Stock-based compensation expense (stock options)		-			-		48			-			-		-			48
Balance, March 31, 2012		3,995,161		$	40	$	38,768		$	(1,586	)	$	31,304	$	3,002		$	71,528

See notes to unaudited consolidated financial statements.

5

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 

	Three Months Ended  March 31,
	2013			2012
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	497		$	248
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		42			1,248
Depreciation expense		138			154
Stock-based compensation expense		78			108
Net earnings on bank-owned life insurance		(107	)		(86	)
Net amortization of loan costs		299			14
Net gain on sales and calls of investment securities		(51	)		(166	)
Net gain on the sale of real estate owned		(13	)		(31	)
Write-down of real estate owned		140			-
Amortization of premium (accretion of discount) on investment securities, net		8			(54	)
Increase in accrued interest receivable		(106	)		(194	)
Decrease (increase) in other assets		146			(682	)
Increase in accrued interest payable and other liabilities		267			47
Net cash provided by operating activities		1,338			606
Cash Flows from Investing Activities:
Proceeds from sales of investment securities available-for-sale		-			998
Proceeds from calls and maturities of investment securities available-for-sale		26,894			22,968
Proceeds from calls and maturities of investment securities held-to-maturity		11,131			1,495
Purchase of investment securities available-for-sale		(56,230	)		(48,480	)
Purchase of investment securities held-to-maturity		(8,674	)		(290	)
Purchase of mortgage-backed securities and collateralized mortgage obligations available-for-sale		(12,563	)		(3,001	)
Purchase of office properties and equipment		(70	)		(38	)
Principal repayments from investment securities		119			313
Principal repayments from mortgage-backed securities and collateralized mortgage obligations		10,158			11,622
Net (increase) decrease of Federal Home Loan Bank stock		(380	)		362
Proceeds from the sale of real estate owned		182			296
Net (increase) decrease in loans receivable		(979	)		1,615
Net cash used in investing activities		(30,412	)		(12,140	)
Cash Flows from Financing Activities:
Net increase in deposits		846			43,209
Repayment in Federal Home Loan Bank short-term borrowings		-			(8,045	)
Proceeds from Federal Home Loan Bank short-term borrowings		8,460			-
Increase in advances from borrowers for taxes and insurance		53			75
Common stock repurchased		(134	)		-
Net cash provided by financing activities		9,225			35,239
(Decrease) increase in cash and cash equivalents		(19,849	)		23,705
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		26,418			7,893
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	6,569		$	31,598
Supplemental Cash Flow Disclosures:
Cash paid:
Interest	$	1,084		$	1,470
Income taxes	$	-		$	260
Supplemental Schedule of Noncash Investing and Financing Activities:
Other real estate acquired in settlement of loans	$	341		$	399

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, as a savings and loan holding company, is subject to regulation by the Board of Governors of the Federal Reserve System.  The Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency (“OCC”).

The Bank is a federally chartered capital stock savings bank.  The Bank maintains its executive office and main branch in Vineland, New Jersey with branches in Bridgeton, Mantua, Millville, Upper Deerfield, Vineland, Sewell and Cedarville, New Jersey.  The Bank’s principal business consists of attracting customer deposits and investing these deposits primarily in single-family residential, commercial and consumer loans and investments.

The Bank has established a Delaware corporation, COBK Investments, Inc. (formerly known as CB Delaware Investments, Inc.) whose purpose is to invest in and manage securities, and a New Jersey corporation, Cohansey Bridge, LLC, whose purpose is to hold foreclosed real estate (collectively, the “Operating Subsidiaries”).

7

The consolidated financial statements include the accounts of the Company, the Bank and the Operating Subsidiaries.  All material intercompany transactions and balances have been eliminated.  The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) as set by the Financial Accounting Standards Board (“FASB”).  The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.  They do not include all of the information and footnotes required by US GAAP for complete financial statements.  Operating results for the three months ended March 31, 2013 (unaudited) are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any other period.  The balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, evaluation of other-than-temporary impairment of investment securities, our ability to realize deferred tax assets and measurements of fair value.

For comparative purposes, prior periods’ consolidated financial statements have been reclassified when necessary to conform to report classifications of the current year.  The reclassifications had no effect on net income.

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

8

2. Recent Accounting Pronouncements

In January 2013 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”  The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.  The amendments in this Update affect entities that have derivatives accounted for in accordance with Topic 815, including bifurcated embedded derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.  Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in Update 2011-11.  The amendments in this update are effective during interim and annual periods beginning on or after January 1, 2013.  An entity should provide the required disclosure retrospectively for all comparative periods presented.  The adoption of this FASB ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2013 the FASB issued ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under United States Generally Accepted Accounting Principles (“GAAP”) to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.  The amendments in this Update apply to all entities that issue financial statements that are presented in conformity with U.S. GAAP and that report items of other comprehensive income.  Public companies are required to comply with these amendments for all reporting periods presented, including interim periods.  For public entities, the amendments in this Update are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this FASB ASU did not have a material impact on the Company’s consolidated financial statements.

9

3. Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS.  Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented.  Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”).  CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards.  CSEs which are considered antidilutive are not included for the purposes of this calculation. There are no convertible securities which would affect the net income (numerator) in calculating basic and diluted earnings per share; therefore, for these calculations, the net income for the three months ended March 31, 2013 and 2012 is $497,000 and $248,000, 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 March 31, 2013 and 2012, there were 0 and 473,230 anti-dilutive options and awards excluded from the computation of diluted earnings per share.

	For the Three Months Ended  March 31,
	2013			2012
Net income	$	497,000		$	248,000
Weighted average common shares issued		3,853,501			3,979,034
Average unearned ESOP shares		(133,415	)		(153,500	)
Weighted average common shares outstanding-basic		3,720,086			3,825,534
Effect of dilutive non-vested shares and stock options outstanding		23,938			-
Weighted average common shares outstanding-diluted		3,744,024			3,825,534
Basic earnings per share	$	0.13		$	0.06
Diluted earnings per share	$	0.13		$	0.06

4.             Stock-Based Compensation

At March 31, 2013, the Company has two share-based compensation plans under which grants have been made, the 2006 Stock-Based Incentive Plan (the “2006 Plan”) and the 2011 Equity Incentive Plan (the “2011 Plan”).  Under the 2006 Plan, the total number of shares that could be granted as awards was 83,300 and the total amount of shares that could be granted as options was 208,247.  Under the 2011 Plan, the total number of shares that could be granted as awards was 91,800 and the total amount of shares that could be granted as options was 229,500.

On October 19, 2006, for the 2006 Plan, 83,300 shares of restricted stock were awarded.  The restricted shares awarded had a grant date fair value of $13.27 per share.  The restricted stock awarded was fully vested as of October 19, 2011 and the total expense and related tax effect has been fully recorded.

10

On January 20, 2011, for the 2006 Plan, 3,268 shares of restricted stock were awarded.  The restricted shares awarded had a grant date fair value of $12.00 per share.  The restricted stock awarded vests 33% annually beginning January 20, 2012.  For the three months ended March 31, 2013 and 2012, $3,000 in compensation expense was recognized in regard to the stock awards given in January 2011 with a related tax benefit of $1,000.  As of March 31, 2013, there was $10,000 of unrecognized compensation expense related to the restricted stock awards which is expected to be recognized over a period of .75 years.

On January 2, 2012, 45,895 shares of restricted time-based stock grants were awarded.  The restricted time-based stock grants had a grant date fair value of $12.46 per share and vest 20% annually beginning January 2, 2013.  Also, on January 2, 2012, 45,895 shares of restricted performance-based stock grants were awarded.  The restricted performance-based stock grants had a grant date fair value of $12.46 and vest 20% annually with the attainment of the performance goal.  If the goal is not attained for the year, the stock grants are forfeited.  For the three months ended March 31, 2013 and 2012, $29,000 and $57,000 in compensation expense was recognized in regard to these restricted stock awards, respectively with a related tax benefit of $10,000 and $19,000, respectively.  For the three months ended March 31, 2013, there was no expense recorded for the performance-based awards.  As of March 31, 2013, there was $886,000 of unrecognized compensation expense related to the restricted stock awards which is expected to be recognized over a period of 3.75 years.

A summary of the status of the shares under the two Plans as of March 31, 2013 and changes during the three months ended March 31, 2013 are presented below.

Award Shares	Number of Shares		Weighted Average Grant Date Fair Value
Restricted, January 1, 2013		93,970	$	12.45
Granted		-		-
Forfeitures		-		-
Vested		10,267		12.41
Restricted stock, end of period		83,703	$	12.44

On October 19, 2006, for the 2006 Plan, options to purchase 184,660 shares of common stock at $13.27 per share were awarded.  The options awarded fully vested in October 2011 and expire in 2016.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2006:  dividend yield of 0%, risk-free interest rate of 4.79%, expected life of 6.5 years, and expected volatility of 15.00%.  The calculated fair value of options granted in 2006 was $4.03 per option.  The weighted average contractual term of options outstanding and exercisable was 3.50 years at March 31, 2013 and 4.50 years at March 31, 2012.  The total expense and related tax effect has been fully recorded for these options.

11

On January 20, 2011, for the 2006 Plan, options to purchase 8,328 shares of common stock at $12.00 per share were awarded.  The options awarded vest 33% annually beginning January 20, 2012 and expire in 2021.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2011:  dividend yield of 0%, risk-free interest rate of 3.47%, expected life of 6.5 years, and expected volatility of 33.00%.  The calculated fair value of options granted in 2011 was $4.84 per option.  The weighted average contractual term of options outstanding and exercisable was 7.75 years at March 31, 2013 and 8.75 years at March 31, 2012.  Stock-based compensation expense related to stock options granted in 2011 for the three months ended March 31, 2013, was $3,000 with a related tax benefit of $1,000.  As of March 31, 2013, there was approximately $11,000 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 0.75 years.  Stock-based compensation expense related to stock options awarded in 2011 for the three months ended March 31, 2012, was $3,000 with a related tax benefit of $1,000.

On January 2, 2012, for the 2011 Plan, options to purchase 194,600 shares of common stock at $12.46 were awarded.  The options awarded vest 20% annually beginning January 20, 2013 and expire in 2022.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2012:  dividend yield of 0%, risk-free interest rate of 1.41%, expected life of 6.5 years, and expected volatility of 32.00%.  The calculated fair value of options granted in 2012 was $4.34 per option.  The weighted average contractual term of options outstanding and exercisable was 8.75 years at March 31, 2013.  Stock-based compensation expense related to stock options granted in 2012 for the three months ended March 31, 2013, was $43,000 with a related tax benefit of $14,000.  As of March 31, 2013, there was approximately $634,000 of unrecognized compensation cost related to unvested stock options granted in 2012.  The cost will be recognized in a straight line method over a period of 3.75 years.

A summary of the status of the Company’s stock options under the two plans as of March 31, 2013 and changes during the three months ended March 31, 2013 are presented below.

	Options		Weighted Average Exercise Price
Options outstanding, January 1, 2013		379,260	$	12.85
Granted		-		-
Exercised		-		-
Forfeitures		-		-
Options outstanding, end of period		379,260	$	12.85
Exercisable at end of period		220,804	$	13.10

12

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 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 $67,000 for the three months ended March 31, 2013 and $62,000 for the three months ended March 31, 2012, respectively.

The following table presents the components of the ESOP shares:

	March 31, 2013		March 31, 2012
Shares released for allocation		114,784		94,699
Unreleased shares		133,415		153,500
Total ESOP shares		248,199		248,199

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5.            Contingent Liabilities and Guarantees

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit that are not reflected in the accompanying financial statements.  No material losses are anticipated as a result of those transactions on either a completed or uncompleted basis.

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit 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 $2.5 million of standby letters of credit outstanding as of March 31, 2013.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees.

In October 2009, the Bank entered into an agreement to sponsor a not-for-profit corporation for a Federal Home Loan Bank of New York Affordable Housing Program (“AHP”) Grant in the amount of $275,000.  If the non-for-profit corporation does not comply with terms of the agreement, the Bank may be required to repay the grant to the Federal Home Loan Bank of New York.  The term of the recapture agreement is 15 years.  The Bank expects the not-for-profit corporation to adhere to all requirements of the grant and does not expect to be required to repay any of the AHP grant.

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6.            Investment Securities

Investment securities are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale:
March 31, 2013
U. S. Government obligations	$	158,980	$	569	$	(120	)	$	159,429
Corporate debt obligations		5,606		171		-			5,777
Mutual fund		3,320		35		-			3,355
Municipal debt obligations		5,662		91		(12	)		5,741
SBA pools		1,381		10		(2	)		1,389
Mortgage-backed securities		27,748		2,094		(1	)		29,841
Collateralized mortgage obligations		58,042		1,089		(125	)		59,006
	$	260,739	$	4,059	$	(260	)	$	264,538

December 31, 2012
U. S. Government obligations	$	126,524	$	692	$	(163	)	$	127,053
Corporate debt obligations		6,603		151		(1	)		6,753
Mutual fund		4,909		39		-			4,948
Municipal debt obligations		6,171		94		(9	)		6,256
SBA pools		1,427		13		(1	)		1,439
Mortgage-backed securities		32,340		2,411		(30	)		34,721
Collateralized mortgage obligations		50,846		1,290		(2	)		52,134
	$	228,820	$	4,690	$	(206	)	$	233,304
Held to Maturity:
March 31, 2013
Corporate debt obligations	$	1,192	$	298	$	-		$	1,490
Municipal debt obligations		25,907		712		-			26,619
Mortgage-backed securities		368		37		-			405
	$	27,467	$	1,047	$	-		$	28,514
December 31, 2012
Corporate debt obligations	$	1,192	$	310	$	-		$	1,502
Municipal debt obligations		28,318		635		-			28,953
Mortgage-backed securities		429		40		-			469
	$	29,939	$	985	$	-		$	30,924

All of the Company’s mortgage-backed securities and collateralized mortgage obligations at March 31, 2013 and December 31, 2012 have been issued by U. S. government agencies or government sponsored enterprises and the collateral is predominantly one- to four-family mortgages.

15

The amortized cost and estimated fair value of investment securities at March 31, 2013, 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	$	15,102	$	15,102	$	7,975	$	8,034
Due after one year through five years		8,786		9,097		41,681		42,139
Due after five years through ten years		1,312		1,483		121,997		122,216
Due thereafter		1,899		2,427		3,296		3,302
Sub-total		27,099		28,109		174,949		175,691
Mortgage-backed securities and collateralized mortgage obligations		368		405		85,790		88,847
Total	$	27,467	$	28,514	$	260,739	$	264,538

At March 31, 2013 and December 31, 2012, $126.7 million and $92.3 million, respectively, of securities were pledged as collateral to secure certain deposits and FHLB advances.

Gross realized gains on available-for-sale securities totaled $51,000 while gross realized gains on held-to-maturity securities totaled $0, for the three months ended March 31, 2013.  There were no gross realized losses on available-for-sale or held-to-maturity securities for the three months ended March 31, 2013.

Gross realized gains on available-for-sale securities totaled $166,000 while gross realized gains on held-to-maturity securities totaled $0, for the three months ended March 31, 2012.  There were no gross realized losses on available-for-sale or held-to-maturity securities for the three months ended March 31, 2012.

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 March 31, 2013	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U. S. government obligations	$	46,986	$	120	$	-	$	-	$	46,986	$	120
Corporate debt obligations		-		-		-		-		-		-
Municipal debt obligations		952		12		-		-		952		12
SBA pools		1,063		2		-		-		1,063		2
Mortgage-backed securities		-		-		35		1		35		1
Collateralized mortgage obligations		10,935		125		-		-		10,935		125
Total	$	59,936	$	259	$	35	$	1	$	59,971	$	260

 16

At December 31, 2012	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	$	30,705	$	163	$	-	$	-	$	30,705	$	163
Corporate debt obligations		496		1		-		-		496		1
Municipal debt obligations		1,539		9		-		-		1,539		9
SBA pools		101		1		-		-		101		1
Mortgage-backed securities		42		1		1,508		29		1,550		30
Collateralized mortgage obligations		706		1		287		1		993		2
Total	$	33,589	$	176	$	1,795	$	30	$	35,384	$	206

At March 31, 2013, there were 40 securities in the less-than-twelve-month category and one security in the twelve-month-or-more category for the available-for-sale portfolio.  Included in the 40 securities in the less-than-twelve-month category are 24 U.S government obligations, eight collateralized mortgage obligations, four municipal obligations and four SBA pools.  The one security in the twelve-month-or-more category is a mortgage-backed security.

At December 31, 2012, there were 27 securities in the less-than-twelve-months category and three securities in the twelve-months-or-more category for the available-for-sale portfolio.  Included in the 27 securities in the less-than-twelve-months category for available-for-sale securities are 16 U.S government securities, one corporate debt obligation, six municipal debt obligations, two SBA pools, one mortgage-backed security and one collateralized mortgage obligation.  Included in the three securities in the twelve-months-or-more category are two mortgage-backed securities and one collateralized mortgage obligation.

At March 31, 2013 and December 31, 2012, there were no held to maturity investments in an unrealized loss position.

The Company’s investment in U. S. Government agency securities and SBA loan pools consist of debt obligations of government sponsored enterprises and pools of loans from the Small Business Administration.  All principal and interest payments are current in regards to the investments.  The contractual cash flows of these investments are guaranteed by an agency of the United States government.  The change in market value is attributable to current interest rate levels relative to the Company’s cost and not credit quality.  As the change in market value is attributable to changes in interest rates and not 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 March 31, 2013.

17

The Company’s investment in corporate bonds consists of debt obligations of corporations mostly in the financial, insurance and pharmaceutical sectors of the economy.  All interest payments are current in regards to all the corporate investments.  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 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 March 31, 2013.

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 March 31, 2013.

The Company’s investment in mortgage-backed securities and collateralized mortgage obligations consists of government sponsored enterprise (“GSE”) securities.  The change in market value is attributable to changes in interest rates and widening credit spreads, and not due to underlying credit deterioration.  The contractual cash flows for the investments are performing as expected.  As the change in market value is attributable to changes in interest rates and credit spread and not underlying credit deterioration, and because the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the securities before recovery occurs, the Company does not consider the investments to be other-than-temporarily impaired at March 31, 2013.

7.            Loans and Allowance for Loan Losses

The components of loans at March 31, 2013 and December 31, 2012 are as follows:

	At March 31, 2013						At December 31, 2012
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	149,732			49.5	%	$	148,674			49.2	%
Multi-family		925			0.3			397			0.1
Commercial		91,448			30.3			90,143			29.9
Construction and land		9,667			3.2			9,683			3.3
Home equity loans and lines of credit		27,037			8.9			28,657			9.5
Commercial		22,667			7.5			23,345			7.7
Consumer		995			0.3			1,043			0.3
Total loans receivable	$	302,471			100.0	%	$	301,942			100.0	%
Deferred loan fees		(913	)					(614	)
Allowance for loan losses		(4,079	)					(4,146	)
Total loans receivable, net	$	297,479					$	297,182

 18

Our loans are originated and administered through our loan policies.  We originate one- to four-family residential real estate loans, multi-family loans, commercial real estate loans, construction and land loans, home equity loans and lines of credit, commercial business loans and consumer loans.  Our one- to four-family residential loans also include loans to businesses for a commercial purpose which is secured by liens on the borrower’s residence.  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.

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 Board Loan Committee, Management Loan Committee and to individual executive officers and loan officers.  Our lending activities are subject to written policies established by the board of directors.  These policies are reviewed periodically.  The Management Loan Committee may approve loans in accordance with applicable loan policies, including our policy governing loans to one borrower.  This policy limits the aggregate dollar amount of credit that may be extended to any one borrower and related entities.  The Management Loan Committee may approve secured loans in amounts up to $300,000, and unsecured loans in amounts up to $100,000.  The Board Loan Committee may approve secured loans in amounts above $300,000, and unsecured loans in amounts above $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.

 19

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

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

20

The following table sets forth the activity in the allowance for loan losses and the related recorded investment in loans receivable by portfolio class at and for the three months ended March 31, 2013 (in thousands):

	At or for the three months ended March 31, 2013
	Real Estate
	One-to four- family		Multi- family		Commercial			Construction and land			Home equity and credit lines			Commercial		Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	692	$	6	$	1,107		$	138		$	277		$	405	$	21		$	1,500	$	4,146
Charge-offs		-		-		-			(37	)		(93	)		-		(4	)		-		(134	)
Recoveries		-		-		-			21			-			-		4			-		25
Provision		595		7		(790	)		(32	)		36			222		4			-		42
Ending balance	$	1,287	$	13	$	317		$	90		$	220		$	627	$	25		$	1,500	$	4,079
Allowance ending balance
Related to loans individually evaluated for impairment	$	196	$	-	$	6		$	-		$	2		$	2	$	-		$	-	$	206
Related to loans collectively evaluated for impairment		1,091		13		311			90			218			625		25			1,500		3,873
Total allowance	$	1,287	$	13	$	317		$	90		$	220		$	627	$	25		$	1,500	$	4,079
Loans Receivable:
Individually evaluated for impairment	$	7,931	$	-	$	10,092		$	3,849		$	480		$	2,984	$	-		$	-	$	25,336
Collectively evaluated for impairment		141,801		925		81,356			5,818			26,557			19,683		995			-		277,135
Ending balance	$	149,732	$	925	$	91,448		$	9,667		$	27,037		$	22,667	$	995		$	-	$	302,471

The following table sets forth the activity in the allowance for loan losses by portfolio class for the three months ended March 31, 2012 (in thousands):

	At or for the three months ended March 31, 2012
	Real Estate
	One-to four- family			Multi- family		Commercial			Construction		Home equity and credit lines			Commercial			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,220		$	27	$	2,400		$	34	$	114		$	713		$	19		$	500	$	5,027
Charge-offs		(1,031	)		-		(1,821	)		-		(141	)		(416	)		(4	)		-		(3,413	)
Recoveries		2			-		-			-		-			2			-			-		4
Provision		480			-		591			7		99			71			-			-		1,248
Ending balance	$	671		$	27	$	1,170		$	41	$	72		$	370		$	15		$	500	$	2,866

 21

The following table sets forth the allowance for loan losses and the recorded investment in loans receivable by portfolio class as of December 31, 2012 (in thousands):

	Real Estate
December 31, 2012	One-to four- family		Multi- family		Commercial		Construction and land		Home equity and credit lines		Commercial		Consumer		Unallocated		Total
Allowance ending balance
Related to loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	93	$	7	$	1	$	-	$	101
Related to loans collectively evaluated for impairment		692		6		1,107		138		184		398		20		1,500		4,045
Total allowance	$	692	$	6	$	1,107	$	138	$	277	$	405	$	21	$	1,500	$	4,146
Loans Receivable:
Individually evaluated for impairment	$	7,456	$	-	$	15,128	$	4,177	$	816	$	3,126	$	2	$	-	$	30,705
Collectively evaluated for impairment		141,218		397		75,015		5,506		27,841		20,219		1,041		-		271,237
Ending balance	$	148,674	$	397	$	90,143	$	9,683	$	28,657	$	23,345	$	1,043	$	-	$	301,942

The following tables present the classes of the loan portfolio summarized by the classification rating with the Company’s internal risk rating system as of March 31, 2013 and December 31, 2012:

March 31, 2013	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate loans:
One- to-four family	$	136,705	$	2,520	$	1,238	$	9,142	$	127	$	149,732
Multi-family		826		99		-		-		-		925
Commercial		64,221		13,593		3,071		10,563		-		91,448
Construction and land		4,641		797		-		4,229		-		9,667
Home equity and credit lines		26,918		-		38		81		-		27,037
Commercial		17,476		380		115		2,090		2,606		22,667
Consumer		796		84		110		5		-		995
Total	$	251,583	$	17,473	$	4,572	$	26,110	$	2,733	$	302,471

 22

December 31, 2012	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate loans:
One- to-four family	$	135,692	$	2,794	$	1,523	$	8,538	$	127	$	148,674
Multi-family		298		99		-		-		-		397
Commercial		67,072		12,195		897		9,979		-		90,143
Construction and land		4,310		813		-		4,560		-		9,683
Home equity and credit lines		28,019		-		60		578		-		28,657
Commercial		17,979		386		1,628		3,352		-		23,345
Consumer		889		87		59		8		-		1,043
Total	$	254,259	$	16,374	$	4,167	$	27,015	$	127	$	301,942

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

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

 23

The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
(Dollars in thousands)	Recorded investment		Unpaid Principal Balance		Related Allowance		Recorded investment		Unpaid Principal Balance		Related Allowance
With an allowance recorded:
Real estate loans:
One- to-four family	$	1,913	$	2,213	$	196	$	-	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial		40		40		6		-		-		-
Construction and land		-		-		-		-		-		-
Home equity and credit lines		5		5		2		93		93		93
Commercial		2		2		2		384		387		7
Consumer		-		-		-		2		6		1
	$	1,960	$	2,260	$	206	$	479	$	486	$	101
With no related allowance recorded:
Real estate loans:
One- to-four family	$	6,018	$	6,882	$	-	$	7,456	$	8,601	$	-
Multi-family		-		-		-		-		-		-
Commercial		10,052		14,627		-		15,128		19,667		-
Construction and land		3,849		3,849		-		4,177		4,204		-
Home equity and credit lines		475		574		-		723		907		-
Commercial		2,982		3,322		-		2,742		3,043		-
Consumer		-		-		-		-		-		-
	$	23,376	$	29,254	$	-	$	30,226	$	36,422	$	-
Total
Real estate loans:
One- to-four family	$	7,931	$	9,095	$	196	$	7,456	$	8,601	$	-
Multi-family		-		-		-		-		-		-
Commercial		10,092		14,667		6		15,128		19,667		-
Construction and land		3,849		3,849		-		4,177		4,204		-
Home equity and credit lines		480		579		2		816		1,000		93
Commercial		2,984		3,324		2		3,126		3,430		7
Consumer		-		-		-		2		6		1
	$	25,336	$	31,514	$	206	$	30,705	$	36,908	$	101

 24

The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2013 and March 31, 2012:

For the Three Months Ended:	March 31, 2013				March 31, 2012
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized While Impaired		Average Recorded Investment		Interest Income Recognized While Impaired
With an allowance recorded:
Real estate loans:
One-to-four family	$	1,917	$	13	$	997	$	2
Multi-family		-		-		-		-
Commercial		40		-		-		-
Construction and land		-		-		-		-
Home equity and credit lines		5		-		-		-
Commercial		2		-		18		-
Consumer		-		-		3		-
	$	1,964	$	13	$	1,018	$	2
With no related allowance recorded:
Real estate loans:
One-to-four family	$	6,026	$	57	$	7,378	$	59
Multi-family		-		-		303		2
Commercial		10,096		25		15,158		158
Construction and land		3,850		12		1,731		10
Home equity and credit lines		480		10		558		6
Commercial		3,018		1		511		10
Consumer		-		-		6		-
	$	23,470	$	105	$	25,645	$	245
Total
Real estate loans:
One-to-four family	$	7,943	$	70	$	8,375	$	61
Multi-family		-		-		303		2
Commercial		10,136		25		15,158		158
Construction and land		3,850		12		1,731		10
Home equity and credit lines		485		10		558		6
Commercial		3,020		1		529		10
Consumer		-		-		9		-
	$	25,434	$	118	$	26,663	$	247

If these loans made all the required principal and interest payments under their original contractual rate or the restructured rate, interest income on such loans would have increased by approximately $153,000 and $432,000 for the three months ended March 31, 2013 and 2012, respectively.

 25

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 March 31, 2013
Real estate loans:
One- to four-family	$	5,733	$	948	$	2,284	$	8,965	$	140,767	$	149,732	$	-
Multi-family		-		-		-		-		925		925		-
Commercial		1,438		116		1,654		3,208		88,240		91,448		-
Construction and land		11		-		2,226		2,237		7,430		9,667		-
Home equity loans and lines of credit		334		234		125		693		26,344		27,037		-
Commercial		72		73		379		524		22,143		22,667		-
Consumer and other		61		29		5		95		900		995		-
Total	$	7,649	$	1,400	$	6,673	$	15,722	$	286,749	$	302,471	$	-

	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, 2012
Real estate loans:
One- to four-family	$	5,296	$	1,353	$	2,553	$	9,202	$	139,472	$	148,674	$	-
Multi-family		-		-		-		-		397		397		-
Commercial		2,288		593		1,432		4,313		85,830		90,143		-
Construction and land		-		-		325		325		9,358		9,683		-
Home equity loans and lines of credit		38		169		628		835		27,822		28,657		-
Commercial		-		384		75		459		22,886		23,345		-
Consumer and other		1		2		2		5		1,038		1,043		-
Total	$	7,623	$	2,501	$	5,015	$	15,139	$	286.803	$	301,942	$	-

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.

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Non-performing assets at March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013			December 31, 2012
	(In thousands)
Non-accrual loans:
Real estate loans:
One- to four-family	$	3,364		$	2,553
Multi-family		-			-
Commercial		7,053			6,889
Construction and land		2,226			325
Home equity loans and lines of credit		125			628
Commercial		2,982			2,742
Consumer		3			2	��
Total non-accrual loans		15,753			13,139
Accruing loans 90 days or more past due:
All loans	$	-		$	-
Total non-performing loans	$	15,753		$	13,139
Real estate owned		5,379			5,347
Total non-performing assets	$	21,132		$	18,486
Ratios:
Total non-performing loans to total loans		5.21	%		4.35	%
Total non-performing loans to total assets		2.48	%		2.11	%
Total non-performing assets to total assets		3.34	%		2.96	%

At March 31, 2013, the nonaccrual loans consisted of 27 one- to four-family residential dwelling units, twelve commercial loans, three construction and land loans, four home equity loans, and four commercial loans.  Included in nonaccrual loans are 13 troubled debt restructurings in the amount of $11.3 million that were in nonaccrual status.  The Company had 24 properties in real estate owned totaling $5.4 million consisting of 12 one- to four-family dwelling units, six non-residential properties and six construction and land loans.  Included in real estate owned at March 31, 2013 are three possible branch locations that were transferred from office properties and equipment during 2012 in the amount of $2.2 million.

At March 31, 2013, in addition to the troubled debt restructurings included in the non-accrual loan totals, the Company had 43 loans classified as troubled debt restructurings with a net loan balance of $14.1 million.  Thirty-one of the troubled debt restructurings (TDR’s) are classified as one- to four-family dwelling units with a net loan balance of $4.5 million, ten of the TDR’s are classified commercial real estate with a net loan balance of $7.9 million, one of the TDR’s is classified as a construction and land loan with a net loan balance of $1.6 million, one of the TDR’s is classified as a home equity loan with a net loan balance of $46,000.

 27

The following tables summarize information in regards to troubled debt restructurings for the three months ended March 31, 2013 and 2012:

March 31, 2013	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
	(Dollars in thousands)
Real estate loans:
One- to four-family		1	$	163	$	163
Total		1	$	163	$	163

March 31, 2012	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
	(Dollars in thousands)
Real estate loans:
One- to four-family		4	$	871	$	871
Commercial		1		186		186
Total		5	$	1,057	$	1,057

All of the troubled debt that was restructured during the three months ended March 31, 2013 and 2012 consisted of interest rate modifications and no debt was forgiven.

The following table presents troubled debt restructuring with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three months ended March 31, 2013:

That Subsequently Defaulted	Number of contracts		Recorded Investment
	(Dollars in thousands)
Commercial		2	$	2,982
Total		2	$	2,982

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 three month period ended March 31, 2012:

That Subsequently Defaulted	Number of Contracts		Recorded Investment
	(Dollars in thousands)
Real estate loans:
One- to four-family		1	$	171
Total		1	$	171

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.

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8.            Deposits

Deposit accounts, by type, at March 31, 2013 and December 31, 2012 are summarized as follows:

	At March 31, 2013								At December 31, 2012
	Balance		Percent			Wtd. Avg. Rate			Balance		Percent			Wtd. Avg. Rate
	(Dollars in thousands)
Deposit type:
Non-interest bearing demand	$	41,762		7.53	%		-	%	$	39,301		7.09	%		-	%
Savings		108,655		19.58			0.60			106,469		19.22			0.65
NOW accounts		172,086		31.01			0.77			168,150		30.35			0.82
Super NOW accounts		43,021		7.75			0.40			44,548		8.04			0.54
Money market deposit		70,397		12.69			0.46			72,051		13.00			0.63
Total transaction accounts		435,921		78.56			0.57			430,519		77.70			0.64
Certificates of deposit		119,015		21.44			1.53			123,571		22.30			1.60
Total deposits	$	554,936		100.00	%		0.77	%	$	554,090		100.00	%		0.86	%

9. Federal Home Loan Bank Borrowings

The following table sets forth information concerning advances from the Federal Home Loan Bank (“FHLB”) of New York, at March 31, 2013 and December 31, 2012:

Maturity	Interest Rate			March 31,  2013		December 31, 2012
				(Dollars in thousands)
April 1, 2013		0.38	%	$	8,460	$	-
				$	8,460	$	-

At March 31, 2013, the Bank had a borrowing capacity of 30% of assets or $190.0 million available from the FHLB of New York.  At March 31, 2013, the Bank had $8.5 million in outstanding borrowings from the FHLB of New York.

10. Fair Value Measurements

FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

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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 March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
U. S. Government obligations	$	159,429	$	-	$	159,429	$	-
Corporate debt obligations		5,777		-		5,777		-
Mutual fund		3,355		3,355		-		-
Municipal debt obligations		5,741		-		5,741		-
SBA pools		1,389		-		1,389		-
Mortgage-backed securities		29,841		-		29,841		-
Collateralized mortgage obligations		59,006				59,006
Total investment securities available-for-sale	$	264,538	$	3,355	$	261,183	$	-

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	December 31, 2012		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
U. S. Government obligations	$	127,053	$	-	$	127,053	$	-
Corporate debt obligations		6,753		-		6,753		-
Mutual fund		4,948		4,948		-		-
Municipal debt obligations		6,256		-		6,256		-
SBA pools		1,439		-		1,439		-
Mortgage-backed securities		34,721		-		34,721		-
Collateralized mortgage obligations		52,134				52,134
Total investment securities available-for-sale	$	233,304	$	4,948	$	228,356	$	-

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2013 and December 31, 2012 are as follows:

			March 31, 2013		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(In thousands)
Impaired loans		$	13,294	$	-	$	-	$	13,294
Real estate owned		$	3,430	$	-	$	-	$	3,430

		December 31, 2012		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(In thousand)
Impaired loans	$	14,879	$	-	$	-	$	14,879
Real estate owned	$	3,217	$	-	$	-	$	3,217

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

	Quantitative Information About Level 3 Fair Value Measurements
Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(In thousands)
Impaired loans	$	13,294	Appraisal of collateral (1)	Liquidation expenses (2)	-10.0% to -35.0% (-30.0%)
Real estate owned	$	3,430	Appraisal of collateral (1)	Liquidation expenses (2)	-10.0% to -25.0% (-15.0%)

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

The following methods and assumptions were used to estimate the fair values of certain Company assets and liabilities at March 31, 2013 and December 31, 2012:

Cash and Amounts Due From Banks (Carried at Cost)

The carrying amounts reported in the balance sheet for cash and amounts due from banks approximate those assets’ fair values (Level 1).

Investment Securities

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Loans Receivable (Carried at Cost)

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

Impaired Loans (Generally Carried at Fair Value)

Impaired loans are those in which the Company has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  At March 31, 2013 and December 31, 2012, the fair value consists of loan balances of $2.0 million and $479,000, respectively, net of valuation allowances of $206,000 and $101,000, respectively, and loan balances of $17.6 million and $20.6 million, respectively, net of partial charge-offs of $6.1 million and $6.1 million, respectively.

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Real Estate Owned (Carried at Lower of Cost or Fair Value)

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

Federal Home Loan Bank Stock (Carried at Cost)

The carrying amount of restricted investment in Company stock approximates fair value, and considers the limited marketability of such securities (Level 1).

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value (Level 1).

Deposit Liabilities (Carried at Cost)

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

Short-Term Borrowings (Carried at Cost)

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

Off-Balance Sheet Financial Instruments (Disclosed at Cost)

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

 33

The carrying amount and estimated fair value of the Company’s assets and liabilities at March 31, 2013 and December 31, 2012 are as follows:

	March 31, 2013
	Carrying amount		Level 1		Level 2		Level 3		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and amounts due from banks	$	6,569	$	6,569	$	-	$	-	$	6,569
Investment securities available-for-sale		264,538		3,355		261,183		-		264,538
Corporate debt obligations held-to-maturity		1,192		-		1,490		-		1,490
Municipal debt obligations held-to-maturity		25,907		-		26,619		-		26,619
Mortgage-backed securities held-to-maturity		368		-		405				405
Federal Home Loan Bank stock		1,138		1,138		-		-		1,138
Loans receivable, net		297,479		-		-		311,101		311,101
Accrued interest receivable		1,756		-		1,756		-		1,756
Financial liabilities:
Deposits		554,936		-		558,687		-		558,687
Federal Home Loan Bank short-term borrowings		8,460		-		8,460		-		8,460
Accrued interest payable		18		-		18		-		18
Off-balance sheet financial instruments:
Commitments to extend credit and letters of credit		-		-		-		-		-

	December 31, 2012
	Carrying amount		Level 1		Level 2		Level 3		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and amounts due from banks	$	26,418	$	26,418	$	-	$	-	$	26,418
Investment securities available-for-sale		233,304		4,948		228,356		-		233,304
Corporate debt obligations held-to-maturity		1,192		-		1,502		-		1,502
Municipal debt obligations held-to-maturity		28,318		-		28,953		-		28,953
Mortgage-backed securities held-to-maturity		429		-		469				469
Federal Home Loan Bank stock		758		758		-		-		758
Loans receivable, net		297,182		-		-		308,253		308,253
Accrued interest receivable		1,650		-		1,650		-		1,650
Financial liabilities:
Deposits		554,090		-		557,001		-		557,001
Federal Home Loan Bank short-term borrowings		-		-		-		-		-
Federal Home Loan Bank long-term borrowings		-		-		-		-		-
Accrued interest payable		24		-		24		-		24
Off-balance sheet financial instruments:
Commitments to extend credit and letters of credit		-		-		-		-		-

 34

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 for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral.

We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish the allowance for loan losses. The allowance for loan losses is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision for loan losses based on our evaluation of the losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date.

35

The allowance for loan losses consists of specific, general and unallocated components. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses.  The fair value of impaired collateral dependent loans is estimated using an appraisal of the collateral less estimated liquidation expenses or discounted cash flows for non-collateral dependent loans.  Those impaired loans not requiring a write-down represent loans for which the fair value of the collateral or expected repayments exceeds the recorded investment in such loans.  Impaired loans are charged off to the estimated fair value.

The allowance for losses on loans is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio.  The allowance is adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.  These significant factors may include changes in our lending policies and procedures, changes in current general economic conditions and business conditions affecting our primary lending areas, credit quality trends, collateral values, 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.  In addition, the OCC and the Board of Governors of the Federal Reserve System, as an integral part of their examination processes, periodically review our allowance for loan losses.  They may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations.  To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods

 36

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 March 31, 2013.

Valuation of Deferred Tax Assets.  In evaluating our ability to realize deferred tax assets, management considers all positive and negative information, including our past operating results and our forecast of future taxable income.  In determining future taxable income, management utilizes a budget process that makes business assumptions and the implementation of feasible and prudent tax planning strategies.  These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business.  Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets which would result in additional income tax expense in the period.

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

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total assets increased $9.6 million, or 1.5%, to $633.2 million at March 31, 2013, from $623.6 million at December 31, 2012.  The increase was mainly the result of an increase in investment securities available-for-sale offset by decreases in cash and cash equivalents and in investment securities held-to-maturity.

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Net loans receivable increased $297,000, or 0.10%, to $297.5 million at March 31, 2013 from $297.2 million at December 31, 2012.  Commercial real estate loans increased $1.4 million to $91.5 million at March 31, 2013 from $90.1 million at December 31, 2012.  Construction and land loans decreased $16,000 to $9.7 million at March 31, 2013.  One- to four-family residential real estate loans increased $1.0 million to $149.7 million at March 31, 2013 from $148.7 million at December 31, 2012.    Home equity loans and lines of credit decreased $1.6 million to $27.0 million at March 31, 2013 from $28.6 million at December 31, 2012.  Commercial loans decreased by $700,000 to $22.7 million at March 31, 2013 from $23.4 million at December 31, 2012.  We currently have an internal limit for our loans (other than one- to four-family residential real estate loans) which is 275% of the sum of core capital (generally Colonial Bank’s common stockholder’s equity including retained earnings and minority interest 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 increased to $15.0 million at March 31, 2013 from $13.1 million at December 31, 2012.

Real estate owned totaled $5.4 million and $5.3 million at March 31, 2013 and December 31, 2012, respectively.  We completed the foreclosure process or received deed-in-lieu of foreclosure on 22 properties, nine of which were residential one- to four-family properties, five of which were nonresidential properties and eight of which were construction and land loans.  The activity in the real estate owned category includes three previously disclosed possible shovel-ready branch locations in the amount of $2.4 million that were moved from the office property and equipment category.

Securities available-for-sale increased $31.2 million, or 13.4%, to $264.5 million at March 31, 2013 from $233.3 at December 31, 2012.  This increase was the result of purchases in the amount of $68.8 million offset by calls and maturities in the amount of $26.9 million, and $10.0 in principal amortization.  Securities held-to-maturity decreased by $2.4 million, to $27.5 million at March 31, 2013 from $29.9 million at December 31, 2012.  This decrease was the result of calls and maturities in the amount of $11.1 million and principal amortization of $61,000 offset by purchases in the amount of $8.7 million.

Deposits increased $846,000, or 0.15%, to $554.9 million at March 31, 2013 from $554.1 million at December 31, 2012.  NOW accounts increased $3.9 million, or 2.3%, to $172.1 million at March 31, 2013 from $168.2 million at December 31, 2012.  Savings accounts increased $2.2 million to $108.7 million at March 31, 2013 from $106.5 million at December 31, 2012.  Super NOW accounts decreased by $1.5 million to $43.0 million at March 31, 2013 from $44.5 million at December 31, 2012.  Non-interest bearing demand accounts increased by $2.5 million to $41.8 million at March 31, 2013 from $39.3 million at December 31, 2012.  Certificates of deposit decreased by $4.6 million to $119.0 million at March 31, 2013 from $123.6 million at December 31, 2012.  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 $8.5 million at March 31, 2013; there were no Federal Home Loan Bank borrowings at December 31, 2012.

Total stockholders’ equity decreased $5,000 to $68.0 million at March 31, 2013.  This decrease was mainly attributable to net income of $497,000, an increase of $78,000 from the amortization of stock awards and options, offset by a reduction in the market value of available for sale securities of $446,000 and the repurchase and retirement of $134,000 in common shares.

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Comparison of Operating Results for the Three Months Ended March 31, 2013 and March 31, 2012

General.  We experienced net income of $497,000 for the three months ended March 31, 2013 compared to net income of $248,000 for the three months ended March 31, 2012.  The principal reasons for the increase in net income was a decrease in the provision for loan losses in the amount of $1.2 million offset by a decrease in net interest income of $484,000, a decrease in total non-interest income of $31,000, an increase in total non-interest expense of $341,000 and an increase in income taxes of $101,000.

Interest Income.  Interest income decreased $872,000 to $4.7 million for the three months ended March 31, 2013 from $5.6 million for the three months ended March 31, 2012.  The decrease in interest income resulted from a decrease of $486,000 in interest income on loans and a decrease of $386,000 in interest income on securities.

Interest income on loans decreased $486,000 to $3.6 million for the three months ended March 31, 2013 from $4.1 million for the three months ended March 31, 2012.  The average balance of loans decreased $881,000 to $295.9 million for the three months ended March 31, 2013 from $296.8 million for the three months ended March 31, 2012 and the average yield decreased to 4.85% for the three months ended March 31, 2013 from 5.49% for the three months ended March 31, 2012.

Interest income on securities decreased by $386,000 to $1.1 million for the three months ended March 31, 2013 from $1.5 million for the three months ended March 31, 2012.  The decrease in interest income on securities was due to a decrease in the average yield on taxable and tax-exempt securities of 52 basis points to 1.78% for the three months ended March 31, 2013 from 2.30% for the three months ended March 31, 2012, offset by an increase in the average balance of taxable and tax-exempt securities to $267.3 million for the three months ended March 31, 2013 from $262.4 million for the three months ended March 31, 2012.  The yields on tax-exempt securities are not tax-affected.

Interest Expense.Interest expense decreased $388,000 to $1.1 million for the three months ended March 31, 2013 from $1.5 million for the three months ended March 31, 2012.

Interest expense on interest-bearing deposits decreased by $377,000 to $1.1 million for the three months ended March 31, 2013 from $1.5 million for the three months ended March 31, 2012.  The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 0.84% for the three months ended March 31, 2013 from 1.15% for the three months ended March 31, 2012, offset by an increase in the average balance of interest-bearing deposits to $515.7 million for the three months ended March 31, 2013 from $504.2 million for the three months ended March 31, 2012.  We experienced increases in the average balances of savings accounts, money market deposit accounts and NOW and Super-NOW accounts.  We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended March 31, 2013, reflecting lower market rates.

Interest expense on borrowings decreased $11,000 for the three months ended March 31, 2013 from $11,000 for the three months ended March 31, 2012.  This decrease was primarily due to a $2.5 million decrease in the average balance of borrowings to $400,000 for the three months ended March 31, 2013 from $2.9 million for the three months ended March 31, 2012 offset by a decrease in the average rate paid on borrowings to 0.45% for the three months ended March 31, 2013 from 1.52% for the three months ended March 31, 2012.  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, did meet 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 quarterly basis and make provisions for loan losses in order to maintain the allowance.

In an effort to enhance the ALLL methodology, the bank instituted a migration analysis process in determining allowance.  Migration analysis uses loan level attributes to track the movement of loans through the various loan classifications in order to estimate the percentage of losses likely to be incurred in a financial institution’s current portfolio. The purpose of migration analysis is to determine what rate of loss an institution has incurred on similarly criticized or past due loans. This purpose is the same as that of historical loss rate analysis, but it is more granular and therefore can give a truer reflection of the losses inherent in the current portfolio.  Since this was the first quarter for the analysis under this process, some reallocation occurred between categories of loans but the overall allowance was deemed sufficient.

During the three months ended March 31, 2013, the Company charged off $134,000 in loans, which included $37,000 on construction and land loans, $93,000 on home equity and lines of credit, and $4,000 on consumer loans.  The charge-offs during this quarter are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan.  The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

For the three months ended March 31, 2012, the charge-offs on commercial real estate loans were due to reduced valuations on re-appraisals of the underlying collateral for such loans.  Four out of seven loans in one particular sector of the commercial real estate portfolio were identified as impaired and written down in the three months ended March 31, 2012 to their estimated fair value based on appraisals.  We feel this industry sector is not representative of the remaining commercial real estate portfolio and have therefore reduced the risk-weighted historical loss factor for the first quarter of 2012 in the calculation for the general loan loss allowance.  We have not seen similar decreases in collateral valuations in other commercial real estate industry sectors since the collateral in other sectors is different in type and nature.  The charge-offs for the three months ended March 31, 2012 are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan.  The historical loan rates are segmented by eight quarters and incorporated in calculating the general component of our allowance for loan loss by loan category.  The calculation of the allowance for loans losses on our loan portfolio consists of the historical loan loss rate and a qualitative adjustment.  While qualitative risk factors in the general allowance calculation were increased in response to the increase collateral valuation risk noted in the previously mentioned sector, positive trends in the volume and severity of past due loans in the rest of the commercial real estate portfolio resulted in lower qualitative risk factors and an overall lower general reserve for the commercial real estate portfolio.

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Based on our evaluation of the above factors, we recorded a provision for loan losses of $42,000 for the three months ended March 31, 2013 and a provision for loan losses of $1.2 million for the three months ended March 31, 2012.  The allowance for loan losses was $4.1 million, or 1.35% of total loans, at March 31, 2013, compared to $2.9 million, or 0.96% of total loans, at March 31, 2012.  Our balance of loans we evaluated individually for impairment was $25.1 million at March 31, 2013 and $30.7 million at December 31, 2012.  At March 31, 2013 and 2012, we maintained unallocated allowances for loan losses of $1.5 million and $500,000 respectively.

To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate at March 31, 2013 and 2012.  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 $348,000 for the three months ended March 31, 2013 and $291,000 for the three months ended March 31, 2012.  Fees and service charges on deposit accounts increased by $57,000 to $348,000 for the three months ended March 31, 2013 from $291,000 for the three months ended March 31, 2012.  For the three months ended March 31, 2013, there was a net gain on the sale and call of investment securities in the amount of $51,000 compared to a net gain of $166,000 for the three months ended March 31, 2012.  Earnings on bank owned life insurance totaled $107,000 for the three months ended March 31, 2013 and $86,000 for the three months ended March 31, 2012.

Non-interest Expense.  Non-interest expense increased $341,000 to $3.4 million for the three months ended March 31, 2013 from $3.1 million for the three months ended March 31, 2012.  Compensation and benefits expense increased by $49,000 to $1.8 million for the three months ended March 31, 2013 from $1.7 million for the three months ended March 31, 2012.  Occupancy and equipment expense increased $30,000 to $406,000 for the three months ended March 31, 2013 from $376,000 for the three months ended March 31, 2012.  Federal deposit insurance premiums increased $21,000 to $131,000 for the three months ended March 31, 2013 from $110,000 for the three months ended March 31, 2012.  Data processing fees increased by $39,000 to $237,000 for the three months ended March 31, 2013 from $198,000 for the three months ended March 31, 2012.  Professional fees decreased $12,000 mainly due to a reduction in legal fees related to collection efforts on loans.  Net real estate owned expense totaled $213,000 for the three months ended March 31, 2013 due to an increase in other real estate properties.

Income Tax Expense.We recorded an income tax expense of $179,000 for the three months ended March 31, 2013, compared to an income tax expense of $78,000 for the three months ended March 31, 2012.  Our effective tax rates for the three months ended March 31, 2013 and 2012 were 26.5% and 23.9%, respectively.

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Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2013, cash and cash equivalents totaled $6.6 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $264.5 million at March 31, 2013.  In addition, at March 31, 2013, we had the ability to borrow a total of $190.0 million from the Federal Home Loan Bank of New York (30% of our assets at that date).  On that date, we had $8.5 million in advances outstanding.

At March 31, 2013, loan commitments outstanding totaled $6.8 million. In addition to commitments to originate loans, we had $21.9 million in unadvanced funds to borrowers.  Total certificates of deposit due within one year of March 31, 2013 totaled $62.4 million.  Total certificates of deposit due within one year of March 31, 2013 represent 9.5% 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 March 31, 2014.  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 three months ended March 31, 2013, we originated $19.9 million of loans and purchased $77.5 million of securities.  For the three months ended March 31, 2012, we originated $9.6 million of loans and purchased $51.8 million of securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances.  We experienced net increases in total deposits of $846 thousand and $43.2 million for the three months ended March 31, 2013 and 2012, respectively.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.  We generally manage the pricing of our deposits to be competitive in our local markets.

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Total borrowings, which include Federal Home Loan Bank advances, totaled $8.5 million at March 31, 2013.  Federal Home Loan Bank advances have primarily been used to fund loan demand and purchase securities.

Colonial Bank, FSB is subject to various regulatory capital requirements administered by the Office of Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.

On June 6, 2012, the OCC and the other federal bank regulatory agencies issued a series of proposed rules to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”).  The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”).  Among other things, the proposed rules establish a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement, and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The proposed rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.  The proposed rules indicated that the final rules would become effective January 1, 2013, and the changes set forth in the final rules would be phased in from January 1, 2013 through January 1, 2019.  However, the federal bank regulatory agencies have recently indicated that, due to the volume of public comments received, the implementation of the final rule would be delayed past January 1, 2013.

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Item 3.                  Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.                   Controls and Procedures

(a)          Evaluation of disclosure controls and procedures.

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

(b)          Changes in internal control over financial reporting.

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

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PART II – OTHER INFORMATION

Item 1.                   Legal Proceedings

The Company is not engaged in any legal proceedings of a material nature at March 31, 2013. In the ordinary course of business, the Company is from time to time party to legal proceedings incident to its business.  While the ultimate outcome of these proceedings cannot be predicted with certainty, management, after consultation with counsel representing the Company in these proceedings, does not expect that the resolution of these proceedings will have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

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 first quarter in 2013 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)
January 1 – January 31, 2013		10,000	$	13.30		81,870		117,081
February 1 – February 28, 2013		-		-		81,870		117,081
March 1 – March 31, 2013		-		-		81,870		117,081
Total		10,000	$	13.30		81,870		117,081

 (1) On February 17, 2012, the Company announced a second stock repurchase program to repurchase approximately 5%, or 198,951 shares of outstanding common stock.

Item 3.                   Defaults Upon Senior Securities

None

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Item 4. Mine Safety Disclosures

Not applicable

Item 5.                   Other Information

None

Item 6.                   Exhibits

Exhibit 10.26 Amendment to Director Retirement Plan

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

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

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

Exhibit 101.INS XBRL Instance Document.*

Exhibit 101.SCH XBRL Taxonomy Extension Schema Document.*

Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.*

Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document.*

Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.*

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

* These interactive data files are being furnished as part of this Quarterly Report, and in accordance with Rule 402 of Regulation S-T, 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:  May 14, 2013	By:  /s/ Edward J. Geletka
	Edward J. Geletka
	President and Chief Executive Officer
	(Principal Executive Officer)
Date:  May 14, 2013	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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