Colonial Financial Services 10Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 November 13, 2013, 3,853,058 shares of common stock, par value $0.01 per share

TABLE OF CONTENTS


		PAGE
PART I	FINANCIAL INFORMATION

Item 1	Consolidated Statements of Financial Condition (Unaudited)	2
	Consolidated Statements of Operations (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	4
	Consolidated Statements of Stockholders’ Equity (Unaudited)	5
	Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	48
PART II	OTHER INFORMATION

Item 1	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3	Defaults Upon Senior Securities	49

Item 4	Mine Safety Disclosures	50

Item 5	Other Information	50

Item 6	Exhibits	50

	Signatures	51

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

	September 30, 2013			December 31, 2012

	(Dollars in thousands, except per share data)
Assets
Cash and amounts due from banks	$	9,010		$	26,418
Investment securities available for sale		241,616			233,304
Investment securities held to maturity (fair value at September 30, 2013 - $25,055; at December 31, 2012 - $30,924)		24,373			29,939
Loans receivable, net of allowance for loan losses of $5,680 at September 30, 2013 and $4,146 at December 31, 2012		284,387			297,182
Real estate owned, net		4,148			5,347
Federal Home Loan Bank stock, at cost		1,081			758
Office properties and equipment, net		7,957			8,195
Bank-owned life insurance		14,498			14,168
Accrued interest receivable		1,559			1,650
Other assets		9,607			6,635
Total Assets	$	598,236		$	623,596

Liabilities and Stockholders’ Equity

Liabilities
Deposits:
Noninterest-bearing	$	46,284		$	39,301
Interest-bearing		481,028			514,789
Total deposits		527,312			554,090
Federal Home Loan Bank short-term borrowings		8,410			-
Advances from borrowers for taxes and insurance		927			661
Accrued interest payable and other liabilities		1,286			808
Total Liabilities		537,935			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 September 30, 2013 and 3,852,791 shares at December 31, 2012		39			39
Additional paid-in capital		37,167			37,155
Unearned shares held by Employee Stock Ownership Plan (“ESOP”)		(1,378	)		(1,378	)
Retained earnings		26,876			29,307
Accumulated other comprehensive income (loss)		(2,403	)		2,914
Total Stockholders’ Equity		60,301			68,037
Total Liabilities and Stockholders’ Equity	$	598,236		$	623,596

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
	(Dollars in thousands, except per share data)
Interest income
Loans, including fees	$	3,370		$	3,914	$	10,350		$	11,860
Mortgage-backed securities		489			719		1,540			2,346
Investment securities: Taxable		514			532		1,557			1,601
Investment securities: Tax-exempt		114			149		353			480
Total Interest Income		4,487			5,314		13,800			16,287

Interest Expense
Deposits		892			1,281		3,003			4,175
Borrowings		15			10		27			32
Total Interest Expense		907			1,291		3,030			4,207
Net Interest Income		3,580			4,023		10,770			12,080

Provision for Loan Losses		2,831			329		5,540			5,072
Net Interest Income after Provision for Loan Losses		749			3,694		5,230			7,008

Non-Interest Income
Fees and service charges		303			294		904			866
Net gain on sales and calls of investment securities		4			22		1,064			218
Earnings on life insurance		112			88		330			261
Other		10			21		32			25
Total Non-Interest Income		429			425		2,330			1,370

Non-Interest Expenses
Compensation and benefits		1,802			1,753		5,177			5,135
Occupancy and equipment		416			396		1,202			1,216
Data processing		235			237		720			642
FDIC insurance premium		211			148		534			399
Office supplies		38			51		116			144
Professional fees		290			199		929			592
Advertising and promotions		35			42		91			122
Real estate owned, net		429			247		1,189			419
Other		367			355		1,147			1,051
Total Non-Interest Expenses		3,823			3,428		11,105			9,720
Income (Loss) before Income Taxes		(2,645	)		691		(3,545	)		(1,342	)

Income Tax Expense (BENEFIT)		(697	)		216		(1,114	)		(553	)
Net Income (Loss)	$	(1,948	)	$	475	$	(2,431	)	$	(789	)

Per Share Data (See Note 3):
Income (Loss) per share – basic	$	(0.52	)	$	0.13	$	(0.65	)	$	(0.21	)
Income (Loss) per share – diluted	$	(0.52	)	$	0.12	$	(0.65	)	$	(0.21	)
Weighted average number of shares outstanding – basic		3,719,643			3,793,790		3,719,789			3,814,645
Weighted average number of shares outstanding – diluted		3,719,643			3,805,545		3,719,789			3,814,645

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30.
	2013			2012			2013			2012

	(Dollars in thousands)

Net income (loss)	$	(1,948	)	$	475		$	(2,431	)	$	(789	)

Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities net of tax expense (benefit) – 2013, $136 and $(2,500); 2012, $77 and $73		215			134			(4,678	)		126

Less reclassification adjustment for realized gain on sale of securities (net) included in net income (loss) net of tax expense – 2013, $1 and $425; 2012, $7 and $86		(3	)		(15	)		(639	)		(132	)
Total Other Comprehensive Income (Loss)		212			119			(5,317	)		(6	)

Comprehensive Income (Loss)	$	(1,736	)	$	594		$	(7,748	)	$	(795	)

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)


	Common Stock Shares		Common Stock			Additional Paid-in Capital			Unearned Shares Held by ESOP			Retained Earnings			Accumu- lated Other Compre- hensive Income (Loss)			Total Stock- holders’ Equity
	(Dollars in thousands)
Balance, January 1, 2013	3,852,791		$	39		$	37,155		$	(1,378	)	$	29,307		$	2,914		$	68,037

Net loss	-			-			-			-			(2,431	)		-			(2,431	)

Other comprehensive loss	-			-			-			-			-			(5,317	)		(5,317	)

Repurchase and retirement of common stock	(10,000	)		-			(134	)		-			-			-			(134	)

Stock-based compensation expense (restricted stock awards)	10,267			-			59			-			-			-			59

Stock-based compensation expense (stock options)	-			-			87			-			-			-			87

Balance, September 30, 2013	3,853,058		$	39		$	37,167		$	(1,378	)	$	26,876		$	(2,403	)	$	60,301


Balance, January 1, 2012	3,994,046		$	40		$	38,660		$	(1,586	)	$	31,056		$	3,515		$	71,685

Net loss	-			-			-			-			(789	)		-			(789	)

Other comprehensive loss	-			-			-			-			-			(6	)		(6	)

Repurchase and retirement of common stock	(71,870	)		(1	)		(943	)		-			-			-			(944	)
Stock-based compensation expense (restricted stock awards)	1,088			-			96			-			-			-			96

Stock-based compensation expense (stock options)	-			-			139			-			-			-			139

Balance, September 30, 2012	3,923,264		$	39		$	37,952		$	(1,586	)	$	30,267		$	3,509		$	70,181

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30,
	2013			2012
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net loss	$	(2,431	)	$	(789	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		5,540			5,072
Depreciation expense		426			424
Stock-based compensation expense		146			235
Net earnings on bank-owned life insurance		(330	)		(261	)
Net amortization of loan costs		260			62
Net (gain) on sales and calls of investment securities		(1,064	)		(218	)
Net (gain) on the sale of real estate owned		(149	)		(50	)
Provision for real estate owned		1,073			175
(Accretion of discount) on investment securities, net		(183	)		(186	)
Decrease (increase) in accrued interest receivable		91			(110	)
Increase in other assets		(2,972	)		(1,581	)
Increase in accrued interest payable and other liabilities		478			189
Net cash provided by operating activities		885			2,962
Cash Flows from Investing Activities:
Proceeds from sales of investment securities available-for-sale		5,996			998
Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations available-for-sale		13,075			-
Proceeds from calls and maturities of investment securities available-for-sale		39,049			76,298
Proceeds from calls and maturities of investment securities held-to-maturity		21,126			13,899
Purchase of investment securities available-for-sale		(61,309	)		(108,452	)
Purchase of investment securities held-to-maturity		(15,625	)		(9,205	)
Purchase of mortgage-backed securities and collateralized mortgage obligations available-for-sale		(36,609	)		(13,832	)
Purchase of office properties and equipment		(188	)		(354	)
Principal repayments from investment securities		2,870			207
Principal repayments from mortgage-backed securities and collateralized mortgage obligations		24,611			30,778
Net (increase) decrease of Federal Home Loan Bank stock		(323	)		423
Proceeds from the sale of real estate owned		1,085			489
Net decrease (increase) in loans receivable		6,185			(4,196	)
Net cash used in investing activities		(57	)		(12,947	)
Cash Flows from Financing Activities:
Net (decrease) increase in deposits		(26,778	)		35,668
Repayment of Federal Home Loan Bank short-term borrowings		-			(8,045	)
Proceeds from Federal Home Loan Bank short-term borrowings		8,410			-
Increase in advances from borrowers for taxes and insurance		266			172
Common stock repurchased and retired		(134	)		(944	)
Net cash (used in) provided by financing activities		(18,236	)		26,851
(Decrease) increase in cash and cash equivalents		(17,408	)		16,866
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		26,418			7,893
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9,010		$	24,759


Supplemental Cash Flow Disclosures:
Cash paid:
Interest	$	3,039		$	4,219
Income taxes	$	-		$	690

Supplemental Schedule of Noncash Investing and Financing Activities:
Other real estate acquired in settlement of loans	$	810		$	2,200
Transfer from office properties and equipment to real estate owned	$	-		$	2,405
Transfer from real estate owned to office properties and equipment	$	-		$	205

See notes to unaudited consolidated financial statements.

COLONIAL FINANCIAL SERVICES, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1.	Organization and Basis of Presentation

Colonial Financial Services, Inc. (the “Company”), a Maryland corporation, was formed in March 2010, to serve as the stock holding company for Colonial Bank, FSB (the “Bank”) as part of the mutual-to-stock conversion of Colonial Bankshares, MHC. On July 13, 2010, Colonial Financial Services, Inc. completed its second-step conversion and related public stock offering. The Bank is 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.

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, LLC (formerly known as COBK Investments, Inc. and 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”).

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 and nine months ended September 30, 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 (loss).

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

2.	Recent Accounting Pronouncements

In January 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 July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, Income Taxes (Topic 740).” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The amendments in this Update do not require new recurring disclosures. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this FASB ASU to have a material impact on the consolidated financial statements.

3.	Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSEs which are considered antidilutive are not included for the purposes of this calculation. There are no convertible securities which would affect the net loss (numerator) in calculating basic and diluted earnings per share; therefore, for these calculations, the net income (loss) for the three months ended September 30, 2013 and 2012 is $(1,948,000) and $475,000, respectively. Net loss for the nine months ended September 30, 2013 and 2012 is $(2,431,000) and $(789,000), respectively. The dilutive effect of potential common shares is computed using the treasury stock method. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and diluted earnings per share computation. At September 30, 2013 and 2012, there were 346,175 and 176,332 anti-dilutive options and awards excluded from the computation of diluted earnings per share.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
Net income (loss)	$	(1,948,000	)	$	475,000		$	(2,431,000	)	$	(789,000	)

Weighted average common shares issued		3,853,058			3,947,290			3,853,204			3,968,145
Average unearned ESOP shares		(133,415	)		(153,500	)		(133,415	)		(153,500	)
Weighted average common shares outstanding-basic		3,719,643			3,793,790			3,719,789			3,814,645
Effect of dilutive non-vested shares and stock options outstanding		-			11,755			-			-
Weighted average common shares outstanding-diluted		3,719,643			3,805,545			3,719,789			3,814,645
Basic income (loss) per share	$	(0.52	)	$	0.13		$	(0.65	)	$	(0.21	)
Diluted income (loss) per share	$	(0.52	)	$	0.12		$	(0.65	)	$	(0.21	)

4. Stock-Based Compensation

At September 30, 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.

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 and nine months ended September 30, 2013, $(1,000) and $5,000 in compensation expense was recognized in regard to the stock awards given in January 2011 with a related tax benefit of $0 and $2,000, respectively. The negative amount was due to reversing the previously recognized expense for awards that were forfeited during the quarter. As of September 30, 2013, there was $4,000 of unrecognized compensation expense related to the restricted stock awards which is expected to be recognized over a period of 0.25 years. For the three and nine months ended September 30, 2012, $3,000 and $9,000 in compensation expense was recognized in regard to the stock awards given in January 2011 with a related tax benefit of $1,000 and $2,000, respectively.

On January 2, 2012, 45,895 shares of restricted time-based stock grants were awarded. The restricted time-based stock grants had a grant date fair value of $12.46 per share and vest 20% annually beginning January 2, 2013. Also, on January 2, 2012, 45,895 shares of restricted performance-based stock grants were awarded. The restricted performance-based stock grants had a grant date fair value of $12.46 and vest 20% annually with the attainment of the performance goal. If the goal is not attained for the year, the stock grants are forfeited. For the three and nine months ended September 30, 2013, $(4,000) and $54,000 in compensation expense was recognized in regard to these restricted stock awards, respectively with a related tax benefit of $0 and $18,000, respectively. The negative amount was due to reversing the previously recognized expense for awards that were forfeited during the quarter. For the three and nine months ended September 30, 2013, there was no expense recorded for the performance-based awards. For the three and nine months ended September 30, 2012, $29,000 and $87,000 in compensation expense was recognized in regard to these restricted stock awards, respectively with a related tax benefit of $10,000 and $30,000, respectively. For the three and nine months ended September 30, 2012, there was no expense recorded for the performance-based awards. As of September 30, 2013, there was $722,000 of unrecognized compensation expense related to the restricted stock awards which is expected to be recognized over a period of 3.25 years.

A summary of the status of the shares under the two Plans as of September 30, 2013 and changes during the nine months ended September 30, 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		30,871		12.45
Vested		10,267		12.41
Restricted stock, end of period		52,832	$	12.46

On October 19, 2006, for the 2006 Plan, options to purchase 184,660 shares of common stock at $13.27 per share were awarded. The options awarded fully vested in October 2011 and expire in 2016. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2006: dividend yield of 0%, risk-free interest rate of 4.79%, expected life of 6.5 years, and expected volatility of 15.00%. The calculated fair value of options granted in 2006 was $4.03 per option. The weighted average contractual term of options outstanding and exercisable was 3.00 years at September 30, 2013 and 4.00 years at September 30, 2012. The total expense and related tax effect has been fully recorded for these options.

On January 20, 2011, for the 2006 Plan, options to purchase 8,328 shares of common stock at $12.00 per share were awarded. The options awarded vest 33% annually beginning January 20, 2012 and expire in 2021. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2011: dividend yield of 0%, risk-free interest rate of 3.47%, expected life of 6.5 years, and expected volatility of 33.00%. The calculated fair value of options granted in 2011 was $4.84 per option. The weighted average contractual term of options outstanding and exercisable was 7.25 years at September 30, 2013 and 8.25 years at September 30, 2012. Stock-based compensation expense related to stock options granted in 2011 for the three and nine months ended September 30, 2013, was $(1,000) and $5,000 with a related tax benefit of $0 and $2,000, respectively. The negative amount was due to reversing the previously recognized expense for options that were forfeited during the quarter. As of September 30, 2013, there was approximately $2,000 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 0.25 years. Stock-based compensation expense related to stock options awarded in 2011 for the three and nine months ended September 30, 2012, was $3,000 and $9,000 with a related tax benefit of $1,000 and $3,000, respectively.

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 8.25 years at September 30, 2013. Stock-based compensation expense related to stock options granted in 2012 for the three and nine months ended September 30, 2013, was $(3,000) and $82,000 with a related tax benefit of $0 and $28,000, respectively. The negative amount was due to reversing the previously recognized expense for options that were forfeited during the quarter. For the three and nine months ended September 30, 2012, there was $41,000 and $130,000 with a related tax benefit of $14,000 and $44,000 of stock based compensation expense, respectively. As of September 30, 2013, there was approximately $406,000 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 3.25 years.

A summary of the status of the Company’s stock options under the two plans as of September 30, 2013 and changes during the nine months ended September 30, 2013 are presented below.


	Options		Weighted Average Exercise Price
Options outstanding, January 1, 2013		379,260	$	12.85
Granted		-		-
Exercised		-		-
Forfeitures		85,917		12.78
Options outstanding, end of period		293,343	$	12.87
Exercisable at end of period		184,318	$	13.12

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 4.25% with principal and interest payable annually in equal installments over 10 years. The loan is secured by the shares of the common stock purchased.

As the debt is repaid, shares are released from the collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Statements of Financial Condition. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The compensation expense is recorded on a monthly basis. The Company’s contribution expense for the ESOP was $71,000 and $206,000 for the three and nine months ended September 30, 2013 and $66,000 and $193,000 for the three and nine months ended September 30, 2012, respectively.

The following table presents the components of the ESOP shares:


	September 30, 2013		September 30, 2012
Shares released for allocation		114,784		94,699
Unreleased shares		133,415		153,500
Total ESOP shares		248,199		248,199

5. Contingent Liabilities and Guarantees

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit that are not reflected in the accompanying financial statements. No material losses are anticipated as a result of those transactions on either a completed or uncompleted basis. The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit 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 $3.3 million of standby letters of credit outstanding as of September 30, 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.

6. Investment Securities

Investment securities are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale:
September 30, 2013
U. S. Government obligations	$	144,359	$	27	$	(3,642	)	$	140,744
Corporate debt obligations		4,490		17		(5	)		4,502
Mutual fund		4,435		44		-			4,479
Municipal debt obligations		7,221		28		(146	)		7,103
SBA pools		1,225		2		(5	)		1,222
Mortgage-backed securities		16,260		866		(44	)		17,082
Collateralized mortgage obligations		67,384		468		(1,368	)		66,484
	$	245,374	$	1,452	$	(5,210	)	$	241,616

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:
September 30, 2013
Corporate debt obligations	$	1,193	$	220	$	-	$	1,413
Municipal debt obligations		22,955		440		-		23,395
Mortgage-backed securities		225		22		-		247
	$	24,373	$	682	$	-	$	25,055

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 September 30, 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.

The amortized cost and estimated fair value of investment securities at September 30, 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	$	19,357	$	19,357	$	8,931	$	8,485
Due after one year through five years		1,500		1,740		50,864		46,902
Due after five years through ten years		1,646		1,438		100,710		100,981
Due thereafter		1,645		2,273		1,225		1,682
Sub-total		24,148		24,808		161,730		158,050
Mortgage-backed securities and collateralized mortgage obligations		225		247		83,644		83,566
Total	$	24,373	$	25,055	$	245,374	$	241,616

At September 30, 2013 and December 31, 2012, $146.4 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 $1.1 million while gross realized losses on available-for-sale securities totaled $18,000, for the nine months ended September 30, 2013. There were no gross realized gains or losses on held-to-maturity securities for the nine months ended September 30, 2013.

Gross realized gains on available-for-sale securities totaled $22,000 while gross realized losses on available-for-sale securities totaled $18,000, for the three months ended September 30, 2013. There were no gross realized gains or losses on held-to-maturity securities for the three months ended September 30, 2013.

Gross realized gains on available-for-sale securities totaled $234,000 while gross realized losses on available-for-sale securities totaled $16,000, for the nine months ended September 30, 2012. There were no gross realized gains or losses on held-to-maturity securities for the nine months ended September 30, 2012.

Gross realized gains on available-for-sale securities totaled $22,000 while gross realized losses on held-to-maturity securities totaled $0, for the three months ended September 30, 2012. There were no gross realized gains or losses on held-to-maturity securities for the three months ended September 30, 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 September 30, 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	$	128,920	$	3,642	$	-	$	-	$	128,920	$	3,642
Corporate debt obligations		1,496		5		-		-		1,496		5
Municipal debt obligations		3,890		146		-		-		3,890		146
SBA pools		916		5		-		-		916		5
Mortgage-backed securities		1,757		43		33		1		1,790		44
Collateralized mortgage obligations		37,427		1,368		-		-		37,427		1,368
Total	$	174,406	$	5,209	$	33	$	1	$	174,439	$	5,210


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 September 30, 2013, there were 108 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 108 securities in the less-than-twelve-month category are 68 U.S government obligations, 22 collateralized mortgage obligations, 11 municipal obligations, two SBA pools, two corporate debt obligations and three mortgage-backed securities. 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 September 30, 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 September 30, 2013.

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 September 30, 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 September 30, 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 September 30, 2013.

7. Loans and Allowance for Loan Losses

The components of loans at September 30, 2013 and December 31, 2012 are as follows:


	At September 30, 2013						At December 31, 2012
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	146,436			50.3	%	$	148,674			49.2	%
Multi-family		387			0.1			397			0.1
Commercial		87,377			30.0			90,143			29.9
Construction and land		9,247			3.2			9,683			3.3
Home equity loans and lines of credit		27,247			9.4			28,657			9.5
Commercial		19,047			6.6			23,345			7.7
Consumer		1,200			0.4			1,043			0.3
Total loans receivable	$	290,941			100.0	%	$	301,942			100.0	%
Deferred loan fees		(874	)					(614	)
Allowance for loan losses		(5,680	)					(4,146	)
Total loans receivable, net	$	284,387					$	297,182

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 up to $750,000 and unsecured amounts above $100,000. Secured amounts above $750,000 must go to the full Board.

When a loan is more than 10 days delinquent, we generally send a computer-generated notice of delinquency to the borrower to remit the delinquent payment or contact the Bank. When the computer-generated notice does not cause the loan to be brought current, a telephone call is the next step in the process. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. If payment is not received within 60 days of the due date, we accelerate loans and demand payment in full. Failure to pay within 90 days of the original due date may result in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are charged-off between 90 to 120 days. For commercial loans, procedures with respect to demand letters and legal action may vary depending upon individual circumstances.

Loans are reviewed on a regular basis, and are placed on nonaccrual status when either principal or interest is 90 days or more past due. In addition, we 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.

The following table sets forth the activity in the allowance for loan losses and the related recorded investment in loans receivable by portfolio class at and for the three and nine months ended September 30, 2013 (in thousands):


	Real Estate
	One- to four- family			Multi- family			Commer- cial			Con- struction and land			Home equity and credit lines			Commer- cial			Con- sumer			Unallo- cated		Total
Allowance for loan losses for the three months ended September 30, 2013:
Beginning balance	$	1,361		$	15		$	660		$	105		$	239		$	703		$	22		$	1,500	$	4,605
Charge-offs		(50	)		-			(866	)		-			(59	)		(954	)		-			-		(1,929	)
Recoveries		1			-			-			-			-			167			5			-		173
Provision		166			(11	)		1,471			124			98			985			(2	)		-		2,831
Ending balance	$	1,478		$	4		$	1,265		$	229		$	278		$	901		$	25		$	1,500	$	5,680

Allowance for loan losses for the nine months ended September 30, 2013:
Beginning balance	$	692		$	6		$	1,107		$	138		$	277		$	405		$	21		$	1,500	$	4,146
Charge-offs		(209	)		-			(1,813	)		(37	)		(210	)		(1,961	)		(7	)		-		(4,237	)
Recoveries		1			-			-			54			-			167			9			-		231
Provision		994			(2	)		1,971			74			211			2,290			2			-		5,540
Ending balance	$	1,478		$	4		$	1,265		$	229		$	278		$	901		$	25		$	1,500	$	5,680

Ending balance:
individually evaluated for impairment	$	119		$	-		$	3		$	133		$	8		$	492		$	-		$	-	$	755
collectively evaluated for impairment		1,359			4			1,262			96			270			409			25			1,500		4,925
Total balance	$	1,478		$	4		$	1,265		$	229		$	278		$	901		$	25		$	1,500	$	5,680

Loans receivable:
individually evaluated for impairment	$	8,403		$	-		$	10,275		$	3,401		$	722		$	2,861		$	1		$	-	$	25,663
collectively evaluated for impairment		138,033			387			77,102			5,846			26,525			16,186			1,199			-		265,278
Ending balance	$	146,436		$	387		$	87,377		$	9,247		$	27,247		$	19,047		$	1,200		$	-	$	290,941

The following table sets forth the activity in the allowance for loan losses by portfolio class at and for the three and nine months ended September 30, 2012 (in thousands):


	Real Estate
	One- to four- family			Multi- family			Commer- cial			Con- struction and land			Home equity and credit lines			Commer- cial			Con- sumer			Unallo- cated		Total
Allowance for loan losses for the three months ended September 30, 2012:
Beginning balance	$	856		$	6		$	927		$	153		$	87		$	395		$	14		$	500	$	2,938
Charge-offs		(242	)		-			(17	)		(27	)		-			-			(8	)		-		(294	)
Recoveries		-			-			-			-			-			29			4			-		33
Provision		141			-			156			(22	)		76			(31	)		9			-		329
Ending balance	$	755		$	6		$	1,066		$	104		$	163		$	393		$	19		$	500	$	3,006

Allowance for loan losses for the nine months ended September 30, 2012:
Beginning balance	$	1,220		$	27		$	2,307		$	127		$	114		$	713		$	19		$	500	$	5,027
Charge-offs		(1,723	)		-			(4,781	)		(49	)		(177	)		(432	)		(16	)		-		(7,178	)
Recoveries		42			-			-			-			2			34			7			-		85
Provision		1,216			(21	)		3,540			26			224			78			9			-		5,072
Ending balance	$	755		$	6		$	1,066		$	104		$	163		$	393		$	19		$	500	$	3,006

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		Commer- cial		Con- struction and land		Home equity and credit lines		Commer- cial		Con- sumer		Unallo- cated		Total
Allowance ending balance
Related to loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	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 September 30, 2013 and December 31, 2012:


September 30, 2013	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate loans:
One- to four-family	$	128,718	$	6,281	$	945	$	10,492	$	-	$	146,436
Multi-family		290		97		-		-		-		387
Commercial		50,455		23,509		4,783		8,630		-		87,377
Construction and land		4,532		1,161		-		3,554		-		9,247
Home equity and credit lines		27,031		104		37		75		-		27,247
Commercial		11,430		1,004		3,752		355		2,506		19,047
Consumer		1,032		76		91		1		-		1,200
Total	$	223,488	$	32,232	$	9,608	$	23,107	$	2,506	$	290,941


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.

The following table summarizes information in regards to impaired loans by loan portfolio class as of September 30, 2013 and December 31, 2012:


	September 30, 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	$	2,294	$	2,438	$	119	$	-	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial		2,228		2,230		3		-		-		-
Construction and land		1,479		1,612		133		-		-		-
Home equity and credit lines		135		143		8		93		93		93
Commercial		-		454		492		384		387		7
Consumer		-		-		-		2		6		1
	$	6,136	$	6,877	$	755	$	479	$	486	$	101

With no related allowance recorded:
Real estate loans:
One- to four-family	$	6,109	$	7,232	$	-	$	7,456	$	8,601	$	-
Multi-family		-		-		-		-		-		-
Commercial		8,047		11,336		-		15,128		19,667		-
Construction and land		1,922		1,789		-		4,177		4,204		-
Home equity and credit lines		587		766		-		723		907		-
Commercial		2,861		2,768		-		2,742		3,043		-
Consumer		1		4		-		-		-		-
	$	19,527	$	23,895	$	-	$	30,226	$	36,422	$	-

Total
Real estate loans:
One- to four-family	$	8,403	$	9,670	$	119	$	7,456	$	8,601	$	-
Multi-family		-		-		-		-		-		-
Commercial		10,275		13,566		3		15,128		19,667		-
Construction and land		3,401		3,401		133		4,177		4,204		-
Home equity and credit lines		722		909		8		816		1,000		93
Commercial		2,861		3,222		492		3,126		3,430		7
Consumer		1		4		-		2		6		1
	$	25,663	$	30,772	$	755	$	30,705	$	36,908	$	101

The following table presents additional information regarding the Company’s impaired loans for the nine months ended September 30, 2013 and September 30, 2012:


For the Nine Months Ended:	September 30, 2013				September 30, 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	$	2,393	$	57	$	-	$	-
Multi-family		-		-		-		-
Commercial		2,253		30		-		-
Construction and land		1,612		12		-		-
Home equity and credit lines		147		3		-		-
Commercial		474		3		-		-
Consumer		-		-		-		-
	$	6,879	$	105	$	-	$	-

With no related allowance recorded:
Real estate loans:
One-to four-family	$	6,225	$	157	$	7,789	$	139
Multi-family		-		-		-		-
Commercial		9,108		303		15,493		537
Construction and land		1,901		25		4,624		103
Home equity and credit lines		603		21		564		13
Commercial		2,512		42		731		1
Consumer		2		-		12		1
	$	20,351	$	548	$	29,213	$	794

Total
Real estate loans:
One-to four-family	$	8,618	$	214	$	7,789	$	139
Multi-family		-		-		-		-
Commercial		11,361		333		15,493		537
Construction and land		3,513		37		4,624		103
Home equity and credit lines		750		24		564		13
Commercial		2,986		45		731		1
Consumer		2		-		12		1
	$	27,230	$	653	$	29,213	$	794

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 $328,000 and $244,000 for the nine months ended September 30, 2013 and 2012, respectively.

The following table presents additional information regarding the Company’s impaired loans for the three months ended September 30, 2013 and September 30, 2012:


For the Three Months Ended:	September 30, 2013				September 30, 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	$	2,375	$	27	$	-	$	-
Multi-family		-		-		-		-
Commercial		2,238		28		-		-
Construction and land		1,612		12		-		-
Home equity and credit lines		146		3		-		-
Commercial		464		3		-		-
Consumer		-		-		-		-
	$	6,835	$	73	$	-	$	-

With no related allowance recorded:
Real estate loans:
One-to four-family	$	6,155	$	63	$	7,394	$	59
Multi-family		-		-		-		-
Commercial		8,998		139		13,534		162
Construction and land		1,826		-		4,604		35
Home equity and credit lines		597		10		487		5
Commercial		2,486		14		1,759		-
Consumer		2		-		9		1
	$	20,064	$	226	$	27,787	$	262

Total
Real estate loans:
One-to four-family	$	8,530	$	90	$	7,394	$	59
Multi-family		-		-		-		-
Commercial		11,236		161		13,534		162
Construction and land		3,438		12		4,604		35
Home equity and credit lines		743		13		487		5
Commercial		2,950		17		1,759		-
Consumer		2		-		9		1
	$	26,899	$	299	$	27,787	$	262

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 $59,000 and $138,000 for the three months ended September 30, 2013 and 2012, respectively.

The performances and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status at the dates indicated.


	30-59 Days Past Due		60-89 Days Past Due			90 or More Days Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
	(In thousands)
At September 30, 2013
Real estate loans:
One- to four-family	$	-	$	1,683	$	2,504	$	4,187	$	142,249	$	146,436	$	-
Multi-family		-		-		-		-		387		387		-
Commercial		629		226		692		1,547		85,830		87,377		-
Construction and land		-		-		-		-		9,247		9,247		-
Home equity loans and lines of credit		90		217		315		622		26,625		27,247		-
Commercial		-		478		355		833		18,214		19,047		-
Consumer and other		14		-		1		15		1,185		1,200		-
Total	$	733	$	2,604	$	3,867	$	7,204	$	283,737	$	290,941	$	-


	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.

Non-performing assets at September 30, 2013 and December 31, 2012 are as follows:


	September 30, 2013			December 31, 2012
	(In thousands)
Non-accrual loans:
Real estate loans:
One- to four-family	$	4,118		$	2,553
Multi-family		-			-
Commercial		5,525			6,889
Construction and land		1,789			325
Home equity loans and lines of credit		659			628
Commercial		2,369			2,742
Consumer		1			2
Total non-accrual loans		14,461			13,139

Accruing loans 90 days or more past due:
All loans	$	-		$	-
Total non-performing loans	$	14,461		$	13,139
Real estate owned		4,148			5,347
Total non-performing assets	$	18,609		$	18,486

Ratios:
Total non-performing loans to total loans		4.97	%		4.35	%
Total non-performing loans to total assets		2.42	%		2.11	%
Total non-performing assets to total assets		3.11	%		2.96	%

At September 30, 2013, the nonaccrual loans consisted of 37 one- to four-family residential dwelling units, 12 commercial real estate loans, two construction and land loans, 14 home equity loans, three commercial loans and one consumer loan. Included in nonaccrual loans are 19 troubled debt restructurings in the amount of $9.6 million. The Company had 17 properties in real estate owned totaling $4.1 million consisting of five one- to four-family dwelling units, five non-residential properties and seven construction and land loans. Included in real estate owned at September 30, 2013 are three possible branch locations in the amount of $2.4 million that were transferred from office properties and equipment during 2012.

At September 30, 2013, in addition to the troubled debt restructurings included in the non-accrual loan totals, the Company had 34 loans classified as troubled debt restructurings with a net loan balance of $10.5 million. Twenty-five of the troubled debt restructurings (TDRs) are one- to four-family dwelling units with a net loan balance of $4.1 million, seven of the TDRs are commercial real estate with a net loan balance of $4.7 million, one of the TDRs is a construction and land loan with a net loan balance of $1.6 million, and one of the TDRs is a home equity loan with a net loan balance of $46,000.

The following tables summarize information in regards to troubled debt restructurings for the three months ended September 30, 2013 (of which there were none) and September 30, 2012:


September 30, 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	$	667	$	667
Home equity loans		1		47		47
Commercial		2		2,990		2,990
Total		7	$	3,704	$	3,704

All of the troubled debt that was restructured during the three months ended September 30, 2012 consisted of interest rate modifications and no debt was forgiven.

The following table presents troubled debt restructurings with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three months ended September 30, 2013 (of which there were none) and September 30, 2012:


September 30, 2012 That Subsequently Defaulted	Number of contracts		Recorded Investment
	(Dollars in thousands)
Real estate:
One-to four-family		1	$	223
Commercial		1		391
Total		2	$	614

The following tables summarize information in regards to troubled debt restructurings for the nine months ended September 30, 2013 and 2012:


September 30, 2013	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
	(Dollars in thousands)
Real estate loans:
One- to four-family		3	$	458	$	458
Total		3	$	458	$	458


September 30, 2012	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
	(Dollars in thousands)
Real estate loans:
One- to four-family		8	$	1,538	$	1,538
Commercial		2		3,954		3,954
Home equity loans		1		47		47
Commercial		2		2,990		2,990
Total		13	$	8,529	$	8,529

All of the troubled debt that was restructured during the nine months ended September 30, 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 nine months ended September 30, 2013 and 2012:


September 30, 2013 That Subsequently Defaulted	Number of contracts		Recorded Investment
	(Dollars in thousands)
Real estate loans:
One- to four-family		1	$	111
Commercial		2		2,982
Total		3	$	3,093


September 30, 2012 That Subsequently Defaulted	Number of contracts		Recorded Investment
	(Dollars in thousands)
Real estate loans:
One- to four-family		1	$	223
Commercial		1		391
Total		2	$	614

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

8. Deposits

Deposit accounts, by type, at September 30, 2013 and December 31, 2012 are summarized as follows:


	At September 30, 2013								At December 31, 2012
	Balance		Percent			Wtd. Avg. Rate			Balance		Percent			Wtd. Avg. Rate
	(Dollars in thousands)

Deposit type:
Non-interest bearing demand	$	46,284		8.78	%		-	%	$	39,301		7.09	%		-	%
Savings		109,698		20.81			0.56			106,469		19.22			0.65
NOW accounts		152,873		28.99			0.42			168,150		30.35			0.82
Super NOW accounts		40,720		7.72			0.34			44,548		8.04			0.54
Money market deposit		65,236		12.37			0.41			72,051		13.00			0.63
Total transaction accounts		414,811		78.67			0.40			430,519		77.70			0.64

Certificates of deposit		112,501		21.33			1.46			123,571		22.30			1.60

Total deposits	$	527,312		100.00	%		0.63	%	$	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 September 30, 2013 and December 31, 2012:


Maturity	Interest Rate			September 30, 2013		December 31, 2012
				(Dollars in thousands)
October 1, 2013		0.33	%	$	8,410	$	-
				$	8,410	$	-

At September 30, 2013, the Bank had a borrowing capacity of 30% of assets, or $179.8 million, available from the FHLB of New York. At September 30, 2013, the Bank had $8.4 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).

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

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

Level 2: Quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2013 and December 31, 2012 are as follows:


	September 30, 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	$	140,744	$	-	$	140,744	$	-
Corporate debt obligations		4,502		-		4,502		-
Mutual fund		4,479		4,479		-		-
Municipal debt obligations		7,103		-		7,103		-
SBA pools		1,222		-		1,222		-
Mortgage-backed securities		17,082		-		17,082		-
Collateralized mortgage obligations		66,484		-		66,484		-
Total investment securities available-for-sale	$	241,616	$	4,479	$	237,137	$	-


	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 September 30, 2013 and December 31, 2012 are as follows:


	September 30, 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	$	18,858	$	-	$	-	$	18,858
Real estate owned	$	3,248	$	-	$	-	$	3,248


	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 thousands)
Impaired loans	$	14,879	$	-	$	-	$	14,879
Real estate owned	$	3,217	$	-	$	-	$	3,217

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value at September 30, 2013:


		Quantitative Information About Level 3 Fair Value Measurements
Description		Fair Value Estimate	Valuation Techniques	Unobservable Input	Range (Weighted Average)
		(In thousands)

Impaired loans	$	18,858	Appraisal of collateral (1)	Liquidation expenses (2)	-10.0% to -35.0% (-30.0%)

Real estate owned	$	3,248	Appraisal of collateral (1)	Liquidation expenses (2)	-10.0% to -25.0% (-15.0%)

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors including estimated liquidation expenses. The range of adjustments including liquidation expenses is presented as a percent of the appraisal.

The following methods and assumptions were used to estimate the fair values of certain Company assets and liabilities at September 30, 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 September 30, 2013 and December 31, 2012, the fair value consists of loan balances of $6.8 million and $479,000, respectively, net of valuation allowances of $755,000 and $101,000, respectively, and loan balances of $17.5 million and $20.6 million, respectively, net of partial charge-offs of $4.8 million and $6.1 million, respectively.

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.

The carrying amount and estimated fair value of the Company’s assets and liabilities at September 30, 2013 and December 31, 2012 are as follows:


	September 30, 2013
	Carrying amount		Level 1		Level 2		Level 3		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and amounts due from banks	$	9,010	$	9,010	$	-	$	-	$	9,010
Investment securities available-for-sale		241,616		4,479		237,137		-		241,616
Corporate debt obligations held-to-maturity		1,193		-		1,413		-		1,413
Municipal debt obligations held-to-maturity		22,955		-		23,395		-		23,395
Mortgage-backed securities held-to-maturity		225		-		247		-		247
Federal Home Loan Bank stock		1,081		1,081		-		-		1,081
Loans receivable, net		284,387		-		-		288,623		288,623
Accrued interest receivable		1,559		-		1,559		-		1,559

Financial liabilities:
Deposits		527,312		-		529,843		-		529,843
Federal Home Loan Bank short-term borrowings		8,410		-		8,410		-		8,410
Accrued interest payable		15		-		15		-		15

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		-		-		-		-		-

11.	Regulatory Matters and Capital Requirements

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

On May 30, 2013, the Bank was notified by the OCC that it established minimum capital ratios for the Bank requiring it to maintain a Tier 1 capital to adjusted total assets ratio of 9.50%, a Tier 1 capital to risk-weighted assets ratio of 11.00%, and a Total risk-based capital to risk-weighted assets ratio of 13.00%. As of September 30, 2013, the Bank’s ratios for these items were 9.95%, 19.25% and 20.51%, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provision, growth opportunities, regulatory compliance, interest rates and deposit growth. Words such as “may,” “could,” “should,” “would,” “will,” “will likely result,” “believe,” “expect,” “plan,” “will continue,” “is anticipated,” “estimate,” “intend,” “project,” and similar expressions are intended to identify these forward-looking statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings 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, shutdown of the federal government, 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 for the year ended December 31, 2012 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.

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.

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.

Other-Than-Temporary Impairment. Investment securities are evaluated on at least a quarterly basis, to determine whether a decline in their value is other-than-temporary. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). For equity securities, the full amount of the other-than-temporary impairment is recognized in earnings.

Management’s determination of whether FHLB stock is impaired is based on our assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of the cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB. Management believes no impairment is necessary related to the FHLB stock at September 30, 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 September 30, 2013 and December 31, 2012

Total assets decreased $25.4 million, or 4.1%, to $598.2 million at September 30, 2013, from $623.6 million at December 31, 2012. The decrease was mainly the result of decreases in cash and amounts due from banks, investment securities held-to-maturity and net loans receivable offset by increases in investment securities available-for-sale and other assets.

Net loans receivable decreased $12.8 million, or 4.3%, to $284.4 million at September 30, 2013 from $297.2 million at December 31, 2012. One- to four-family residential real estate loans decreased $2.3 million to $146.4 million at September 30, 2013 from $148.7 at December 31, 2012. Commercial real estate loans decreased $2.7 million to $87.4 million at September 30, 2013 from $90.1 million at December 31, 2012. Construction and land loans decreased $436,000 to $9.2 million at September 30, 2013 from $9.7 million at December 31, 2012. Home equity loans and lines of credit decreased $1.5 million to $27.2 million at September 30, 2013 from $28.7 million at December 31, 2012. Commercial loans decreased by $4.3 million to $19.0 million at September 30, 2013 from $23.3 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 $14.5 million at September 30, 2013 from $13.1 million at December 31, 2012.

Real estate owned totaled $4.1 million and $5.3 million at September 30, 2013 and December 31, 2012, respectively. We currently hold through the foreclosure process or deed-in-lieu of foreclosure 17 properties, five of which are residential one- to four-family properties, four of which are nonresidential properties and eight of which are 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 in June 2012.

Securities available-for-sale increased $8.3 million, or 3.6%, to $241.6 million at September 30, 2013 from $233.3 at December 31, 2012. This increase was the result of purchases in the amount of $97.9 million offset by calls, maturities and sales in the amount of $58.1 million, $23.3 in principal amortization and a market value decrease of $8.3 million. Securities held-to-maturity decreased by $5.5 million, to $24.4 million at September 30, 2013 from $30.0 million at December 31, 2012. This decrease was the result of purchases in the amount of $15.6 million offset by calls and maturities in the amount of $21.1 million and principal amortization of $206,000. We have used excess cash to invest in securities.

Deposits decreased $26.8 million, or 4.8%, to $527.3 million at September 30, 2013 from $554.1 million at December 31, 2012. NOW accounts decreased $15.3 million, or 9.1%, to $152.9 million at September 30, 2013 from $168.2 million at December 31, 2012. Savings accounts increased $3.2 million to $109.7 million at September 30, 2013 from $106.5 million at December 31, 2012. Super NOW accounts decreased by $3.8 million to $40.7 million at September 30, 2013 from $44.5 million at December 31, 2012. Non-interest bearing demand accounts increased by $7.0 million to $46.3 million at September 30, 2013 from $39.3 million at December 31, 2012. Certificates of deposit decreased by $11.1 million to $112.5 million at September 30, 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 $8.4 million at September 30, 2013; there were no Federal Home Loan Bank borrowings at December 31, 2012. We have increased our outstanding borrowings because proceeds received from the sales, calls, maturities and amortization of securities did not meet our cash needs to fund loan originations, investment securities purchases and a net decrease in deposits.

Total stockholders’ equity decreased $7.7 million to $60.3 million at September 30, 2013 from $68.0 million at December 31, 2012. This decrease was mainly attributable to a net loss of $2.4 million and a reduction in the market value of available for sale securities of $5.3 million.

Comparison of Operating Results for the Three Months Ended September 30, 2013 and September 30, 2012

General. We experienced a net loss of $1.9 million for the three months ended September 30, 2013 compared to net income of $475,000 for the three months ended September 30, 2012. The principal reasons for the decrease in net income were an increase in the provision for loan losses in the amount of $2.5 million, a decrease in net interest income of $443,000, and an increase in total non-interest expense of $395,000 offset by a decrease in income tax expense of $913,000.

Interest Income. Interest income decreased $827,000 to $4.5 million for the three months ended September 30, 2013 from $5.3 million for the three months ended September 30, 2012. The decrease in interest income resulted from a decrease of $544,000 in interest income on loans and a decrease of $283,000 in interest income on securities.

Interest income on loans decreased $544,000 to $3.4 million for the three months ended September 30, 2013 from $3.9 million for the three months ended September 30, 2012. This decrease was caused by a decrease in the average yield on loans to 4.59% for the three months ended September 30, 2013 from 5.36% for the three months ended September 30, 2012 partially offset by an increase in the average balance of loans by $2.1 million to $294.0 million for the three months ended September 30, 2013 from $291.9 million for the three months ended September 30, 2012.

Interest income on securities decreased by $283,000 to $1.1 million for the three months ended September 30, 2013 from $1.4 million for the three months ended September 30, 2012. The decrease in interest income on securities was due to a decrease in the average yield on taxable and tax-exempt securities of 50 basis points to 1.62% for the three months ended September 30, 2013 from 2.12% for the three months ended September 30, 2012, offset by an increase in the average balance of taxable and tax-exempt securities to $276.2 million for the three months ended September 30, 2013 from $264.6 million for the three months ended September 30, 2012. The yields on tax-exempt securities are not tax-affected.

Interest Expense. Interest expense decreased $384,000 to $907,000 for the three months ended September 30, 2013 from $1.3 million for the three months ended September 30, 2012.

Interest expense on interest-bearing deposits decreased by $389,000 to $892,000 for the three months ended September 30, 2013 from $1.3 million for the three months ended September 30, 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 0.71% for the three months ended September 30, 2013 from 1.01% for the three months ended September 30, 2012, and a decrease in the average balance of interest-bearing deposits to $501.7 million for the three months ended September 30, 2013 from $509.0 million for the three months ended September 30, 2012. We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended September 30, 2013, reflecting lower market rates.

Interest expense on borrowings increased $5,000 to $15,000 for the three months ended September 30, 2013 from $10,000 for the three months ended September 30, 2012. This increase was primarily due to a $7.6 million increase in the average balance of borrowings to $9.6 million for the three months ended September 30, 2013 from $2.0 million for the three months ended September 30, 2012 offset by a decrease in the average rate paid on borrowings to 0.63% for the three months ended September 30, 2013 from 2.00% for the three months ended September 30, 2012. We have increased our outstanding borrowings because proceeds received from the sales, calls, maturities and amortization of securities did not meet our cash needs to fund loan originations, investment securities purchases and a net decrease in deposits.

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

During the three months ended September 30, 2013, the Company charged off $1.9 million in loans, which included $50,000 on one- to four-family real estate loans, $867,000 on commercial real estate loans, $59,000 on home equity and lines of credit, and $954,000 on commercial loans. As part of the Bank’s loan collection process, we re-appraise loans that are 90 days delinquent or impaired. The reason for the charge-offs in the three months ended September 30, 2013 were the reduced appraisals that we received on impaired loans we were monitoring. The charge-offs during this quarter are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan. The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

For the three months ended September 30, 2012, the Company charged off $291,000 in loans, including $242,000 on residential one- to four-family loans, $17,000 on commercial real estate loans, $27,000 on construction and land loans and $5,000 on consumer loans. The charge-offs for the three months ended September 30, 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.

Based on our evaluation of the above factors, we recorded a provision for loan losses of $2.8 million for the three months ended September 30, 2013 and a provision for loan losses of $329,000 for the three months ended September 30, 2012. The allowance for loan losses was $5.7 million, or 1.95% of total loans, at September 30, 2013, compared to $3.0 million, or 1.01% of total loans, at September 30, 2012. Our balance of loans we evaluated individually for impairment was $25.7 million at September 30, 2013 and $30.7 million at December 31, 2012. At September 30, 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 September 30, 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 $429,000 for the three months ended September 30, 2013 and $425,000 for the three months ended September 30, 2012. For the three months ended September 30, 2013, there was a net gain on the sale and call of investment securities in the amount of $4,000 compared to a net gain of $22,000 for the three months ended September 30, 2012. Fees and service charges on deposit accounts decreased by $9,000 to $303,000 for the three months ended September 30, 2013 from $294,000 for the three months ended September 30, 2012. Earnings on bank owned life insurance totaled $112,000 for the three months ended September 30, 2013 and $88,000 for the three months ended September 30, 2012.

Non-interest Expense. Non-interest expense increased $395,000 to $3.8 million for the three months ended September 30, 2013 from $3.4 million for the three months ended September 30, 2012. Compensation and benefits expense increased by $49,000 to $1.8 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Occupancy and equipment expense increased $20,000 to $416,000 for the three months ended September 30, 2013 from $396,000 for the three months ended September 30, 2012. Federal deposit insurance premiums increased $63,000 to $211,000 for the three months ended September 30, 2013 from $148,000 for the three months ended September 30, 2012. The increase in federal deposit insurance premiums was due to the formal agreement with the OCC which began in the second quarter of 2013. Data processing fees decreased by $2,000 to $235,000 for the three months ended September 30, 2013 from $237,000 for the three months ended September 30, 2012. Professional fees increased $91,000 due to increased costs associated with loan collection, regulatory consulting and strategic planning services. Net real estate owned expense increased $182,000 to $429,000 for the three months ended September 30, 2013 due to allowances set up on properties where we received updated reduced appraisals.

Income Tax Expense/Benefit. We recorded an income tax benefit of $697,000 for the three months ended September 30, 2013, compared to an income tax expense of $216,000 for the three months ended September 30, 2012. The effective tax rates for the three months ended September 30, 2013 and 2012 were (26.4%) and 31.3%, respectively. The reasons for the change in the tax rates noted above were the recording of a valuation allowance for certain deferred tax assets for the three months ended September 30, 2013 and the decrease in the percentage of tax-exempt income to net income for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Comparison of Operating Results for the Nine Months Ended September 30, 2013 and September 30, 2012

General. We experienced a net loss of $2.4 million for the nine months ended September 30, 2013 compared to a net loss of $789,000 for the nine months ended September 30, 2012. The principal reasons for the increase in net loss were an increase in the provision for loan losses in the amount of $468,000, a decrease in net interest income of $1.3 million and an increase in total non-interest expense of $1.4 million offset by an increase in non-interest income of $960,000 and an increase in income tax benefit of $561,000.

Interest Income. Interest income decreased $2.5 million to $13.8 million for the nine months ended September 30, 2013 from $16.3 million for the nine months ended September 30, 2012. The decrease in interest income resulted from a decrease of $1.5 million in interest income on loans and a decrease of $977,000 in interest income on securities.

Interest income on loans decreased $1.5 million to $10.4 million for the nine months ended September 30, 2013 from $11.9 million for the nine months ended September 30, 2012. The decrease was due to a decrease in the average yield on loans to 4.69% for the nine months ended September 30, 2013 from 5.38% for the nine months ended September 30, 2012. The average balance of loans remained constant at $294.0 million for the nine months ended September 30, 2013 and 2012.

Interest income on securities decreased by $977,000 to $3.4 million for the nine months ended September 30, 2013 from $4.4 million for the nine months ended September 30, 2012. The decrease in interest income on securities was due to a decrease in the average yield on taxable and tax-exempt securities of 54 basis points to 1.66% for the nine months ended September 30, 2013 from 2.20% for the nine months ended September 30, 2012, offset by an increase in the average balance of taxable and tax-exempt securities to $277.7 million for the nine months ended September 30, 2013 from $268.6 million for the nine months ended September 30, 2012. The yields on tax-exempt securities are not tax-affected.

Interest Expense. Interest expense decreased $1.2 million to $3.0 million for the nine months ended September 30, 2013 from $4.2 million for the nine months ended September 30, 2012.

Interest expense on interest-bearing deposits decreased by $1.2 million to $3.0 million for the nine months ended September 30, 2013 from $4.2 million for the nine months ended September 30, 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 0.80% for the nine months ended September 30, 2013 from 1.09% for the nine months ended September 30, 2012, and a decrease in the average balance of interest-bearing deposits to $501.7 million for the nine months ended September 30, 2013 from $510.1 million for the nine months ended September 30, 2012. We experienced decreases in the average cost across all categories of interest-bearing deposits for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

Interest expense on borrowings decreased $5,000 to $27,000 for the nine months ended September 30, 2013 from $32,000 for the nine months ended September 30, 2012. This decrease was primarily due to a $7.3 million increase in the average balance of borrowings to $9.6 million for the nine months ended September 30, 2013 from $2.3 million for the nine months ended September 30, 2012 offset by a decrease in the average rate paid on borrowings to 0.38% for the nine months ended September 30, 2013 from 1.86% for the nine months ended September 30, 2012. We have increased our outstanding borrowings because proceeds received from the sales, calls, maturities and amortization of securities did not meet our cash needs to fund loan originations, investment securities purchases and a net decrease in deposits.

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

For the nine months ended September 30, 2012, the Company charged off $7.2 million in loans, including $4.8 million in commercial real estate loans. The charge-offs on commercial real estate loans were due to reduced valuations on re-appraisals of the underlying collateral for such loans. Six out of seven loans in one particular sector of the commercial real estate portfolio were identified as impaired and written down in the nine months ended September 30, 2012 to their estimated fair value based on appraisals less liquidation expenses. At September 30, 2012, we felt this industry sector was not representative of the remaining commercial real estate portfolio and have therefore reduced the risk-weighted historical loss factor for the first half of 2012 in the calculation for the general loan loss allowance. At that time, we had 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 nine months ended September 30, 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 increased collateral valuation risk noted in the particular commercial real estate loan 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.

Based on our evaluation of the above factors, we recorded a provision for loan losses of $5.5 million for the nine months ended September 30, 2013 and a provision for loan losses of $5.1 million for the nine months ended September 30, 2012. The allowance for loan losses was $5.6 million, or 1.95% of total loans, at September 30, 2013, compared to $3.0 million, or 1.01% of total loans, at September 30, 2012. Our balance of loans we evaluated individually for impairment was $24.9 million at September 30, 2013 and $30.7 million at December 31, 2012. At September 30, 2013 and 2012, we maintained unallocated allowances for loan losses of $1.5 million and $500,000 respectively.

Non-interest Income. Non-interest income was $2.3 million for the nine months ended September 30, 2013 and $1.4 million for the nine months ended September 30, 2012. Fees and service charges on deposit accounts increased by $38,000 to $904,000 for the nine months ended September 30, 2013 from $866,000 for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, there was a net gain on the sale and call of investment securities in the amount of $1.1 million compared to a net gain of $218,000 for the nine months ended September 30, 2012. Earnings on bank owned life insurance totaled $330,000 for the nine months ended September 30, 2013 and $261,000 for the nine months ended September 30, 2012.

Non-interest Expense. Non-interest expense increased $1.4 million to $11.1 million for the nine months ended September 30, 2013 from $9.7 million for the nine months ended September 30, 2012. Compensation and benefits expense increased slightly by $42,000 to $5.2 million for the nine months ended September 30, 2013 from $5.1 million for the nine months ended September 30, 2012. Occupancy and equipment expense decreased $14,000 to $1.2 million for the nine months ended September 30, 2013 from $1.2 million for the nine months ended September 30, 2012. Federal deposit insurance premiums increased $135,000 to $534,000 for the nine months ended September 30, 2013 from $399,000 for the nine months ended September 30, 2012. Data processing fees increased by $78,000 to $720,000 for the nine months ended September 30, 2013 from $642,000 for the nine months ended September 30, 2012. This increase was due to costs associated with item processing. Professional fees increased $337,000 to $929,000 for the nine months ended September 30, 2013 from $592,000 for the nine months ended September 30, 2012 due to increased costs associated with loan collection, regulatory consulting and strategic planning services. Net real estate owned expense increased $770,000 to $1.2 million for the nine months ended September 30, 2013 from $419,000 for the nine months ended September 30, 2012 due to allowances set up on properties with lower appraisals.

Income Tax Benefit. We recorded an income tax benefit of $1.1 million for the nine months ended September 30, 2013, compared to an income tax benefit of $553,000 for the nine months ended September 30, 2012. The effective tax rates for the nine months ended September 30, 2013 and 2012 were (31.4%) and (41.2%), respectively. The reasons for the change in the tax rates noted above were the recording of a valuation allowance for certain deferred tax assets for the nine months ended September 30, 2013 and the decrease in the percentage of tax-exempt income to net income for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2013, cash and cash equivalents totaled $9.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $241.6 million at September 30, 2013. In addition, at September 30, 2013, we had the ability to borrow a total of $179.5 million from the Federal Home Loan Bank of New York (30% of our assets at that date). On that date, we had $8.4 million in advances outstanding.

At September 30, 2013, loan commitments outstanding totaled $7.8 million. In addition to commitments to originate loans, we had $17.4 million in unadvanced funds to borrowers. Total certificates of deposit due within one year of September 30, 2013 totaled $49.5 million. Total certificates of deposit due within one year of September 30, 2013 represent 9.4% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 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 nine months ended September 30, 2013, we originated $40.0 million of loans and purchased $113.5 million of securities. For the nine months ended September 30, 2012, we originated $44.6 million of loans and purchased $131.5 million of securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a decrease of $26.8 million and a net increase of $35.7 million in total deposits for the nine months ended September 30, 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.

Total borrowings, which include Federal Home Loan Bank advances, totaled $8.4 million at September 30, 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. Please see Note 11, Regulatory Matters and Capital Requirements, for minimal capital requirements imposed on the Bank by the Office of Comptroller of the Currency.

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

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

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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not engaged in any legal proceedings of a material nature at September 30, 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 third 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)
July 1 – July 31, 2013		-		-		81,870		117,081

August 1 – August 31, 2013		-		-		81,870		117,081

September 1 – September 30, 2013		-		-		81,870		117,081

Total		-		-		81,870		117,081


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

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits


	Exhibit 31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
	Exhibit 31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
	Exhibit 32		Certification of Chief Executive Officer and Chief 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.

SIGNATURES

In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	COLONIAL FINANCIAL SERVICES, INC.
	Registrant



Date: November 14, 2013	By: /s/ Edward J. Geletka
	Edward J. Geletka President and Chief Executive Officer (Principal Executive Officer)


Date: November 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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Colonial Financial Services Inactive 10-Q2013 Q3 Quarterly report

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