Colonial Financial Services 10Q 2014 Q2 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 June 30, 2014

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

For the transition period from ____________________ to ____________________

Commission file number 001-34817

COLONIAL FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

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

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

(856) 205-0058

(Registrant’s telephone number including area code)

N/A

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

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

x Yes o No

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

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

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

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

As of August 13, 2014, 3,860,140 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		49

Item 5	Other Information		49

Item 6	Exhibits		50

	Signatures		51

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)


	June 30, 2014			December 31, 2013

	(Dollars in thousands, except per share data)
Assets
Cash and amounts due from banks	$	7,038		$	23,404
Investment securities available for sale		238,536			227,126
Investment securities held to maturity (fair value at June 30, 2014 - $0; at December 31, 2013 - $17,882)		-			17,291
Loans receivable, net of allowance for loan losses of $5,064 at June 30, 2014 and $5,853 at December 31, 2013		267,655			276,154
Real estate owned, net		3,182			3,258
Federal Home Loan Bank stock, at cost		1,110			702
Office properties and equipment, net		7,640			7,825
Bank-owned life insurance		14,818			14,607
Accrued interest receivable		1,375			1,530
Other assets		9,296			11,260
Total Assets	$	550,650		$	583,157

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	50,312		$	42,739
Interest-bearing		425,264			479,288
Total deposits		475,576			522,027
Federal Home Loan Bank short-term borrowings		9,770			-
Advances from borrowers for taxes and insurance		1,064			831
Accrued interest payable and other liabilities		1,183			1,136
Total Liabilities		487,593			523,994

Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value; authorized 50,000,000 shares; none issued		-			-
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 3,860,140 shares at June 30, 2014 and 3,853,058 shares at December 31, 2013		39			39
Additional paid-in capital		37,390			37,289
Unearned shares held by Employee Stock Ownership Plan (“ESOP”)		(1,170	)		(1,170	)
Retained earnings		28,068			27,482
Accumulated other comprehensive loss		(1,270	)		(4,477	)
Total Stockholders’ Equity		63,057			59,163
Total Liabilities and Stockholders’ Equity	$	550,650		$	583,157

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
	(Dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	3,020	$	3,392		$	6,109	$	6,980
Mortgage-backed securities		424		547			851		1,051
Investment securities: Taxable		395		538			899		1,043
Investment securities: Tax-exempt		43		123			133		239
Total Interest Income		3,882		4,600			7,992		9,313

Interest Expense
Deposits		666		1,033			1,347		2,111
Borrowings		2		12			8		12
Total Interest Expense		668		1,045			1,355		2,123
Net Interest Income		3,214		3,555			6,637		7,190

Provision for Loan Losses		-		2,667			548		2,709
Net Interest Income after Provision for Loan Losses		3,214		888			6,089		4,481

Non-Interest Income
Fees and service charges		295		253			567		601
Net gain on sales and calls of investment securities		492		1,009			496		1,060
Earnings on bank-owned life insurance		106		111			211		218
Other		7		13			24		22
Total Non-Interest Income		900		1,386			1,298		1,901

Non-Interest Expenses
Compensation and benefits		1,412		1,611			2,886		3,375
Occupancy and equipment		389		380			844		786
Data processing		269		248			516		485
FDIC insurance premium		175		192			363		323
Office supplies		23		33			47		78
Professional fees		311		424			651		639
Advertising and promotions		13		23			26		56
Real estate owned, net		300		547			550		760
Other		343		392			655		780
Total Non-Interest Expenses		3,235		3,850			6,538		7,282
Income (Loss) before Income Tax Expense (Benefit)		879		(1,576	)		849		(900	)

Income Tax Expense (Benefit)		326		(596	)		263		(417	)
Net Income (Loss)	$	553	$	(980	)	$	586	$	(483	)

Per Share Data (See Note 3):
Earnings (Loss) per share – basic	$	0.15	$	(0.26	)	$	0.16	$	(0.13	)
Earnings (Loss) per share – diluted	$	0.15	$	(0.26	)	$	0.16	$	(0.13	)
Weighted average number of shares outstanding – basic		3,746,810		3,719,643			3,746,677		3,719,863
Weighted average number of shares outstanding – diluted		3,746,810		3,719,643			3,746,677		3,719,863

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Dollars in thousands)

Net income (loss)	$	553		$	(980	)	$	586		$	(483	)

Other Comprehensive Income (loss):
Unrealized gain (loss) on securities net of tax expense (benefit) – 2014, $748 and $1,513; 2013, $(2,420) and $(2,636)		1,127			(4,478	)		3,044			(4,893	)
Unrealized gain on securities transferred from the held-to-maturity category into the available-for-sale category net of tax expense – 2014, $0 and $306; 2013$ 0 and $0		-			-			461			-
Less reclassification adjustment for net realized gain on sale of securities included in net income (loss) net of tax expense – 2014, $197 and $198; 2013, $404 and $424 (1)		(295	)		(605	)		(298	)		(636	)
Total Other Comprehensive Income (loss)		832			(5,083	)		3,207			(5,529	)

Comprehensive Income (loss)	$	1,385		$	(6,063	)	$	3,793		$	(6,012	)

(1)	Gross amounts are included in Net gain on sales and calls of investment securities in the Consolidated Statements of Operations as a separate element within Total Non-Interest Income. Tax expense amounts are included in Income Tax Expense (Benefit) in the Consolidated Statements of Operations.

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)


	Common Stock Shares			Common Stock		Additional Paid-in Capital			Unearned Shares Held by ESOP			Retained Earnings			Accumu- lated Other Compre- hensive Income (Loss)			Total Stock- holders’ Equity
		(Dollars in thousands)
Balance, January 1, 2014		3,853,058		$	39	$	37,289		$	(1,170	)	$	27,482		$	(4,477	)	$	59,163

Net income		-			-		-			-			586			-			586

Other comprehensive income		-			-		-			-			-			3,207			3,207

Stock-based compensation expense (restricted stock awards)		7,082			-		41			-			-			-			41

Stock-based compensation expense (stock options)		-			-		60			-			-			-			60

Balance, June 30, 2014		3,860,140		$	39	$	37,390		$	(1,170	)	$	28,068		$	(1,270	)	$	63,057

Balance, January 1, 2013		3,852,791		$	39	$	37,155		$	(1,378	)	$	29,307		$	2,914		$	68,037

Net loss		-			-		-			-			(483	)		-			(483	)

Other comprehensive loss		-			-		-			-			-			(5,529	)		(5,529	)

Repurchase and retirement of common stock		(10,000	)		-		(134	)		-			-			-			(134	)
Stock-based compensation expense (restricted stock awards)		10,267			-		64			-			-			-			64

Stock-based compensation expense (stock options)		-			-		91			-			-			-			91

Balance, June 30, 2013		3,853,058		$	39	$	37,176		$	(1,378	)	$	28,824		$	(2,615	)	$	62,046

See notes to unaudited consolidated financial statements.

Colonial Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Six Months Ended June 30,
	2014			2013
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net income (loss)	$	586		$	(483	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for loan losses		548			2,709
Depreciation expense		267			279
Stock-based compensation expense		101			155
Net earnings on bank-owned life insurance		(211	)		(218	)
Net (accretion) amortization of loan fees		(151	)		273
Net gain on sales and calls of investment securities		(496	)		(1,060	)
Net gain on the sale of real estate owned		(70	)		(57	)
Provision for real estate owned		328			648
Accretion of discount on investment securities, net		(178	)		(115	)
Decrease (increase) in accrued interest receivable		155			(47	)
Decrease (increase) in other assets		1,964			(2,490	)
Increase in accrued interest payable and other liabilities		47			321
Net cash provided by (used in) operating activities		2,890			(85	)
Cash Flows from Investing Activities:
Proceeds from sales of investment securities available-for-sale		47,803			5,996
Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations available-for-sale		-			19,071
Proceeds from calls and maturities of:
Investment securities held to maturity (HTM)		7,299			14,009
Investment securities available for sale (AFS)		10,243			34,491
Purchase of:
Investment securities HTM		-			(15,625	)
Investment securities AFS		(18,102	)		(61,309	)
Mortgage-backed securities and collateralized mortgage obligations AFS		(44,767	)		(36,609	)
Purchase of office properties and equipment		(82	)		(136	)
Principal repayments from:
Investment securities		234			2,931
Mortgage-backed securities and collateralized mortgage obligations		7,052			12,447
Net increase in Federal Home Loan Bank stock		(408	)		(1,475	)
Proceeds from the sale of real estate owned		323			609
Net decrease in loans receivable		7,597			413
Net cash provided by (used in) investing activities		17,192			(25,187	)
Cash Flows from Financing Activities:
Net decrease in deposits		(46,451	)		(26,458	)
Proceeds from Federal Home Loan Bank short-term borrowings		9,770			34,020
Increase in advances from borrowers for taxes and insurance		233			113
Common stock repurchased and retired		-			(134	)
Net cash (used in) provided by financing activities		(36,448	)		7,541
Decrease in cash and cash equivalents		(16,366	)		(17,731	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		23,404			26,418
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,038		$	8,687

Supplemental Cash Flow Disclosures:
Cash paid:
Interest	$	1,359		$	2,130
Income taxes	$	-		$	-

Supplemental Schedule of Noncash Investing and Financing Activities:
Other real estate acquired in settlement of loans	$	505		$	567
Transfer of held-to-maturity securities to available-for-sale	$	9,989		$	-

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 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.) 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 six months ended June 30, 2014 (unaudited) are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or for any other period. The balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.

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

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

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

2.	Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company does not expect the adoption of this FASB ASU to have a material impact on the consolidated financial statements.

In May 2014, the FASB issued ASU, 2014-09, Revenue from Contracts with Customers, which supersedes nearly all exiting revenue recognition guidance under U. S. GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U. S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

In June 2014, the FASB issued ASU, 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this update are effective for annual period and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect the adoption of this FASB ASU to have a material impact on the consolidated financial statements.

3.	Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSEs which are considered antidilutive are not included for the purposes of this calculation. There are no convertible securities which would affect the net income (numerator) in calculating basic and diluted earnings per share; therefore, for these calculations, the net income (loss) for the three months ended June 30, 2014 and 2013 is $553,000 and $(980,000), respectively. Net income (loss) for the six months ended June 30, 2014 and 2013 is $586,000 and $(483,000), 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 June 30, 2014 and 2013, there were 318,557 and 397,302 anti-dilutive options and awards excluded from the computation of diluted earnings per share.


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net income (loss)	$	553,000		$	(980,000	)	$	586,000		$	(483,000	)

Weighted average common shares issued		3,860,140			3,853,058			3,860,007			3,853,278
Average unearned ESOP shares		(113,330	)		(133,415	)		(113,330	)		(133,415	)
Weighted average common shares outstanding-basic		3,746,810			3,719,643			3,746,677			3,719,863
Effect of dilutive non-vested shares and stock options outstanding		-			-			-			-
Weighted average common shares outstanding-diluted		3,746,810			3,719,643			3,746,677			3,719,863
Basic income (loss) per share	$	0.15		$	(0.26	)	$	0.16		$	(0.13	)
Diluted income (loss) per share	$	0.15		$	(0.26	)	$	0.16		$	(0.13	)

4.	Stock-Based Compensation

At June 30, 2014, the Company has two share-based compensation plans under which grants have been made, the 2006 Stock-Based Incentive Plan (the “2006 Plan”) and the 2011 Equity Incentive Plan (the “2011 Plan”). Under the 2006 Plan, the total number of shares that could be granted as awards was 83,300 and the total amount of shares that could be granted as options was 208,247. Under the 2011 Plan, the total number of shares that could be granted as awards was 91,800 and the total amount of shares that could be granted as options was 229,500.

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

On January 20, 2011, for the 2006 Plan, 3,268 shares of restricted stock were awarded. The restricted shares awarded had a grant date fair value of $12.00 per share. The restricted stock awarded vests 33% annually beginning January 20, 2012. The restricted stock awarded on January 20, 2011 is fully vested and the total expense and related tax effect has been fully recorded. For the three and six months ended June 30, 2013, $3,000 and $6,000 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 six months ended June 30, 2014, $20,000 and $41,000 in compensation expense was recognized in regard to the time-based restricted stock awards, with a related tax benefit of $7,000 and $14,000, respectively. For the three and six months ended June 30, 2014, there was no expense recorded for the performance-based awards. For the three and six months ended June 30, 2013, $29,000 and $58,000 in compensation expense was recognized in regard to these restricted stock awards, with a related tax benefit of $10,000 and $20,000, respectively. For the three and six months ended June 30, 2013, there was no expense recorded for the performance-based awards. As of June 30, 2014, there was $447,000 of unrecognized compensation expense related to the restricted stock awards which is expected to be recognized over a period of 2.50 years.

A summary of the status of the shares under the two Plans as of June 30, 2014 and changes during the three and six months ended June 30, 2014 are presented below.


	For the Three Months Ended June 30, 2014				For the Six Months Ended June 30, 2014
Award Shares	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Restricted, beginning of period		39,214	$	12.46		52,832	$	12.46
Granted		-		-		-		-
Forfeitures		-		-		6,536		12.46
Vested		-		-		7,082		12.43
Restricted stock, end of period		39,214	$	12.46		39,214	$	12.46

On October 19, 2006, for the 2006 Plan, options to purchase 184,660 shares of common stock at $13.27 per share were awarded. The options awarded fully vested in October 2011 and expire in 2016. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2006: dividend yield of 0%, risk-free interest rate of 4.79%, expected life of 6.5 years, and expected volatility of 15.00%. The calculated fair value of options granted in 2006 was $4.03 per option. The weighted average contractual term of options outstanding and exercisable was 2.25 years at June 30, 2014 and 3.25 years at June 30, 2013. The total expense and related tax effect has been fully recorded for these options.

On January 20, 2011, for the 2006 Plan, options to purchase 8,328 shares of common stock at $12.00 per share were awarded. The options awarded vest 33% annually beginning January 20, 2012 and expire in 2021. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted in 2011: dividend yield of 0%, risk-free interest rate of 3.47%, expected life of 6.5 years, and expected volatility of 33.00%. The calculated fair value of options granted in 2011 was $4.84 per option. The weighted average contractual term of options outstanding and exercisable was 6.50 years at June 30, 2014 and 7.50 years at June 30, 2013. The total expense and related tax effect has been fully recorded for these options therefore there is no expense related to this award in 2014. Stock-based compensation expense related to stock options awarded in 2011 for the three and six months ended June 30, 2013, was $3,000 and $6,000 with a related tax benefit of $1,000 and $2,000, 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 7.50 years at June 30, 2014. Stock-based compensation expense related to stock options granted in 2012 for the three and six months ended June 30, 2014, was $30,000 and $60,000 with a related tax benefit of $10,000 and $20,000, respectively. For the three and six months ended June 30, 2013, there was $43,000 and $85,000 with a related tax benefit of $14,000 and $29,000 of stock based compensation expense, respectively. As of June 30, 2014, there was approximately $302,000 of unrecognized compensation cost related to unvested stock options granted in 2012. The cost will be recognized in a straight line method over a period of 2.50 years.

A summary of the status of the Company’s stock options under the two plans as of June 30, 2014 and changes during the three and six months ended June 30, 2014 are presented below.


	For the Three Months Ended June 30, 2014				For the Six Months Ended June 30, 2014
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Options outstanding, beginning of period		279,343	$	12.87		291,343	$	12.87
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeitures		-		-		12,000		12.78
Options outstanding, end of period		279,343	$	12.87		279,343	$	12.87
Exercisable at end of period		199,536	$	13.12		199,536	$	13.12

In 2005, the Bank established a leveraged Employee Stock Ownership Plan (“ESOP”) for full-time employees who satisfy eligibility criteria. The ESOP trust initially purchased 156,399 shares of common stock. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears an interest rate of 6.00% with principal and interest payable annually in equal installments over 15 years. The loan is secured by the shares of the common stock purchased.

In July 2010, the ESOP acquired an additional 91,800 shares of the Company’s common stock with a loan from the Company in the amount of $918,000, at a price of $10.00 per share. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears an interest rate of 4.25% with principal and interest payable annually in equal installments over 10 years. The loan is secured by the shares of the common stock purchased.

As the debt is repaid, shares are released from the collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Statements of Financial Condition. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The compensation expense is recorded on a monthly basis. The Company’s contribution expense for the ESOP was $59,000 and $118,000 for the three and six months ended June 30, 2014 and $69,000 and $135,000 for the three and six months ended June 30, 2013, respectively.

The following table presents the components of the ESOP shares:

	June 30, 2014		June 30, 2013
Shares released for allocation		134,869		114,784
Unreleased shares		113,330		133,415
Total ESOP shares		248,199		248,199

5.	Contingent Liabilities and Guarantees

In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit that are not reflected in the accompanying financial statements. No material losses are anticipated as a result of those transactions on either a completed or uncompleted basis. The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting those commitments. The Company had $2.5 million of standby letters of credit outstanding as of June 30, 2014. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees.

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

6.	Investment Securities

Investment securities are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale:
June 30, 2014
U. S. Government obligations	$	97,299	$	46	$	(1,886	)	$	95,459
Corporate debt obligations		995		7		-			1,002
Mutual fund		3,921		41		-			3,962
Municipal debt obligations		7,171		143		(42	)		7,272
SBA pools		15,564		9		(45	)		15,528
Government-sponsored enterprise (“GSE”) mortgage-backed securities		54,374		836		(101	)		55,109
GSE collateralized mortgage obligations		61,327		224		(1,347	)		60,204
	$	240,651	$	1,306	$	(3,421	)	$	238,536

December 31, 2013
U. S. Government obligations	$	141,836	$	16	$	(5,069	)	$	136,783
Corporate debt obligations		4,493		12		(4	)		4,501
Mutual fund		903		42		-			945
Municipal debt obligations		6,828		35		(144	)		6,719
SBA pools		1,097		-		(4	)		1,093
GSE mortgage-backed securities		14,794		752		(83	)		15,463
GSE collateralized mortgage obligations		64,120		190		(2,688	)		61,622
	$	234,071	$	1,047	$	(7,992	)	$	227,126

Held to Maturity:
December 31, 2013
Corporate debt obligations	$	1,193	$	203	$	-	$	1,396
Municipal debt obligations		15,910		368		-		16,278
GSE mortgage-backed securities		188		20		-		208
	$	17,291	$	591	$	-	$	17,882

The Company had no investment securities classified as held-to-maturity at June 30, 2014.

At March 31, 2014, the Company reclassified its $10.0 million held-to-maturity portfolio as available for sale. The Company made this reclassification to ease the facilitation of security replacement to mitigate interest rate risk and to shift to mortgage related securities. The securities reclassified included: $8.6 million in municipal debt securities with an unrealized gain of $522,000, $1.2 million in corporate debt securities with an unrealized gain of $228,000 and $155,000 in GSE mortgage-backed securities with an unrealized gain of $17,000. In accordance with regulatory and accounting requirements, the Company is prohibited from classifying security purchases as held-to-maturity for a period of two years.

All of the Company’s mortgage-backed securities and collateralized mortgage obligations at June 30, 2014 and December 31, 2013 have been issued by U. S. government agencies or government sponsored enterprises and the collateral is predominantly one- to four-family mortgages.

The amortized cost and estimated fair value of investment securities at June 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	4,421	$	4,463
Due after one year through five years		20,406		20,345
Due after five years through ten years		84,753		83,081
Due thereafter		15,370		15,334
Sub-total		124,950		123,223
GSE mortgage-backed securities and GSE collateralized mortgage obligations		115,701		115,313
Total	$	240,651	$	238,536

At June 30, 2014 and December 31, 2013, $120.1 million and $139.0 million, respectively, of securities were pledged as collateral to secure certain deposits and FHLB advances.

Gross realized gains on available-for-sale securities totaled $714,000 while gross realized losses on available-for-sale securities totaled $218,000, for the six months ended June 30, 2014. There were no gross realized gains or losses on held-to-maturity securities for the six months ended June 30, 2014.

Gross realized gains on available-for-sale securities totaled $710,000 while gross realized losses on available-for-sale securities totaled $218,000, for the three months ended June 30, 2014.

Gross realized gains on available-for-sale securities totaled $1.1 million while gross realized gains on held-to-maturity securities totaled $0, for the six months ended June 30, 2013. There were no gross realized losses on available-for-sale or held-to-maturity securities for the six months ended June 30, 2013.

Gross realized gains on available-for-sale securities totaled $1.0 million while gross realized gains on held-to-maturity securities totaled $0, for the three months ended June 30, 2013. There were no gross realized losses on available-for-sale or held-to-maturity securities for the three months ended June 30, 2013.

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 June 30, 2014	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U. S. government obligations	$	1,988	$	12	$	88,434	$	1,874	$	90,422	$	1,886
Corporate debt obligations		-		-		-		-		-		-
Municipal debt obligations		-		-		2,514		42		2,514		42
SBA pools		3,632		43		866		2		4,498		45
GSE mortgage-backed securities		23,598		84		1,503		17		25,101		101
GSE collateralized mortgage obligations		9,027		175		33,896		1,172		42,923		1,347
Total	$	38,245	$	314	$	127,213	$	3,107	$	165,458	$	3,421

At December 31, 2013	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U. S. government obligations	$	126,055	$	4,590	$	8,006	$	479	$	134,061	$	5,069
Corporate debt obligations		1,497		4		-		-		1,497		4
Municipal debt obligations		3,319		123		565		21		3,884		144
SBA pools		1,093		4		-		-		1,093		4
GSE mortgage-backed securities		1,629		82		33		1		1,662		83
GSE collateralized mortgage obligations		46,346		2,628		781		60		47,127		2,688
Total	$	179,939	$	7,431	$	9,385	$	561	$	189,324	$	7,992

At June 30, 2014, there were 20 securities in the less-than-twelve-month category and 77 securities in the twelve-month-or-more category for the available-for-sale portfolio. Included in the 20 securities in the less-than-twelve-month category are (a) one U.S government obligation, (b) seven collateralized mortgage obligations, (c) one SBA pool, and (d) eleven mortgage-backed securities. Included in the 77 securities in the twelve-month-or-more category are (a) 46 U.S government obligations, (b) 19 collateralized mortgage obligations, (c) two mortgage-backed securities, (d) eight municipal debt obligations and (e) two SBA pools.

At December 31, 2013, there were 120 securities in the less-than-twelve-months category and eight securities in the twelve-months-or-more category for the available-for-sale portfolio. Included in the 120 securities in the less-than-twelve months category for available-for-sale securities are (a) 68 U. S. government securities; (b) two corporate debt obligations of which one has been in a loss position for two months and one has been in a loss position for one month; (c) twelve municipal debt obligations, of which five have been in a loss position for eight months, five have been in a loss position for seven months and two of which had been in a loss position for two months; (d) three SBA pools, two of which have been in a loss position for 10 months and one has been in a loss position for one month; (e) two mortgage-backed securities, one of which has been in a loss position for eight months and one of which has been in a loss position for five months and (f) 33 collateralized mortgage obligations. Included in the eight securities in the twelve-months-or-more category are (a) four U. S. government securities; (b) two municipal debt obligations; (c) one mortgage-backed security and (d) one collateralized mortgage obligation.

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

The Company’s investment in U. S. Government agency securities and SBA loan pools consist of debt obligations of government sponsored enterprises (“GSE”) and pools of loans from the Small Business Administration. All principal and interest payments are current in regards to the investments. The contractual cash flows of these investments are guaranteed by an agency of the United States government. The change in market value is attributable to current interest rate levels relative to the Company’s cost and not credit quality. As the change in market value is attributable to changes in interest rates and not necessarily underlying credit deterioration, and because the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the securities before recovery occurs, the Company does not consider the investments to be other-than-temporarily impaired at June 30, 2014.

The Company’s investment in corporate bonds consists of debt obligations of corporations mostly in the financial sector 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 June 30, 2014.

The Company’s investment in municipal bonds consists of general obligations and revenue obligations of municipalities in the United States and bond anticipation notes of entities located in New Jersey. The change in market value is attributable to the changes in interest rates relative to the Company’s cost and because the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the securities before recovery occurs, the Company does not consider the investments to be other-than-temporarily impaired at June 30, 2014.

The Company’s investment in mortgage-backed securities and collateralized mortgage obligations consists of GSE securities. The change in market value is attributable to changes in interest rates and widening credit spreads, and not due to underlying credit deterioration. The contractual cash flows for the investments are performing as expected. As the change in market value is attributable to changes in interest rates and credit spread and not underlying credit deterioration, and because the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the securities before recovery occurs, the Company does not consider the investments to be other-than-temporarily impaired at June 30, 2014.

7.	Loans and Allowance for Loan Losses

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


	At June 30, 2014						At December 31, 2013
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	153,203			56.0	%	$	149,726			52.9	%
Multi-family		3,317			1.2			284			0.1
Commercial		67,731			24.8			79,601			28.1
Construction and land		9,961			3.6			8,665			3.1
Home equity loans and lines of credit		25,400			9.3			26,442			9.4
Commercial		12,797			4.7			17,302			6.1
Consumer		1,006			0.4			834			0.3
Total loans receivable	$	273,415			100.0	%	$	282,854			100.0	%
Deferred loan fees		(696	)					(847	)
Allowance for loan losses		(5,064	)					(5,853	)
Total loans receivable, net	$	267,655					$	276,154

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

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

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

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

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

When a loan is more than 10 days delinquent, we generally send a computer-generated notice of delinquency to the borrower to remit the delinquent payment or contact the Bank. When the computer-generated notice does not cause the loan to be brought current, a telephone call is the next step in the process. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. By the 36th day of delinquency, good faith efforts to establish live contact with the borrower is made to inform them that loss mitigation options may be available. In addition, written notice with information about loss mitigation options is provided to the borrower by the 45th day of delinquency. If payment is not received within 60 days of the due date, we accelerate loans and demand payment in full. Failure to pay within 90 days of the original due date may result in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are charged-off 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 six months ended June 30, 2014 (in thousands):


	Real Estate
	One-to four- family			Multi- family		Commer- cial			Con- struction and land			Home equity and credit lines			Commer- cial			Con- sumer			Unallo- cated		Total
Allowance for loan losses for the three months ended June 30, 2014:
Beginning balance	$	1,562		$	3	$	1,112		$	90		$	387		$	1,005		$	28		$	750	$	4,937
Charge-offs		(91	)		-		(26	)		-			(82	)		(990	)		-			-		(1,189	)
Recoveries		58			-		903			-			-			354			1			-		1,316
Provision		(259	)		37		(1,465	)		15			(25	)		656			(9	)		1,050		-
Ending balance	$	1,270		$	40	$	524		$	105		$	280		$	1,025		$	20		$	1,800	$	5,064

Allowance for loan losses for the six months ended June 30, 2014:
Beginning balance	$	1,650		$	3	$	1,222		$	90		$	275		$	1,843		$	20		$	750	$	5,853
Charge-offs		(191	)		-		(145	)		(76	)		(100	)		(2,287	)		-			-		(2,799	)
Recoveries		64			-		903			-			-			441			54			-		1,462
Provision		(253	)		37		(1,456	)		91			105			1,028			(54	)		1,050		548
Ending balance	$	1,270		$	40	$	524		$	105		$	280		$	1,025		$	20		$	1,800	$	5,064

Allowance ending balance:
Related to loans individually evaluated for impairment	$	278		$	-	$	8		$	-		$	41		$	-		$	-		$	-	$	327
Related to loans collectively evaluated for impairment		992			40		516			105			239			1,025			20			1,800		4,737
Total balance	$	1,270		$	40	$	524		$	105		$	280		$	1,025		$	20		$	1,800	$	5,064

Loans receivable:
individually evaluated for impairment	$	9,050		$	-	$	6,294		$	3,139		$	1,066		$	1,133		$	-		$	-	$	20,682
collectively evaluated for impairment		144,153			3,317		61,437			6,822			24,334			11,664			1,006			-		252,733
Ending balance	$	153,203		$	3,317	$	67,731		$	9,961		$	25,400		$	12,797		$	1,006		$	-	$	273,415

The following table sets forth the activity in the allowance for loan losses by portfolio class for the three and six months ended June 30, 2013 (in thousands):


	Real Estate
												Home
												equity
	One-to								Con-			and
	four-			Multi-		Commer-			struction			credit			Commer-			Con-			Unallo-
	family			family		cial			and land			lines			cial			sumer			cated		Total
Allowance for loan losses for the three months ended June 30, 2013:
Beginning balance	$	1,287		$	13	$	317		$	90		$	220		$	627		$	25		$	1,500	$	4,079
Charge-offs		(159	)		-		(947	)		-			(58	)		(1,007	)		(3	)		-		(2,174	)
Recoveries		-			-		-			33			-			-			-			-		33
Provision		233			2		1,290			(18	)		77			1,083			-			-		2,667
Ending balance	$	1,361		$	15	$	660		$	105		$	239		$	703		$	22		$	1,500	$	4,605

Allowance for loan losses for the six months ended June 30, 2013:
Beginning balance	$	692		$	6	$	1,107		$	138		$	277		$	405		$	21		$	1,500	$	4,146
Charge-offs		(159	)		-		(947	)		(37	)		(151	)		(1,007	)		(7	)		-		(2,308	)
Recoveries		-			-		-			54			-			-			4			-		58
Provision		828			9		500			(50	)		113			1,305			4			-		2,709
Ending balance	$	1,361		$	15	$	660		$	105		$	239		$	703		$	22		$	1,500	$	4,605

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


	Real Estate
									Home
									equity
	One- to						Con-		and
	four-		Multi-		Commer-		struction		credit		Commer-		Con-		Unallo-
	family		family		cial		and land		lines		cial		sumer		cated		Total
Allowance ending balance:
Related to loans individually evaluated for impairment	$	210	$	-	$	9	$	-	$	8	$	1,550	$	-	$	-	$	1,777
Related to loans collectively evaluated for impairment		1,440		3		1,213		90		267		293		20		750		4,076
Total allowance	$	1,650	$	3	$	1,222	$	90	$	275	$	1,843	$	20	$	750	$	5,853

Loans receivable:
Individually evaluated for impairment	$	8,933	$	-	$	9,452	$	3,323	$	778	$	2,784	$	-	$	-	$	25,270
Collectively evaluated for impairment		140,793		284		70,149		5,342		25,664		14,518		834		-		257,584
Ending balance	$	149,726	$	284	$	79,601	$	8,665	$	26,442	$	17,302	$	834	$	-	$	282,854

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 June 30, 2014 and December 31, 2013:


June 30, 2014	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Real estate loans:
One- to four-family	$	135,649	$	8,774	$	1,552	$	7,228	$	-	$	153,203
Multi-family		3,038		279		-		-		-		3,317
Commercial		49,161		10,910		929		6,731		-		67,731
Construction and land		5,719		716		-		3,526		-		9,961
Home equity and credit lines		23,275		733		104		1,288		-		25,400
Commercial		11,004		660		-		1,133		-		12,797
Consumer		819		99		88		-		-		1,006
Total	$	228,665	$	22,171	$	2,673	$	19,906	$	-	$	273,415

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

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

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

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


	June 30, 2014						December 31, 2013
(Dollars in thousands)	Recorded investment		Unpaid Principal Balance		Related Allowance		Recorded investment		Unpaid Principal Balance		Related Allowance

With an allowance recorded:
Real estate loans:
One- to four-family	$	3,400	$	3,661	$	278	$	2,728	$	2,870	$	210
Multi-family		-		-		-		-		-		-
Commercial		169		169		8		66		66		9
Construction and land		-		-		-		-		-		-
Home equity and credit lines		165		173		41		60		61		8
Commercial		-		-		-		2,784		3,178		1,550
Consumer		-		-		-		-		-		-
	$	3,734	$	4,003	$	327	$	5,638	$	6,175	$	1,777

With no related allowance recorded:
Real estate loans:
One- to four-family	$	5,650	$	6,846	$	-	$	6,205	$	7,297	$	-
Multi-family		-		-		-		-		-		-
Commercial		6,125		7,240		-		9,386		12,709		-
Construction and land		3,139		3,216		-		3,323		3,325		-
Home equity and credit lines		901		1,123		-		718		946		-
Commercial		1,133		2,679		-		-		-		-
Consumer		-		-		-		-		3		-
	$	16,948	$	21,104	$	-	$	19,632	$	24,280	$	-

Total
Real estate loans:
One- to four-family	$	9,050	$	10,507	$	278	$	8,933	$	10,167	$	210
Multi-family		-		-		-		-		-		-
Commercial		6,294		7,409		8		9,452		12,775		9
Construction and land		3,139		3,216		-		3,323		3,325		-
Home equity and credit lines		1,066		1,296		41		778		1,007		8
Commercial		1,133		2,679		-		2,784		3,178		1,550
Consumer		-		-		-		-		3		-
	$	20,682	$	25,107	$	327	$	25,270	$	30,455	$	1,777

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


For the Six Months Ended:	June 30, 2014				June 30, 2013
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized While Impaired		Average Recorded Investment		Interest Income Recognized While Impaired

With an allowance recorded:
Real estate loans:
One-to four-family	$	3,340	$	37	$	2,263	$	30
Multi-family		-		-		-		-
Commercial		171		3		179		2
Construction and land		-		-		-		-
Home equity and credit lines		152		1		46		-
Commercial		-		46		55		-
Consumer		-		-		-		-
	$	3,663	$	87	$	2,543	$	32

With no related allowance recorded:
Real estate loans:
One-to four-family	$	5,960	$	84	$	6,468	$	94
Multi-family		-		-		-		-
Commercial		6,290		82		12,027		164
Construction and land		3,172		24		3,806		25
Home equity and credit lines		963		7		665		11
Commercial		1,498		19		4,710		28
Consumer		-		-		2		-
	$	17,883	$	216	$	27,678	$	322

Total
Real estate loans:
One-to four-family	$	9,300	$	121	$	8,731	$	124
Multi-family		-		-		-		-
Commercial		6,461		85		12,206		166
Construction and land		3,172		24		3,806		25
Home equity and credit lines		1,115		8		711		11
Commercial		1,498		65		4,765		28
Consumer		-		-		2		-
	$	21,546	$	303	$	30,221	$	354

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 $291,000 and $269,000 for the six months ended June 30, 2014 and 2013, respectively.

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


For the Three Months Ended:	June 30, 2014				June 30, 2013
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized While Impaired		Average Recorded Investment		Interest Income Recognized While Impaired

With an allowance recorded:
Real estate loans:
One-to four-family	$	3,465	$	18	$	2,254	$	17
Multi-family		-		-		-		-
Commercial		170		2		178		2
Construction and land		-		-		-		-
Home equity and credit lines		163		-		46		-
Commercial		-		-		109		-
Consumer		-		-		-		-
	$	3,798	$	20	$	2,587	$	19

With no related allowance recorded:
Real estate loans:
One-to four-family	$	5,942	$	23	$	6,454	$	37
Multi-family		-		-		-		-
Commercial		6,281		25		11,982		139
Construction and land		3,152		12		3,763		13
Home equity and credit lines		972		-		661		1
Commercial		1,486		-		4,651		27
Consumer		-		-		2		-
	$	17,833	$	60	$	27,513	$	217

Total
Real estate loans:
One-to four-family	$	9,407	$	41	$	8,708	$	54
Multi-family		-		-		-		-
Commercial		6,451		27		12,160		141
Construction and land		3,152		12		3,763		13
Home equity and credit lines		1,135		-		707		1
Commercial		1,486		-		4,760		27
Consumer		-		-		2		-
	$	21,631	$	80	$	30,100	$	236

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 $175,000 and $131,000 for the three months ended June 30, 2014 and 2013, respectively.

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


	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
	(In thousands)
At June 30, 2014
Real estate loans:
One- to four-family	$	78	$	1,213	$	3,646	$	4,937	$	148,266	$	153,203	$	-
Multi-family		-		-		-		-		3,317		3,317		-
Commercial		-		-		3,750		3,750		63,981		67,731		-
Construction and land		138		-		-		138		9,823		9,961		-
Home equity loans and lines of credit		193		-		568		761		24,639		25,400		-
Commercial		1,138		-		106		1,244		11,553		12,797		-
Consumer and other		1		-		-		1		1,005		1,006		-
Total	$	1,548	$	1,213	$	8,070	$	10,831	$	262,584	$	273,415	$	-


	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
	(In thousands)
At December 31, 2013
Real estate loans:
One- to four-family	$	3,393	$	2,422	$	3,399	$	9,214	$	140,512	$	149,726	$	-
Multi-family		-		-		-		-		284		284		-
Commercial		62		403		1,054		1,519		78,082		79,601		-
Construction and land		-		-		-		-		8,665		8,665		-
Home equity loans and lines of credit		356		15		464		835		25,607		26,442		-
Commercial		-		340		-		340		16,962		17,302		-
Consumer and other		-		-		-		-		834		834		-
Total	$	3,811	$	3,180	$	4,917	$	11,908	$	270,946	$	282,854	$	-

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

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


	June 30, 2014			December 31, 2013
	(In thousands)
Non-accrual loans:
Real estate loans:
One- to four-family	$	5,266		$	5,162
Multi-family		-			-
Commercial		4,129			5,215
Construction and land		1,079			1,233
Home equity loans and lines of credit		989			715
Commercial		1,133			1,235
Consumer		-			-
Total non-accrual loans		12,596			13,560

Accruing loans 90 days or more past due:
All loans	$	-		$	-
Total non-performing loans	$	12,596		$	13,560
Real estate owned		3,182			3,258
Total non-performing assets	$	15,778		$	16,818

Ratios:
Total non-performing loans to total loans		4.61	%		4.79	%
Total non-performing loans to total assets		2.29	%		2.33	%
Total non-performing assets to total assets		2.87	%		2.88	%

At June 30, 2014, the nonaccrual loans consisted of 45 one- to four-family real estate loans, seven commercial real estate loans, two construction and land loans, 17 home equity loans, and two commercial loans. Included in nonaccrual loans are 15 troubled debt restructurings in the amount of $6.4 million. The Company had 16 properties in real estate owned totaling $3.2 million consisting of seven one- to four-family dwelling units, three non-residential properties and six parcels which had secured construction and land loans. Included in real estate owned at June 30, 2014 are three possible branch locations in the amount of $2.4 million that were transferred from office properties and equipment during 2012.

At June 30, 2014, in addition to the troubled debt restructurings included in the non-accrual loan totals, the Company had 26 loans totaling $7.9 million that were considered troubled debt restructurings and classified as impaired. Twenty-two of the troubled debt restructurings (TDRs) are one- to four-family real estate loans with a net loan balance of $3.6 million, two of the TDRs are commercial real estate with a net loan balance of $2.2 million, one of the TDRs is a construction and land loan with a net loan balance of $2.1 million, and one of the TDRs is a home equity loan with a net loan balance of $45,000.

There were no troubled debt restructurings for the three months ended June 30, 2014. The following table summarizes information in regards to troubled debt restructurings for the three months ended June 30, 2013:

June 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	2	$	282	$	282
Total	2	$	282	$	282

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

The following tables summarize information in regards to troubled debt restructurings for the six months ended June 30, 2014 and 2013:


June 30, 2014	Number of Contracts	Pre-Modification Outstanding Recorded Investments			Post-Modification Outstanding Recorded Investments
	(Dollars in thousands)
Real estate loans:
One- to four-family	1	$	143	��	$	143
Total	1	$	143		$	143

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

All of the troubled debt that was restructured during the six months ended June 30, 2014 and 2013 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 June 30, 2014 (of which there were none) and June 30, 2013:

That Subsequently Defaulted For the Three Months Ended June 30, 2013	Number of contracts		Recorded Investment
	(Dollars in thousands)
One-to-four family		1	$	111
Total		1	$	111

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 six months ended June 30, 2014 (of which there were none) and June 30, 2013:

That Subsequently Defaulted For the Six Months Ended June 30, 2013	Number of contracts		Recorded Investment
	(Dollars in thousands)
One-to-four family		1	$	111
Commercial		2		2,982
Total		3	$	3,093

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.

Deposits

Deposit accounts, by type, at June 30, 2014 and December 31, 2013 are summarized as follows:


	At June 30, 2014						At December 31, 2013
	Balance		Percent		Wtd. Avg. Rate		Balance		Percent		Wtd. Avg. Rate
	(Dollars in thousands)

Deposit type:
Non-interest bearing demand	$	50,312	10.58	%	-	%	$	42,739	8.19	%	-	%
Savings		86,170	18.12		0.33			111,219	21.31		0.56
NOW accounts		141,420	29.74		0.41			152,279	29.17		0.42
Super NOW accounts		38,224	8.04		0.26			43,740	8.38		0.35
Money market deposit		56,088	11.79		0.30			63,811	12.22		0.40

Total transaction accounts		372,214	78.27		0.30			413,788	79.27		0.40

Certificates of deposit		103,362	21.73		1.43			108,239	20.73		1.45

Total deposits	$	475,576	100.00	%	0.55	%	$	522,027	100.00	%	0.62	%

9.	Federal Home Loan Bank Borrowings

The following table sets forth information concerning advances from the Federal Home Loan Bank (“FHLB”) of New York, at June 30, 2014 and December 31, 2013:

Maturity	Interest Rate		June 30, 2014		December 31, 2013
			(Dollars in thousands)
July 1, 2014	0.38	%	$	9,770	$	-
			$	9,770	$	-

At June 30, 2014, the Bank had a borrowing capacity of 30% of assets, or $165.2 million, available from the FHLB of New York, of which $9.8 million was outstanding.

10.	Fair Value Measurements

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

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 June 30, 2014 and December 31, 2013 are as follows:

	June 30, 2014		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
U. S. Government obligations	$	95,459	$	-	$	95,459	$	-
Corporate debt obligations		1,002		-		1,002		-
Mutual fund		3,962		3,962		-		-
Municipal debt obligations		7,272		-		7,272		-
SBA pools		15,528		-		15,528		-
GSE mortgage-backed securities		55,109		-		55,109		-
GSE collateralized mortgage obligations		60,204		-		60,204		-
Total investment securities available-for-sale	$	238,536	$	3,962	$	234,574	$	-

	December 31, 2013		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
U. S. Government obligations	$	136,783	$	-	$	136,783	$	-
Corporate debt obligations		4,501		-		4,501		-
Mutual fund		945		945		-		-
Municipal debt obligations		6,719		-		6,719		-
SBA pools		1,093		-		1,093		-
GSE mortgage-backed securities		15,463		-		15,463		-
GSE collateralized mortgage obligations		61,622		-		61,622		-
Total investment securities available-for-sale	$	227,126	$	945	$	226,181	$	-

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2014 and December 31, 2013 are as follows:


	June 30, 2014		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
		(In thousands)
Impaired loans	$	12,683	$	-	$	-	$	12,683
Real estate owned	$	3,182	$	-	$	-	$	3,182

	December 31, 2013		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Observable Other Inputs		(Level 3) Significant Unobservable Inputs
		(In thousands)
Impaired loans	$	13,531	$	-	$	-	$	13,531
Real estate owned	$	2,600	$	-	$	-	$	2,600

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value at June 30, 2014:

Quantitative Information About Level 3 Fair Value Measurements

Description

Fair Value Estimate

Valuation

Techniques

Unobservable

Input

Range (Weighted Average)

(In thousands)

Impaired loans

12,683

Appraisal of
collateral (1)

Liquidation
expenses (2)

-10.0% to -35.0% (-30.0%)

Real estate owned

3,182

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.

Quantitative Information About Level 3 Fair Value Measurements

Description

Fair Value Estimate

Valuation
Techniques

Unobservable
Input

Range (Weighted Average)

(In thousands)

Impaired loans

13,531

Appraisal of
collateral (1)

Liquidation
expenses (2)

-10.0% to -35.0% (-30.0%)

Real estate owned

2,600

Appraisal of
collateral (1)

Liquidation
expenses (2)

-10.0% to -25.0% (-15.0%)

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

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

The following methods and assumptions were used to estimate the fair values of certain Company assets and liabilities at June 30, 2014 and December 31, 2013:

Cash and Amounts Due From Banks (Carried at Cost)

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

Investment Securities

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

Loans Receivable (Carried at Cost)

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

Impaired Loans (Generally Carried at Fair Value)

Impaired loans are those in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. At June 30, 2014 and December 31, 2013, the fair value consists of loan balances of $3.7 million and $5.6 million, respectively, net of valuation allowances of $327,000 and $1.8 million, respectively, and loan balances of $12.9 million and $14.0 million, respectively, net of partial charge-offs of $3.7 million and $4.3 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 financial assets and liabilities at June 30, 2014 and December 31, 2013 are as follows:


	June 30, 2014
	Carrying amount		Level 1		Level 2		Level 3		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and amounts due from banks	$	7,038	$	7,038	$	-	$	-	$	7,038
Investment securities available-for- sale		238,536		3,962		234,574		-		238,536
Federal Home Loan Bank stock		1,110		1,110		-		-		1,110
Loans receivable, net		267,655		-		-		267,303		267,303
Accrued interest receivable		1,375		-		1,375		-		1,375

Financial liabilities:
Deposits		475,576		-		477,296		-		477,296
Federal Home Loan Bank short-term borrowings		9,770				9,770				9,770
Accrued interest payable		12		-		12		-		12

Off-balance sheet financial instruments:
Commitments to extend credit and letters of credit		-		-		-		-		-

	December 31, 2013
	Carrying amount		Level 1		Level 2		Level 3		Estimated Fair Value
	(In thousands)
Financial assets:
Cash and amounts due from banks	$	23,404	$	23,404	$	-	$	-	$	23,404
Investment securities available-for-sale		227,126		945		226,181		-		227,126
Corporate debt obligations held-to-maturity		1,193		-		1,396		-		1,396
Municipal debt obligations held-to-maturity		15,910		-		16,278		-		16,278
GSE mortgage-backed securities held-to-maturity		188		-		208		-		208
Federal Home Loan Bank stock		702		702		-		-		702
Loans receivable, net		276,154		-		-		276,861		276,861
Accrued interest receivable		1,530		-		1,530		-		1,530

Financial liabilities:
Deposits		522,027		-		524,104		-		524,104
Accrued interest payable		16		-		16		-		16

Off-balance sheet financial instruments:
Commitments to extend credit and letters of credit		-		-		-		-		-

11.	Regulatory Matters and Capital Requirements

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

On May 30, 2013, the Bank was notified by the OCC that it established minimum capital ratios for the Bank requiring it to maintain a Tier 1 capital to adjusted total assets ratio of 9.50%, a Tier 1 capital to risk-weighted assets ratio of 11.00%, and a Total risk-based capital to risk-weighted assets ratio of 13.00%. As of June 30, 2014, the Bank’s ratios for these items were 10.53%, 21.74% and 23.00%, 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, the quality and composition of our loan or investment portfolios, demand for our loan products, deposit flows, competitive products and pricing, demand for financial services in our market area, changes in real estate values in our area, and changes in relevant accounting principles and guidelines. Additional factors that could affect our results may be discussed in our Form 10-K for the year ended December 31, 2013 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, loan volumes and concentrations, seasoning of the loan portfolio, loss experience, and duration of the current business cycle. The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.

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 into (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). For equity securities, the full amount of the other-than-temporary impairment is recognized in earnings.

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

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

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

Total assets decreased $32.5 million, or 5.6%, to $550.7 million at June 30, 2014, from $583.2 million at December 31, 2013. The decrease was mainly the result of decreases in cash and amounts due from banks, investment securities held-to-maturity, and net loans receivable offset by an increase in investment securities available-for-sale.

Net loans receivable decreased $8.5 million, or 3.1%, to $267.7 million at June 30, 2014 from $276.2 million at December 31, 2013. One- to four-family residential real estate loans increased $3.5 million to $153.2 million at June 30, 2014 from $149.7 at December 31, 2013. Commercial real estate loans decreased $11.9 million to $67.7 million at June 30, 2014 from $79.6 million at December 31, 2013. Construction and land loans increased $1.3 million to $10.0 million at June 30, 2014 from $8.7 million at December 31, 2013. Home equity loans and lines of credit decreased $1.0 million to $25.4 million at June 30, 2014 from $26.4 million at December 31, 2013. Commercial loans decreased by $4.5 million to $12.8 million at June 30, 2014 from $17.3 million at December 31, 2013. Included in the net loans receivable are nonaccrual loans which decreased to $12.6 million at June 30, 2014 from $13.6 million at December 31, 2013.

Real estate owned decreased to $3.2 million at June 30, 2014 from $3.3 million at December 31, 2013. We currently hold through the foreclosure process or deed-in-lieu of foreclosure 16 properties, seven of which are residential one- to four-family properties, three of which are nonresidential properties and six 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 $11.4 million, or 5.0%, to $238.5 million at June 30, 2014 from $227.1 at December 31, 2013. This increase was the result of purchases in the amount of $62.9 million and transfers from the held-to-maturity portfolio in the amount of $10.0 million and a market value increase of $4.8 million offset by calls, maturities and sales in the amount of $58.0 million and $8.1 million in principal amortization. Securities held-to-maturity decreased by $17.3 million as the held-to-maturity portfolio was transferred to the available-for-sale portfolio.

Deposits decreased $46.4 million, or 8.9%, to $475.6 million at June 30, 2014 from $522.0 million at December 31, 2013. NOW accounts decreased $10.9 million, or 7.1%, to $141.4 million at June 30, 2014 from $152.3 million at December 31, 2013. Savings accounts decreased $25.0 million to $86.2 million at June 30, 2014 from $111.2 million at December 31, 2013. Super NOW accounts decreased by $5.5 million to $38.2 million at June 30, 2014 from $43.7 million at December 31, 2013. Non-interest bearing demand accounts increased by $7.6 million to $50.3 million at June 30, 2014 from $42.7 million at December 31, 2013. Certificates of deposit decreased by $4.9 million to $103.4 million at June 30, 2014 from $108.2 million at December 31, 2013. 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 $9.8 million at June 30, 2014. There were no Federal Home Loan Bank borrowings outstanding at December 31, 2013.

Total stockholders’ equity increased $3.9 million to $63.1 million at June 30, 2014 from $59.2 million at December 31, 2013. This increase was mainly attributable to net income of $586,000 and an increase in the market value of available for sale securities of $3.2 million.

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

General. We experienced net income of $553,000 for the three months ended June 30, 2014 compared to a net loss of $980,000 for the three months ended June 30, 2013. The principal reasons for the increase in net income were a decrease in the provision for loan losses in the amount of $2.7 million and a decrease in total non-interest expense of $615,000, offset by a decrease in net interest income of $341,000, a decrease in non-interest income of $486,000 and an increase in income tax expense of $922,000.

Interest Income. Interest income decreased $718,000 to $3.9 million for the three months ended June 30, 2014 from $4.6 million for the three months ended June 30, 2013. The decrease in interest income resulted from a decrease of $372,000 in interest income on loans and a decrease of $346,000 in interest income on securities.

Interest income on loans decreased $372,000 to $3.0 million for the three months ended June 30, 2014 from $3.4 million for the three months ended June 30, 2013. This decrease was caused by a decrease in the average yield on loans to 4.48% for the three months ended June 30, 2014 from 4.58% for the three months ended June 30, 2013 along with a decrease in the average balance of loans of $26.5 million to $269.5 million for the three months ended June 30, 2014 from $296.0 million for the three months ended June 30, 2013.

Interest income on securities decreased by $346,000 to $862,000 for the three months ended June 30, 2014 from $1.2 million for the three months ended June 30, 2013. The decrease in interest income on securities was due to a decrease in the average balance of taxable and tax-exempt securities to $235.5 million for the three months ended June 30, 2014 from $292.2 million for the three months ended June 30, 2013 along with a decrease in the average yield of 19 basis points to 1.46% from 1.65% for the three months ended June 30, 2014 and 2013. The yields on tax-exempt securities are not tax-affected.

Interest Expense. Interest expense decreased $377,000 to $668,000 for the three months ended June 30, 2014 from $1.1 million for the three months ended June 30, 2013.

Interest expense on interest-bearing deposits decreased by $367,000 to $666,000 for the three months ended June 30, 2014 from $1.1 million for the three months ended June 30, 2013. The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 0.60% for the three months ended June 30, 2014 from 0.82% for the three months ended June 30, 2013, and a decrease in the average balance of interest-bearing deposits to $442.6 million for the three months ended June 30, 2014 from $506.7 million for the three months ended June 30, 2013. We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended June 30, 2014, reflecting lower market rates.

Interest expense on borrowings decreased $10,000 to $2,000 for the three months ended June 30, 2014 from $12,000 for the three months ended June 30, 2013. This decrease was primarily due to a $10.2 million decrease in the average balance of borrowings to $2.5 million for the three months ended June 30, 2014 from $12.7 million for the three months ended June 30, 2013 offset by an increase in the average rate paid on borrowings to 0.38% for the three months ended June 30, 2014 from 0.37% for the three months ended June 30, 2013.

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 June 30, 2014, the Company charged off $1.2 million in loans, which included $91,000 on one- to four-family real estate loans, $26,000 on commercial real estate loans, $82,000 on home equity and lines of credit, and $990,000 on commercial loans. As part of the Bank’s loan collection process, we re-appraise loans that are 90 days delinquent or impaired. The reasons for the charge-offs in the three months ended June 30, 2014 were the cash flow analysis that we completed on non-collateral based impaired loans and the reduced appraisals that we received on collateral-based impaired loans we were monitoring. The charge-offs during this quarter are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan. The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

During the three months ended June 30, 2013, the Company charged off $2.2 million in loans, which included $159,000 on one- to four-family real estate loans, $947,000 on commercial real estate loans, $57,000 on home equity and lines of credit, $1.0 million on commercial loans, and $3,000 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 three months ended June 30, 2013 were partially due to the reduced appraisals that we received on the impaired loans we were monitoring. The charge-offs during this quarter are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan. The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

Based on our evaluation of the above factors, we did not record a provision for loan losses for the three months ended June 30, 2014 and we recorded a provision for loan losses of $2.7 million for the three months ended June 30, 2013. The allowance for loan losses was $5.1 million, or 1.85% of total loans, at June 30, 2014, compared to $4.6 million, or 1.54% of total loans, at June 30, 2013. Our balance of loans we evaluated individually for impairment was $20.7 million at June 30, 2014 and $25.3 million at December 31, 2013. At June 30, 2014, December 31, 2013 and June 30, 2013, we maintained unallocated allowances for loan losses of $1.8 million, $750,000 and $1.5 million respectively. The main reason for the increase in the unallocated portion of the allowance for loan losses is the amount of recoveries we received on loans that were previously charged off against earnings. The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio, as well as a Company-specific, industry-wide reluctance and a regulatory reluctance to reduce allowances at this time. The Company believes that the amount of provision in 2014 and the resulting allowance at June 30, 2014, are appropriate given the continuing level of risk in the loan portfolio, including the overall level of non-performing loans.

To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate at June 30, 2014 and 2013. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio (including residential and commercial real estate loans) could result in material increases in our provisions for loan losses.

Non-interest Income. Non-interest income was $900,000 for the three months ended June 30, 2014 and $1.4 million for the three months ended June 30, 2013. For the three months ended June 30, 2014, there was a net gain on the sale and call of investment securities in the amount of $492,000 compared to a net gain of $1.0 million for the three months ended June 30, 2013. For the three months ended June 30, 2014, there were $47.8 million in available-for-sale securities sold and for the three months ended June 30, 2013, there were $25.1 million in available-for-sale securities sold. Fees and service charges on deposit accounts increased by $42,000 to $295,000 for the three months ended June 30, 2014 from $253,000 for the three months ended June 30, 2013. Earnings on bank owned life insurance totaled $106,000 for the three months ended June 30, 2014 and $111,000 for the three months ended June 30, 2013.

Non-interest Expense. Non-interest expense decreased $615,000 to $3.2 million for the three months ended June 30, 2014 from $3.9 million for the three months ended June 30, 2013. Compensation and benefits expense decreased by $199,000 to $1.4 million for the three months ended June 30, 2014 compared to $1.6 million for the three months ended June 30, 2013. The decrease in compensation and benefit expense was due to the elimination of director fees for the three months ended June 30, 2014 as the director’s suspended payment of their fees. The decline was also due to reduced employee hours as branch staffing was matched to customer activity for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, and reduced ESOP and stock-based compensation expense. Occupancy and equipment expense increased $9,000 to $389,000 for the three months ended June 30, 2014 from $380,000 for the three months ended June 30, 2013. Federal deposit insurance premiums decreased $17,000 to $175,000 for the three months ended June 30, 2014 from $192,000 for the three months ended June 30, 2013. The decrease in federal deposit insurance premiums was due to reduced deposit balances. Data processing fees increased by $21,000 to $269,000 for the three months ended June 30, 2014 from $248,000 for the three months ended June 30, 2013. Professional fees decreased $113,000 due to decreased costs associated with loan collection, regulatory consulting and strategic planning services. Net real estate owned expense decreased $247,000 to $300,000 for the three months ended June 30, 2014 from $547,000 for the three months ended June 30, 2013. This decrease was due to reduced write-downs on REO properties and reduced REO expenses offset by a loss in the amount of $71,000 on real estate owned sold for the three months ended June 30, 2014 compared to a gain in the amount of $21,000 on real estate owned sold for the three months ended June 30, 2013.

Income Tax Expense/Benefit. We recorded income tax expense of $326,000 for the three months ended June 30, 2014, compared to an income tax benefit of $596,000 for the three months ended June 30, 2013. The effective tax rates for the three months ended June 30, 2014 and 2013 were 37.0% and (37.8%), respectively.

Comparison of Operating Results for the Six Months Ended June 30, 2014 and June 30, 2013

General. We experienced net income of $586,000 for the six months ended June 30, 2014 compared to a net loss of $483,000 for the six months ended June 30, 2013. The principal reasons for the increase in net income were a decrease in the provision for loan losses in the amount of $2.1 million and a decrease in total non-interest expense of $744,000 offset by a decrease in net interest income of $553,000, a decrease in total non-interest income of $603,000 and an increase in income tax expense of $680,000.

Interest Income. Interest income decreased $1.3 million to $8.0 million for the six months ended June 30, 2014 from $9.3 million for the six months ended June 30, 2013. The decrease in interest income resulted from a decrease of $871,000 in interest income on loans and a decrease of $450,000 in interest income on securities.

Interest income on loans decreased $871,000 to $6.1 million for the six months ended June 30, 2014 from $7.0 million for the six months ended June 30, 2013. The average balance of loans decreased $24.2 million to $271.8 million for the six months ended June 30, 2014 from $296.0 million for the six months ended June 30, 2013 along with a decrease in the average yield to 4.49% for the six months ended June 30, 2014 from 4.72% for the six months ended June 30, 2013.

Interest income on securities decreased by $450,000 to $1.9 million for the six months ended June 30, 2014 from $2.3 million for the six months ended June 30, 2013. The decrease in interest income on securities was due to a decrease in the average yield on taxable and tax-exempt securities of 10 basis points to 1.57% for the six months ended June 30, 2014 from 1.67% for the six months ended June 30, 2013 along with a decrease in the average balance of taxable and tax-exempt securities to $239.5 million for the six months ended June 30, 2014 from $279.9 million for the six months ended June 30, 2013. The yields on tax-exempt securities are not tax-affected.

Interest Expense. Interest expense decreased $768,000 to $1.4 million for the six months ended June 30, 2014 from $2.1 million for the six months ended June 30, 2013.

Interest expense on interest-bearing deposits decreased by $764,000 to $1.3 million for the six months ended June 30, 2014 from $2.1 million for the six months ended June 30, 2013. The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 0.60% for the six months ended June 30, 2014 from 0.83% for the six months ended June 30, 2013 along with a decrease in the average balance of interest-bearing deposits to $447.5 million for the six months ended June 30, 2014 from $511.1 million for the six months ended June 30, 2013. We experienced decreases in the average balances of savings accounts and certificates of deposit and increases in NOW and Super-NOW and money market accounts. We experienced decreases in the average cost across all categories of interest-bearing deposits for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Interest expense on borrowings decreased $4,000 to $8,000 for the six months ended June 30, 2014 from $12,000 for the six months ended June 30, 2013. This decrease was primarily due to a $2.3 million decrease in the average balance of borrowings to $4.3 million for the six months ended June 30, 2014 from $6.5 million for the six months ended June 30, 2013, offset by an increase in the average rate paid on borrowings to 0.38% for the six months ended June 30, 2014 from .37% for the six months ended June 30, 2013.

During the six months ended June 30, 2014, the Company charged off $2.8 million in loans, which included $191,000 on one- to four-family loans, $145,000 on commercial real estate loans, $76,000 on construction and land loans, $100,000 on home equity and lines of credit and $2.3 million on commercial loans. As part of the Bank’s loan collection process, we re-appraise loans that are delinquent or impaired. The reasons for the charge-offs in the six months ended June 30, 2014 were the cash flow analysis that we completed on non-collateral based impaired loans and the reduced appraisals that we received on collateral-based impaired loans we were monitoring. The charge-offs during this period are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan. The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

During the six months ended June 30, 2013, the Company charged off $2.3 million in loans, which included $159,000 on one- to four-family loans, $947,000 on commercial real estate loans, $37,000 on construction and land loans, $150,000 on home equity and lines of credit, $1.0 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 six months ended June 30, 2013 were the reduced appraisals that we received on impaired loans we were monitoring. The charge-offs during this period are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan. The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

Based on our evaluation of the above factors, we recorded a provision for loan losses of $548,000 for the six months ended June 30, 2014 and a provision for loan losses of $2.7 million for the six months ended June 30, 2013. The allowance for loan losses was $5.1 million, or 1.85% of total loans, at June 30, 2014, compared to $4.6 million, or 1.54% of total loans, at June 30, 2013. Our balance of loans we evaluated individually for impairment was $20.7 million at June 30, 2014 and $25.3 million at December 31, 2013. At June 30, 2014, December 31, 2013 and June 30, 2013, we maintained unallocated allowances for loan losses of $1.8 million, $750,000 and $1.5 million respectively. The main reason for the increase in the unallocated portion of the allowance for loan losses is the amount of recoveries we received on loans that were previously charged off against earnings. The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio, as well as a Company-specific, industry-wide reluctance and a regulatory reluctance to reduce allowances at this time. The Company believes that the amount of provision in 2014 and the resulting allowance at June 30, 2014, are appropriate given the continuing level of risk in the loan portfolio, including the overall level of non-performing loans.

Non-interest Income. Non-interest income was $1.3 million for the six months ended June 30, 2014 and $1.9 million for the six months ended June 30, 2013. Fees and service charges on deposit accounts decreased by $34,000 to $567,000 for the six months ended June 30, 2014 from $601,000 for the six months ended June 30, 2013. For the six months ended June 30, 2014, there was a net gain on the sale and call of investment securities in the amount of $496,000 compared to a net gain of $1.1 million for the six months ended June 30, 2013. Earnings on bank owned life insurance totaled $211,000 for the six months ended June 30, 2014 and $218,000 for the six months ended June 30, 2013.

Non-interest Expense. Non-interest expense decreased $744,000 to $6.5 million for the six months ended June 30, 2014 from $7.3 million for the six months ended June 30, 2013. Compensation and benefits expense decreased by $489,000 to $2.9 million for the six months ended June 30, 2014 from $3.4 million for the six months ended June 30, 2013. The decrease in compensation and benefit expense was due to the elimination of director fees for the six months ended June 30, 2014 as the director’s suspended payment of their fees. The decline was also due to reduced employee hours as branch staffing was matched to customer activity for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, and reduced ESOP and stock-based compensation expense. Occupancy and equipment expense increased $58,000 to $844,000 for the six months ended June 30, 2014 from $786,000 for the six months ended June 30, 2013. Federal deposit insurance premiums increased $40,000 to $363,000 for the six months ended June 30, 2014 from $323,000 for the six months ended June 30, 2013 due to increased premiums. Data processing fees increased by $31,000 to $516,000 for the six months ended June 30, 2014 from $485,000 for the six months ended June 30, 2013. This increase was due to costs associated with item processing. Professional fees increased $12,000 to $651,000 for the six months ended June 30, 2014 from $639,000 for the six months ended June 30, 2013. Net real estate owned expense decreased $210,000 to $550,000 for the six months ended June 30, 2014 from $760,000 for the six months ended June 30, 2013 due to reduced allowances for REO properties and reduced REO expenses.

Income Tax Benefit. We recorded an income tax expense of $263,000 for the six months ended June 30, 2014, compared to an income tax benefit of $417,000 for the six months ended June 30, 2013. The effective tax rates are 31.0% and (46.3%), respectively.

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 June 30, 2014, cash and cash equivalents totaled $7.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $238.5 million at June 30, 2014. In addition, at June 30, 2014, we had the ability to borrow a total of $165.2 million from the Federal Home Loan Bank of New York (30% of our assets at that date). On that date, there were $9.8 million in Federal Home Loan Bank advances outstanding.

At June 30, 2014, loan commitments outstanding totaled $10.0 million. In addition to commitments to originate loans, we had $21.2 million in unadvanced funds to borrowers. Total certificates of deposit due within one year of June 30, 2014 totaled $53.8 million. Total certificates of deposit due within one year of June 30, 2014 represent 11.3% 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 June 30, 2015. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

Our primary investing activities are the origination of loans and the purchase of securities. For the six months ended June 30, 2014, we originated $28.4 million of loans and purchased $62.9 million of securities. For the six months ended June 30, 2013, we originated $30.1 million of loans and purchased $112.0 million of securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease of $46.5 million and a net decrease of $26.5 million in total deposits for the six months ended June 30, 2014 and 2013, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive in our local markets.

There were $9.8 million in Federal Home Loan Bank short-term borrowings outstanding at June 30, 2014. Federal Home Loan Bank advances have primarily been used to fund loan demand and purchase securities.

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

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

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

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

Item 1A.

Risk Factors

Not applicable, as Colonial Financial Services, Inc. is a “Smaller Reporting Company”.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable.

(b)

Not applicable.

(c)

Purchases of Equity Securities.

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

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: August 14, 2014	By: /s/ Edward J. Geletka
	Edward J. Geletka
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 14, 2014	By: /s/ L. Joseph Stella, III, CPA, CGMA
	L. Joseph Stella, III, CPA, CGMA
	Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

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Colonial Financial Services Inactive 10-Q2014 Q2 Quarterly report

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