UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, ~~2013~~2014

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

For the transition period from _______________ to _______________

Commission File Number: 000-51385

	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 Number)

2745 S. Delsea Drive, Vineland, New Jersey		08360
(Address of Principal Executive Offices)		(Zip Code)

	(856) 205-0058
(Registrant’s Telephone Number Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share		The NASDAQ Stock Market, LLC

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o ☐ No x ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes o ☐ No x ☒

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

Yes x ☒ No o☐

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). Yes x ☒ No o☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o ☐

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.

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).

Yes o ☐ No x☒

As of March 151, ~~2014~~2015 there were 3,~~860~~866,~~140~~745 shares outstanding of the registrant’s common stock. The aggregate value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock as of June 30, ~~2013~~2014, was $4544.94 million.

DOCUMENTS INCORPORATED BY REFERENCE

~~1. Portions of the Proxy Statement for the 2014 Annual Meeting of Stockholders. (Part III)~~None

PART I

ITEM 1.

Business

Forward Looking Statements

This Annual Report contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” These forward-looking statements include, but are not limited to:

●

statements of our goals, intentions and expectations;

●

statements regarding our business plans, prospects, growth and operating strategies;

●

statements regarding the asset quality of our loan and investment portfolios; and

●

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

●

general economic conditions, either nationally or in our market areas, that are worse than expected;

●

competition among depository and other financial institutions;

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inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

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adverse changes in the securities markets;

●

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

●

our ability to manage operations in current economic conditions;

●

our ability to enter new markets successfully and capitalize on growth opportunities;

●

our ability to successfully integrate acquired entities, if any;

●

changes in consumer spending, borrowing and savings habits;

●

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

●

changes in the level of government support for housing finance;

●

significant increases in our loan losses;

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changes in our organization, compensation and benefit plans; and

●

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Colonial Financial Services, Inc.

Colonial Financial Services, Inc. is a Maryland corporation that was incorporated in March 2010 to serve as the successor corporation to Colonial Bankshares, Inc., the former stock holding company for Colonial Bank, FSB, upon completion of the mutual-to-stock conversion of Colonial Bankshares, MHC, the former mutual holding company for Colonial Bank, FSB.

The conversion was completed July 13, 2010. Colonial Financial Services, Inc. sold a total of 2,295,000 shares of common stock at $10.00 per share in the related offering. Concurrent with the completion of the offering, shares of Colonial Bankshares, Inc. common stock owned by public stockholders were exchanged for 0.9399 shares of Colonial Financial Services, Inc.’s common stock. Net proceeds from the offering were $20.3 million. As of December 31, ~~2013~~2014, Colonial Financial Services, Inc. had 3,~~853~~860,~~058~~209 shares outstanding and a market capitalization of approximately $51.27 million.

The executive offices of Colonial Financial Services, Inc. are located at 2745 S. Delsea Drive, Vineland, New Jersey 08360, and its telephone number is (856) 205-0058. Colonial Financial Services, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System.

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

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

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

The Merger Agreement includes customary representations, warranties and covenants of the Company and Cape Bancorp made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract by and among the Company and Cape Bancorp and are not intended to provide factual, business, or financial information about the Company or Cape Bancorp. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to stockholders or different from what a stockholder might view as material, may have been used for purposes of allocating risk between the Company and Cape Bancorp rather than establishing matters as facts, may have been qualified by certain disclosures not reflected in the Merger Agreement that were made to the other party in connection with the negotiation of the Merger Agreement and generally were solely for the benefit of the parties to that agreement. The Company has agreed to operate its business in the ordinary course consistent with past practice until the closing of the transaction and not to engage in certain kinds of transactions during such period (without the prior written consent of the Cape Bancorp).

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

Pursuant to the Merger Agreement, two current directors of the Company will be appointed to the Boards of Directors of the Cape Bancorp and Cape Bank.

The Company expects that the Merger and the Bank Merger will be effective in the second quarter of 2015.

Colonial Bank, FSB

Colonial Bank, FSB is a federally chartered savings bank headquartered in Vineland, New Jersey. Colonial Bank, FSB was originally founded in 1913. Colonial Bank, FSB conducts business from its main office located at 2745 S. Delsea Drive in Vineland, New Jersey, its eight branch offices located in Cumberland and Gloucester Counties, New Jersey, and through its operating subsidiaries, COBK Investments, LLC. (~~formerly~~which ~~known~~was asdissolved ~~COBK~~in ~~Investments,~~August ~~Inc.~~2014), and Cohansey Bridge, LLC. The telephone number at its main office is (856) 205-0058.

Our principal business activity is the origination of one- to four-family residential and commercial real estate loans. We also offer home equity loans and lines of credit, commercial business loans and construction and land loans, and, to a lesser extent, multi-family real estate loans and consumer loans. We also invest in mortgage-backed securities and other investment securities. We offer a variety of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit. Deposits are our primary source of funds for our lending and investing activities. We have also used borrowed funds as a source of funds, and we borrow principally from the Federal Home Loan Bank of New York.

Colonial Bank, FSB is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Colonial Bank, FSB is a member of the Federal Home Loan Bank system. Its website address is www.colonialbankfsb.com. Information on this website is not and should not be considered to be a part of this annual report.

On May 30, 2013, Colonial Bank, FSB entered into a regulatory agreement with the Office of the Comptroller of the Currency (the “OCC”). On May 30, 2013, the OCC notified Colonial Bank, FSB that the OCC had established minimum capital requirements for Colonial Bank, FSB. See “Regulation and Supervision – Regulatory Agreement and Capital Requirements.”

COBK Investments, LLC ~~(formerly known as COBK Investments, Inc.)~~

COBK Investments, LLC iswas a wholly owned subsidiary of Colonial Bank, FSB. It iswas a Delaware corporation that was formed in September 2013 to invest in and manage investment securities that Colonial Bank, FSB is authorized to hold. ~~COBK~~It ~~Investments, Inc.~~ was ~~dissolved~~liquidated in ~~September~~August ~~2013~~2014.

Cohansey Bridge, LLC

Cohansey Bridge, LLC is a wholly owned subsidiary of Colonial Bank, FSB. It is a New Jersey corporation that was formed in March 2012 whose purpose is to invest in and manage real estate.

Market Area

We conduct our operations from our main office in Vineland, New Jersey and eight full-service branch offices located in Cumberland and Gloucester counties in New Jersey, which is our primary market area for loans and deposits. These counties are in the southwest part of New Jersey, within a one hour driving distance of Philadelphia, Pennsylvania, Wilmington, Delaware and Atlantic City, New Jersey.

Our market areas have a broad range of private employers, as well as public employers such as federal, state and local governments. Gloucester County is located within the Greater Philadelphia Metropolitan Statistical Area of the United States Census Bureau, and diverse employment opportunities exist within this area. Cumberland County is predominantly rural, with a smaller proportion of higher paying white collar jobs. Industries represented in the employment base include healthcare, retail, glass manufacturing, higher education, agriculture and food processing. The New Jersey Motor Sports Park opened in July 2008. This motorsports attraction has hosted nationally broadcast races from its 700 acre facility in Cumberland County. As a result, over a dozen hotels and restaurants have come to the area during the past ~~four~~five years. In addition, Boeing has a facility at Millville airport, which replaced many positions lost upon the departure of another company from the same facility. A large number of other Fortune 500 companies are located within Colonial Bank, FSB’s footprint. Higher education attainment is increasing with record numbers of students attending Cumberland and Gloucester County Colleges. Rutgers and Rowan Universities have campuses and research facilities in both counties while both schools, along with St. Joseph’s University and several others offer undergraduate and graduate degrees on the County College campuses.

According to the U. S. Census, the population of Cumberland and Gloucester counties, New Jersey grew 70.73% and 130.7%, respectively, from ~~2000~~April 2010 to ~~2012~~June 2013. The unemployment rates for Cumberland and Gloucester counties were 109.52% and 6.94% as of December ~~2013~~2014, respectively, compared to 1310.95% and 96.9% as of December ~~2012~~2013, respectively. This compares to 76.32% for the entire State of New Jersey and 75.06% for the United States as a whole as of December 31, ~~2013~~2014.

U.S. Census Bureau data indicates the median household income as of December 31, ~~2012~~2013 was $5150,~~530~~750 and $74,~~915~~524 for Cumberland and Gloucester counties, New Jersey, respectively, compared to $39,150 and $54,273 as of December 31, 2000. Based on the American Community Survey for ~~2012~~2013 and the U. S. Census Bureau for 2000, the median home value in Cumberland County, New Jersey was $~~174~~158,~~400~~800 as of December ~~2012~~2013 compared to $91,200 for 2000. Similarly, for Gloucester County, New Jersey, the median home value has increased to $~~232~~207,~~400~~900 as of ~~2012~~2013 compared to $120,100 as of 2000.

Competition

We face significant competition in both originating loans and attracting deposits. Cumberland and Gloucester Counties, New Jersey, which comprise our primary market area, have a high concentration of financial institutions, many of which are significantly larger and have greater financial resources than we, and many of which are our competitors to varying degrees. As of June 30, ~~2013~~2014 (the latest date for which information is available), our market share was 1415.9730% of total FDIC-insured deposits in Cumberland County, making us the second largest of 12 financial institutions in Cumberland County based upon deposit share as of that date. As of June 30, ~~2013~~2014, our market share was 21.5480% of total deposits in Gloucester County, making us the ~~11th~~14th largest of 22 financial institutions based on deposit share as of that date. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies and credit unions. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from nondepository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies.

We seek to meet this competition by emphasizing personalized banking, competitive pricing strategies and the advantage of local decision-making in our banking business. Specifically, we promote and maintain relationships and build customer loyalty within our market area by focusing our marketing and community involvement on the specific needs of local communities.

Lending Activities

General. We originate one- to four-family residential real estate loans, home equity loans and lines of credit, commercial real estate loans, commercial business loans, construction loans, consumer loans and multi-family mortgage loans. At December 31, 2013, our gross loan portfolio totaled $282.9 million compared to $301.9 million at December 31, 2012.

One- to Four-Family Residential Real Estate Loans. We offer conforming and non-conforming, fixed-rate and adjustable-rate residential real estate loans with maturities of up to 30 years. This portfolio totaled $149.7 million, or 52.9% of our total loan portfolio, at December 31, 2013.

We currently offer fixed-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing with monthly loan payments, and adjustable-rate conventional residential real estate loans with initial fixed-rate terms of one, three, five or seven years that amortize up to 30 years. One- to four-family residential real estate loans are generally underwritten according to Fannie Mae guidelines, and loans that conform to such guidelines are referred to as “conforming loans.” We generally originate both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which for 2014 is currently $417,000 for single-family homes located in our primary market area. We also originate loans above conforming limits, referred to as “jumbo loans,” although the significant majority of the loans we have originated have been within conforming loan limits.

We currently offer several adjustable-rate loan products secured by residential properties with rates that are fixed for an initial period ranging from one year to seven years. After the initial fixed-rate period, the interest rate on these loans resets based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one, three or five years, as published weekly by the Federal Reserve Board, subject to certain periodic and lifetime limitations on interest rate changes. We do not offer “teaser” rates on our adjustable-rate loans. We underwrite our adjustable-rate loans in the same manner as we underwrite fixed-rate loans, but do not qualify borrowers based on the fully-indexed interest rate (the maximum interest rate permitted under the terms of the loan). Adjustable-rate residential real estate loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default. We attempt to mitigate this risk through our maximum loan-to-value ratio of 80% for all one- to four-family residential real estate loans (including adjustable-rate loans). At December 31, 2013, our adjustable-rate, one- to four-family residential real estate loan portfolio totaled $9.2 million.

Lending Activities

General. We originate one- to four-family residential real estate loans, home equity loans and lines of credit, commercial real estate loans, commercial business loans, construction and land loans, consumer loans and multi-family mortgage loans. At December 31, 2014, our gross loan portfolio totaled $272.2 million compared to $282.9 million at December 31, 2013.

One- to Four-Family Residential Real Estate Loans. We offer conforming and non-conforming, fixed-rate and adjustable-rate residential real estate loans with maturities of up to 30 years. This portfolio totaled $150.5 million, or 55.3% of our total loan portfolio, at December 31, 2014.

We currently offer fixed-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing with monthly loan payments, and adjustable-rate conventional residential real estate loans with initial fixed-rate terms of one, three, five or seven years that amortize up to 30 years. One- to four-family residential real estate loans are generally underwritten according to Fannie Mae guidelines, and loans that conform to such guidelines are referred to as “conforming loans.” We generally originate both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which is currently $417,000 for single-family homes located in our primary market area. We also originate loans above conforming limits, referred to as “jumbo loans,” although the significant majority of the loans we have originated have been within conforming loan limits.

We currently offer several adjustable-rate loan products secured by residential properties with rates that are fixed for an initial period ranging from one year to seven years. After the initial fixed-rate period, the interest rate on these loans resets based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one, three or five years, as published weekly by the Federal Reserve Board, subject to certain periodic and lifetime limitations on interest rate changes. We do not offer “teaser” rates on our adjustable-rate loans. We underwrite our adjustable-rate loans in the same manner as we underwrite fixed-rate loans, but do not qualify borrowers based on the fully-indexed interest rate (the maximum interest rate permitted under the terms of the loan). Adjustable-rate residential real estate loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default. We attempt to mitigate this risk through our maximum loan-to-value ratio of 80% for all one- to four-family residential real estate loans (including adjustable-rate loans). At December 31, 2014, our adjustable-rate, one- to four-family residential real estate loan portfolio totaled $7.0 million.

We require title insurance on all of our one- to four-family residential real estate loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. Nearly all residential real estate loans must have a mortgage escrow account from which disbursements are made for real estate taxes. We do not conduct environmental testing on residential real estate loans unless specific concerns for hazards are determined by the appraiser utilized in connection with the loan.

Home Equity Loans and Lines of Credit. In addition to traditional one- to four-family residential real estate loans, we offer home equity loans and home equity lines of credit that are secured by the borrower’s primary residence. At December 31, ~~2013~~2014, the outstanding balance of home equity loans totaled $2018.7 9 million, or 76.49% of our total loan portfolio, and the outstanding balance of home equity lines of credit totaled $5.7 4 million, or 2.0% of our total loan portfolio. The borrower is permitted to draw on a home equity line of credit at any time after it is originated and may repay the outstanding balance over a term not to exceed 15 years from the date of the borrower’s last draw on the home equity line of credit. We generally review each performing line of credit every six years to determine whether to continue to offer the unused portion of the line of credit to the borrower. However, due to the current economic environment, we reviewed and evaluated every home equity line of credit during 2011. Our home equity loans are generally originated as mortgages with fixed terms of five to 15 years or with balloon maturities of three or five years. Home equity loans and lines of credit are generally underwritten with the same criteria that we use to underwrite fixed-rate, one- to four-family residential mortgage loans. We currently underwrite fixed-rate home equity loans with a loan-to-value ratio of up to 80% when combined with the principal balance of the existing first mortgage loan and we underwrite lines of credit with a loan-to-value ratio of up to 75% when combined with the principal balance of the existing mortgage loan. We obtain an appraisal of the property securing the loan at the time of the loan application in order to determine the value of the property securing the home equity loan or line of credit. At the time we close a home equity loan or line of credit, we file a mortgage to perfect our security interest in the underlying collateral.

Commercial Real Estate Lending. We also originate real estate loans secured by first liens on commercial real estate. The commercial real estate properties are predominantly professional offices, churches and hotels and, to a lesser extent, manufacturing and retail facilities and healthcare facilities. We have purchased commercial real estate loan participations through the Thrift Institution Community Investment Council, which originates loans for Community Reinvestment Act purposes. We have also originated commercial real estate loans as a participant with other lenders. We emphasize commercial real estate loans with initial principal balances between $100,000 and $2.0 million. Loans secured by commercial real estate totaled $79.6 million, or 28.1% of our total loan portfolio, at December 31, 2013, and consisted of 213 loans outstanding with an average loan balance of approximately $374,000, although we have originated loans with balances substantially higher than this average. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.5

Commercial Real Estate Lending. We also originate real estate loans secured by first liens on commercial real estate. The commercial real estate properties are predominantly professional offices, churches and hotels and, to a lesser extent, manufacturing and retail facilities and healthcare facilities. We have also originated commercial real estate loans as a participant with other lenders. We emphasize commercial real estate loans with initial principal balances between $100,000 and $2.0 million. Loans secured by commercial real estate totaled $65.6 million, or 24.1% of our total loan portfolio, at December 31, 2014, and consisted of 185 loans outstanding with an average loan balance of approximately $355,000, although we have originated loans with balances substantially higher than this average. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

Our commercial real estate loans are generally written as mortgages with balloon maturities of five years. Amortization of these loans is typically based on 10- to 20-year payout schedules. We also originate some 10 and 15-year, fixed-rate, fully amortizing loans. We establish margins for commercial real estate loans based upon our cost of funds, but we also consider rates offered by our competitors in our market area. Interest rates may be fixed or adjustable, but may not be fixed for periods of longer than 10 years.

In the underwriting of commercial real estate loans, we currently lend up to 75% of the lower of the purchase price or the property’s appraised value. We base our decisions to lend on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%), computed after deduction for a vacancy factor and property expenses we deem appropriate. Personal guarantees are usually obtained from commercial real estate borrowers. We require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property.

Commercial real estate loans generally have higher interest rates and shorter terms than those on one- to four-family residential mortgage loans. Commercial real estate loans, however, entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the repayment of loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent than one- to four-family residential loans to adverse conditions in the real estate market and in the general economy.

5Commercial Loans. We offer various types of secured and unsecured commercial loans to customers in our market area for business expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to five years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to the prime rate, as published in The Wall Street Journal, although the significant majority of our commercial loans are fixed-rate loans. At December 31, 2014, we had 150 commercial loans outstanding with an aggregate balance of $18.2 million, or 6.7% of the total loan portfolio. These totals include 33 unsecured commercial loans with an aggregate outstanding balance of $4.4 million. As of December 31, 2014, the average commercial loan balance (secured and unsecured loans) was approximately $121,000, although we have originated loans with balances substantially greater than this average.

Commercial Loans. We offer various types of secured and unsecured commercial loans to customers in our market area for business expansion, working capital and other general business purposes. The terms of these loans generally range from less than one year to five years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to the prime rate, as published in The Wall Street Journal, although the significant majority of our commercial loans are fixed-rate loans. At December 31, 2013, we had 125 commercial loans outstanding with an aggregate balance of $17.3 million, or 6.1% of the total loan portfolio. These totals include 12 unsecured commercial loans with an aggregate outstanding balance of $157,000. As of December 31, 2013, the average commercial loan balance (secured and unsecured loans) was approximately $138,000, although we have originated loans with balances substantially greater than this average.

Commercial credit decisions are based upon our credit assessment of the loan applicant. We determine the applicant’s ability to repay in accordance with the proposed terms of the loans and we assess the risks involved. We also evaluate the applicant’s credit and business history and ability to manage the loan and its business. We usually obtain personal guarantees of the principals. In addition to evaluating the loan applicant’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan. We supplement our analysis of the applicant’s creditworthiness with credit agency reports of the applicant’s credit history. We may also check with other banks and conduct trade investigations. Collateral supporting a secured transaction also is analyzed to determine its marketability. Commercial business loans generally have higher interest rates than residential loans of like duration because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral. Our pricing of commercial business loans is based primarily on the credit risk of the borrower, with due consideration given to borrowers with appropriate deposit relationships and competition.

Construction and Land Loans. We originate construction and land loans to individuals and builders in our market area. These loans totaled $8.7 million, or 3.1% of our total loan portfolio, at December 31, 2013. At December 31, 2013, we had 34 construction and land loans outstanding with an average balance of $255,000. Our construction loans are often originated in conjunction with development loans. In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to 75% of actual construction costs and a 75% loan to completed appraised value ratio. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers.

Construction lending exposes us to greater credit risk than permanent mortgage financing. The repayment of construction loans may depend upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

~~Loan~~Construction ~~Portfolio~~and ~~Composition~~Land Loans. ~~The~~We ~~following~~originate ~~table~~construction ~~sets~~and ~~forth~~land ~~the~~loans ~~composition~~to individuals and builders in our market area. These loans totaled $8.1 million, or 3.0% of our total loan portfolio, byat ~~type~~December 31, 2014. At December 31, 2014, we had 35 construction and land loans outstanding with an average balance of ~~loan~~$232,000. Our atconstruction loans are often originated in conjunction with development loans. In the ~~dates~~case ~~indicated~~of residential subdivisions, these loans finance the cost of completing homes on the improved property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to 75% of actual construction costs and a 75% loan to completed appraised value ratio. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers.

	At December 31,
	2013						2012						2011						2010						2009
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	149,726			52.9	%	$	148,674			49.2	%	$	141,013			46.6	%	$	140,244			43.3	%	$	151,352			46.6	%
Home equity loans and lines of credit		26,442			9.4			28,657			9.5			32,553			10.7			35,373			10.9			37,892			11.7
Multi-family		284			0.1			397			0.1			102			—			3,124			1.0			4,108			1.3
Commercial		79,601			28.1			90,143			29.9			96,737			32.0			114,242			35.2			97,075			29.9
Construction and land		8,665			3.1			9,683			3.2			9,470			3.1			5,944			1.8			14,093			4.3
Commercial		17,302			6.1			23,345			7.7			21,890			7.2			23,253			7.2			17,864			5.5
Consumer and other		834			0.3			1,043			0.4			1,295			0.4			1,783			0.6			2,223			0.7
Total loans receivable		282,854			100.0	%		301,942			100.0	%		303,060			100.0	%		323,963			100.0	%		324,607			100.0	%
Deferred loan fees		(847	)					(614	)					(463	)					(433	)					(394	)
Allowance for loan losses		(5,853	)					(4,146	)					(5,027	)					(3,543	)					(2,606	)
Total loans receivable, net	$	276,154					$	297,182					$	297,570					$	319,987					$	321,607

Loan Portfolio ~~Maturities and Yields~~Composition. The following table ~~summarizes~~sets forth the ~~scheduled~~composition ~~repayments~~ of our loan portfolio ~~at December 31~~, ~~2013. Demand~~by ~~loans,~~type ~~which~~of ~~are loans having no stated repayment schedule or maturity~~loan, ~~and~~at ~~overdraft~~the ~~loans~~dates ~~are reported as being due in one year or less~~indicated.

	One- to Four-Family Residential							Home Equity Loans and Lines of Credit							Multi-Family								Commercial Real Estate
	At December 31,
	Amount			Weighted Average Rate				Amount			Weighted Average Rate				Amount				Weighted Average Rate				Amount			Weighted Average Rate
	2014						2013						2012							2011						2010
	(Dollars in thousands)
	Amount			Percent			Amount			Percent			Amount				Percent			Amount				Percent		Amount			Percent
Due During the Years Ending December 31,
Real estate loans:
2014	$	2,923			6.06	%		$	6,933			3.92	%		$	96				7.93	%		$	6,668			5.38	%
One- to four-family residential	$	150,502		55.3	%		$	149,726		52.9	%		$	148,674			49.2	%		$	141,013			46.6	%	$	140,244		43.3	%
2015		1,187			6.17				570			6.20				-				-				13,786			4.95
Home equity loans and lines of credit		24,324		8.9				26,442		9.4				28,657			9.5				32,553			10.7			35,373		10.9
2016		997			5.14				813			5.54				188				5.53				7,122			5.45
Multi-family		4,618		1.7				284		0.1				397			0.1				102			—			3,124		1.0
2017 through 2018		4,120			4.82				2,022			4.71				-				-				41,468			4.46
Commercial		65,644		24.1				79,601		28.1				90,143			29.9				96,737			32.0			114,242		35.2
2019 through 2023		15,880			3.86				4,841			6.10				-				-				5,146			4.69
Construction and land		8,106		3.0				8,665		3.1				9,683			3.2				9,470			3.1			5,944		1.8
2024 through 2028		28,035			3.69				10,639			4.94				-				-				3,163			5.36
Commercial		18,223		6.7				17,302		6.1				23,345			7.7				21,890			7.2			23,253		7.2
2029 and beyond		96,584			4.71				624			4.56				-				-				2,248			6.39
Consumer and other		773		0.3				834		0.3				1,043			0.4				1,295			0.4			1,783		0.6
Total	$	149,726			4.47	%		$	26,442			4.90	%		$	284				6.34	%		$	79,601			4.82	%
Total loans receivable		272,190		100.0	%			282,854		100.0	%			301,942			100.0	%			303,060			100.0	%		323,963		100.0	%
Deferred loan fees		(107	)					(847	)					(614	)						(463	)					(433	)
Allowance for loan losses		(4,294	)					(5,853	)					(4,146	)						(5,027	)					(3,543	)
Total loans receivable, net	$	267,789					$	276,154					$	297,182						$	297,570					$	319,987

	Construction and Land					Commercial					Consumer and Other					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending December 31,
2014	$	3,896		3.83	%	$	3,596		4.74	%	$	333		7.29	%	$	24,445		4.74	%
2015		2,627		4.33			4,514		3.25			64		8.54			22,748		4.65
2016		238		7.77			58		5.60			211		8.47			9,627		5.55
2017 through 2018		1,052		5.36			2,962		4.10			192		6.17			51,816		4.50
2019 through 2023		89		7.02			6,172		4.81			34		6.43			32,162		4.52
2024 through 2028		508		5.00			-		-			-		-			42,345		4.14
2029 and beyond		255		4.13			-		-			-		-			99,711		4.75
Total	$	8,665		4.39	%	$	17,302		4.27	%	$	834		7.39	%	$	282,854		4.61	%

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2013 that are contractually due after December 31, 2014.

	Due After December 31, 2014
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans:
One- to four-family residential	$	137,622	$	9,181	$	146,803
Home equity loans and lines of credit		12,712		6,797		19,509
Multi-family		188		-		188
Commercial		72,933		-		72,933
Construction and land		4,769		-		4,769
Commercial		13,706		-		13,706
Consumer and other		501		-		501
Total loans	$	242,431	$	15,978	$	258,409

Loan Originations, Purchases, Sales and Servicing. 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.

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2014. Demand loans, which are loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

	One- to Four-Family Residential					Home Equity Loans and Lines of Credit					Multi-Family					Commercial Real Estate
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending December 31,
2015	$	1,610		6.68	%	$	6,200		3.85	%	$	514		5.50	%	$	5,802		5.65	%
2016		729		5.10			418		5.24			1,111		5.92			3,458		5.16
2017		1,631		5.35			557		4.20			-		-			18,197		4.41
2018 through 2019		4,531		4.76			1,888		4.92			-		-			27,751		4.31
2020 through 2024		13,679		3.84			4,423		6.13			1,975		4.50			6,546		4.52
2025 through 2029		29,066		3.59			10,292		4.79			1,018		3.63			2,622		4.96
2030 and beyond		99,256		4.57			546		4.50			-		-			1,268		4.22

Total	$	150,502		4.35	%	$	24,324		4.79	%	$	4,618		4.76	%	$	65,644		4.55	%

	Construction and Land					Commercial					Consumer and Other					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending December 31,
2015	$	3,103		4.43	%	$	4,077		3.58	%	$	342		7.38	%	$	21,648		4.67	%
2016		2,222		3.18			81		4.80			105		8.79			8,124		4.76
2017		305		5.52			2,421		4.16			241		8.32			23,352		4.50
2018 through 2019		1,091		5.19			7,301		3.99			63		5.00			42,625		4.35
2020 through 2024		17		7.01			1,908		4.01			22		6.75			28,570		4.41
2025 through 2029		269		4.00			485		4.00			-		-			43,752		3.96
2030 and beyond		1,099		4.24			1,950		4.22			-		-			104,119		4.56

Total	$	8,106		4.20	%	$	18,223		3.95	%	$	773		7.65	%	$	272,190		4.42	%

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2014 that are contractually due after December 31, 2015.

	Due After December 31, 2015
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans:
One- to four-family residential	$	141,921	$	6,971	$	148,892
Home equity loans and lines of credit		12,695		5,429		18,124
Multi-family		4,104		-		4,104
Commercial		59,842		-		59,842
Construction and land		5,003		-		5,003
Commercial		14,146		-		14,146
Consumer and other		431		-		431

Total loans	$	238,142	$	12,400	$	250,542

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.

During ~~2013~~2014, we did not sell any whole loans. We have not purchased any whole non-government loans in recent periods.

Loan Approval Authority and Underwriting. Our board of directors grants lending authority to our Board Management Loan Committee, Senior 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 Board Management Loan Committee and the Senior 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 Senior Management Loan Committee may approve secured loans in amounts up to $~~300~~750,000, and unsecured loans in amounts up to $~~100~~300,000 with an aggregate exposure not to exceed $1.5 million. The Board Management Loan Committee may approve ~~secured~~ loans inup ~~amounts~~to ~~above~~the ~~$300,000~~Bank’s uplegal tolending ~~$750,000,~~limit ~~and~~so ~~unsecured~~long ~~loans~~as inunanimous ~~amounts~~approval ~~above~~is ~~$100,000~~obtained. The full Board of Directors may approve ~~secured~~all loans ~~above~~in ~~$750,000~~excess of committee limits.

In connection with our residential and commercial real estate loans, we generally require property appraisals to be performed by independent appraisers who are approved by the board of directors. Appraisals are then received by our loan underwriting personnel and reviewed by an independent third party. Under certain conditions, we may not require appraisals for loans under $250,000, but we obtain appraisals in nearly all of these cases. We also require title insurance, hazard insurance and, if necessary, flood insurance on property securing mortgage loans.

Loan Origination Fees and Costs. In addition to interest earned on loans, we also receive loan origination fees. Such fees vary with the volume and type of loans and commitments made, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. We defer loan origination fees and costs and amortize such amounts as an adjustment to yield over the term of the loan by use of the level-yield method. Deferred loan origination fees (net of deferred costs) were $847,000 and $~~614~~107,000 at December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Loans to One Borrower. At December 31, ~~2013~~2014, our five largest aggregate amounts loaned to any borrower and related interests were: (i) a $7.69 million relationship which is collateralized by six commercial properties; (ii) a $5.37 million relationship which is collateralized by ~~three~~two ~~commercial~~multi-family ~~properties~~units, two single family dwellings and two letters of credit; (iii) a $4.5 million relationship which is collateralized by ~~four~~two commercial properties, ~~one~~and two single family ~~dwelling, equipment and vehicles~~dwellings; (iv) a $34.85 million relationship collateralized by four commercial properties, ~~and~~commercial ~~two~~vehicles ~~single~~and ~~family dwellings~~equipment; and (v) a $3.87 million relationship collateralized by ~~nine~~four commercial properties, ~~four lots~~ and ~~one~~two single family ~~dwelling~~dwellings. The balances noted above include the unused portion of credit lines. At December 31, ~~2013~~2014, these loans were all performing according to their original terms~~, except the $5~~.~~3 million relationship which was classified as a troubled debt restructuring and was performing according to its restructured terms.~~ Under federal banking regulations, at December 31, ~~2013~~2014 our maximum regulatory loan-to-one borrower limit was $98.19 million. See “Supervision and Regulation—Federal Banking Regulation—Loans to One Borrower” for a discussion of applicable regulatory limitations.

910

Delinquent Loans, Other Real Estate Owned and Classified Assets

Collection Procedures. When a loan is more than 10 days delinquent, we generally contact the borrower by telephone to determine the reason for delinquency and arrange for payment, and accounts are monitored electronically for receipt of payments. We also send a computer-generated late notice on the tenth day after the payment due date on a commercial loan (the 15th day for a consumer or residential loan), which requests the payment due plus any late charge that is assessed. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. If payment is not received within 60 days of the due date, we accelerate loans and demand payment in full. Failure to pay within 90 days of the original due date may result in legal action, notwithstanding ongoing collection efforts. Unsecured consumer loans are charged-off between 90 to 120 days. For commercial loans, procedures with respect to demand letters and legal action may vary depending upon individual circumstances.

Loans Past Due and Nonperforming Assets. 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.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.

For all loans secured by real estate, carrying values in excess of net realizable value are charged off at or before the time foreclosure is completed or when settlement is reached with the borrower. If foreclosure is not pursued and there is no reasonable expectation for recovery, the account is charged off no later than the end of the month in which the account becomes six months contractually delinquent. For all secured and unsecured commercial business loans, loan balances are charged off at the time all or a portion of the balance is deemed uncollectible.

We currently obtain updated appraisals and title searches on all collateral-dependent loans secured by real estate that are 90 days or more past due and placed on non-accrual status. All appraisals for $250,000 or more are reviewed internally or by an outside service.

The performances and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status at the dates indicated. At each date, we had no loans that were 90 days or more delinquent and still accruing interest.

	30-59 Days Past Due		60-89 Days Past due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
	(In thousands)
At December 31, 2013
Real estate loans:
One- to four-family residential	$	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
At December 31, 2012
Real estate loans:
One- to four-family residential	$	5,296	$	1,353	$	2,553	$	9,202	$	139,472	$	148,674
Multi-family		-		-		-		-		397		397
Commercial		2,288		593		1,432		4,313		85,830		90,143
Construction and land		-		-		325		325		9,358		9,683
Home equity loans and lines of credit		38		169		628		835		27,822		28,657
Commercial		-		384		75		459		22,886		23,345
Consumer and other		1		2		2		5		1,038		1,043
Total	$	7,623	$	2,501	$	5,015	$	15,139	$	286,803	$	301,942
At December 31, 2011
Real estate loans:
One- to four-family residential	$	4,568	$	909	$	3,726	$	9,203	$	131,810	$	141,013
Multi-family		-		-		-		-		102		102
Commercial		1,993		162		1,645		3,800		92,937		96,737
Construction		-		89		383		472		8,998		9,470
Home equity loans and lines of credit		48		150		363		561		31,992		32,553
Commercial		588		-		36		624		21,266		21,890
Consumer and other		82		5		-		87		1,208		1,295
Total	$	7,279	$	1,315	$	6,153	$	14,747	$	288,313	$	303,060
At December 31, 2010
Real estate loans:
One- to four-family residential	$	3,429	$	2,354	$	5,574	$	11,357	$	128,887	$	140,244
Multi-family		-		-		-		-		3,124		3,124
Commercial		124		1,899		4,337		6,360		107,882		114,242
Construction		-		-		384		384		5,560		5,944
Home equity loans and lines of credit		446		302		106		854		34,519		35,373
Commercial		-		-		288		288		22,965		23,253
Consumer and other		67		3		31		101		1,682		1,783
Total	$	4,066	$	4,558	$	10,720	$	19,344	$	304,619	$	323,963
At December 31, 2009
Real estate loans:
One- to four-family residential	$	-	$	1,085	$	4,023	$	5,108	$	146,244	$	151,352
Multi-family		-		-		-		-		4,108		4,108
Commercial		1,093		291		535		1,919		95,156		97,075
Construction		-		-		487		487		13,606		14,093
Home equity loans and lines of credit		128		65		215		408		37,484		37,892
Commercial		-		-		15		15		17,849		17,864
Consumer and other		74		39		2		115		2,108		2,223
Total	$	1,295	$	1,480	$	5,277	$	8,052	$	316,555	$	324,607

~~Nonperforming Assets.~~ The ~~table~~performances ~~below sets forth the amounts~~ and ~~categories~~credit quality of ~~our nonperforming assets at~~ the ~~dates~~loan ~~indicated. We~~portfolio ~~will~~is ~~not~~also ~~advance~~monitored ~~any~~by ~~new~~analyzing ~~funds~~the toage ~~any~~ of the ~~troubled debt restructurings. As of December 31, 2013, we have 29~~ loans ~~totaling~~receivable ~~$9.8~~as ~~million~~determined ~~that~~by ~~were considered performing troubled debt restructurings (where, for economic or legal reasons related to a borrower’s financial difficulties, we granted a concession to~~ the ~~borrower~~length ~~that we would not otherwise consider). These loans consisted~~ of ~~five~~time ~~commercial real estate loans with~~ a recorded ~~investment~~payment ofis ~~$4.2~~past ~~million, one construction and land loan with a recorded investment of $2~~due.~~1 million, 22 one- to four-family residential real estate loans with a recorded investment of $3.5 million and one home equity loan with a recorded investment of $45,000.~~ AsThe offollowing ~~December~~table ~~31,~~presents 2012, we had 46 loans totaling $16.8 million that were considered performing troubled debt restructurings (where, for economic or legal reasons related to a borrower’s financial difficulties, we granted a concession to the ~~borrower~~classes ~~that we would not otherwise consider). These loans consisted~~ of ~~ten~~the commercial real estate loans with a recorded investment of $8.3 million, four construction and land loans with a recorded investment of $3.8 million, 30 one- to four-family residential real estate loans with a recorded investment of $4.2 million, one home equity loan ~~with~~portfolio asummarized ~~recorded~~by ~~investment~~the ofpast ~~$46,000~~due ~~and~~status ~~one~~at ~~commercial~~the ~~loan~~dates ~~with a recorded investment of $384,000~~indicated. AsAt ofeach ~~December 31~~date, ~~2011,~~ we had 39no loans ~~totaling $19.8 million~~ that were ~~considered~~90 ~~performing~~days ~~troubled debt restructurings (where, for economic~~ or ~~legal~~more ~~reasons~~delinquent related to a borrower’s financial difficulties, we granted a concession to the borrower that we would not otherwise consider). These loans consisted of 12 commercial real estate loans, construction and ~~multi-family~~still ~~loans~~accruing with recorded investment totaling $14.8 million, 21 one- to four-family residential real estate loans and home equity loans with a recorded investment totaling $4.2 million, five commercial non-mortgage loans with a recorded investment of $750 thousand and one consumer loan with an immaterial outstanding balance. As of December 31, 2010, we had 15 loans totaling $15.9 million that were performing considered troubled debt restructurings. These loans consisted of 11 commercial real estate loans, construction and multi-family loans with a recorded investment totaling $15.1 million, three one- to four-family residential real estate loans with a recorded investment totaling $3.1 million, and one consumer loan with an immaterial outstanding balance. In each instance, we lowered the interest ~~rate and deferred principal payments~~. ~~We had $4.8 million in troubled debt restructurings as of December 31, 2009.~~

	30-59 Days Past Due		60-89 Days Past due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
	(In thousands)
At December 31, 2014
Real estate loans:
One- to four-family residential	$	1,597	$	724	$	1,621	$	3,942	$	146,560	$	150,502
Multi-family		-		-		-		-		4,618		4,618
Commercial		125		-		119		244		65,400		65,644
Construction and land		-		-		-		-		8,106		8,106
Home equity loans and lines of credit		224		124		446		794		23,530		24,324
Commercial		-		-		-		-		18,223		18,223
Consumer and other		10		-		-		10		763		773
Total	$	1,956	$	848	$	2,186	$	4,990	$	267,200	$	272,190

At December 31, 2013
Real estate loans:
One- to four-family residential	$	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

At December 31, 2012
Real estate loans:
One- to four-family residential	$	5,296	$	1,353	$	2,553	$	9,202	$	139,472	$	148,674
Multi-family		-		-		-		-		397		397
Commercial		2,288		593		1,432		4,313		85,830		90,143
Construction and land		-		-		325		325		9,358		9,683
Home equity loans and lines of credit		38		169		628		835		27,822		28,657
Commercial		-		384		75		459		22,886		23,345
Consumer and other		1		2		2		5		1,038		1,043
Total	$	7,623	$	2,501	$	5,015	$	15,139	$	286,803	$	301,942

At December 31, 2011
Real estate loans:
One- to four-family residential	$	4,568	$	909	$	3,726	$	9,203	$	131,810	$	141,013
Multi-family		-		-		-		-		102		102
Commercial		1,993		162		1,645		3,800		92,937		96,737
Construction		-		89		383		472		8,998		9,470
Home equity loans and lines of credit		48		150		363		561		31,992		32,553
Commercial		588		-		36		624		21,266		21,890
Consumer and other		82		5		-		87		1,208		1,295
Total	$	7,279	$	1,315	$	6,153	$	14,747	$	288,313	$	303,060

At December 31, 2010
Real estate loans:
One- to four-family residential	$	3,429	$	2,354	$	5,574	$	11,357	$	128,887	$	140,244
Multi-family		-		-		-		-		3,124		3,124
Commercial		124		1,899		4,337		6,360		107,882		114,242
Construction		-		-		384		384		5,560		5,944
Home equity loans and lines of credit		446		302		106		854		34,519		35,373
Commercial		-		-		288		288		22,965		23,253
Consumer and other		67		3		31		101		1,682		1,783
Total	$	4,066	$	4,558	$	10,720	$	19,344	$	304,619	$	323,963

Nonperforming Assets. The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated. We will ~~also~~not ~~grant~~advance ~~concessions~~any new funds to any of the troubled debt restructurings. As of December 31, 2014, we have 26 loans totaling $7.6 million that were considered performing troubled debt restructurings (where, for economic or legal reasons related to a borrower’s financial difficulties, we dogranted a concession to the borrower that we would not otherwise consider). These loans consisted of two commercial real estate loans with a recorded investment of $2.1 million, one construction and land loan with a recorded investment of $2.0 million, 22 one- to four-family residential real estate loans with a recorded investment of $3.4 million and one home equity loan with a recorded investment of $45,000. As of December 31, 2013, we had 29 loans totaling $9.8 million that were considered performing troubled debt restructurings (where, for economic or legal reasons related to a borrower’s financial difficulties, we granted a concession to the borrower that we would not otherwise consider). These loans consisted of five commercial real estate loans with a recorded investment of $4.2 million, one construction and land loan with a recorded investment of $2.1 million, 22 one- to four-family residential real estate loans with a recorded investment of $3.5 million and one home equity loan with a recorded investment of $45,000. As of December 31, 2012, we had 46 loans totaling $16.8 million that were considered performing troubled debt restructurings (where, for economic or legal reasons related to a borrower’s financial difficulties, we granted a concession to the borrower that we would not otherwise consider). These loans consisted of ten commercial real estate loans with a recorded investment of $8.3 million, four construction and land loans with a recorded investment of $3.8 million, 30 one- to four-family residential real estate loans with a recorded investment of $4.2 million, one home equity loan with a recorded investment of $46,000 and one commercial loan with a recorded investment of $384,000. As of December 31, 2011, we had 39 loans totaling $19.8 million that were considered performing troubled debt restructurings (where, for economic or legal reasons related to a borrower’s financial difficulties, we granted a concession to the borrower that we would not otherwise consider). These loans consisted of 12 commercial real estate loans, construction and multi-family loans with recorded investment totaling $14.8 million, 21 one- to four-family residential real estate loans and home equity loans with a recorded investment totaling $4.2 million, five commercial non-mortgage loans with a recorded investment of $750 thousand and one consumer loan with an immaterial outstanding balance. As of December 31, 2010, we had 15 loans totaling $15.9 million that were performing considered troubled debt restructurings. These loans consisted of 11 commercial real estate loans, construction and multi-family loans with a recorded investment totaling $15.1 million, three one- to four-family residential real estate loans with a recorded investment totaling $3.1 million, and one consumer loan with an immaterial outstanding balance. In each instance, we lowered the interest rate and deferred principal payments.

	At December 31,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential	$	5,162		$	2,553		$	3,726		$	5,574		$	4,023
Multi-family		-			-			-			-			-
Commercial		5,215			6,889			1,645			4,337			535
Construction and land		1,233			325			383			384			487
Home equity loans and lines of credit		715			628			363			106			215
Commercial		1,235			2,742			36			288			15
Consumer		-			2			-			31			2
Total non-accrual loans		13,560			13,139			6,153			10,720			5,277
Accruing loans 90 days or more past due:
All loans		-			-			-			-			-
Total non-performing loans		13,560			13,139			6,153			10,720			5,277
Real estate owned		3,258			5,347			3,092			276			-
Other non-performing assets					-			-			-			-
Total non-performing assets		16,818			18,486			9,245			10,996			5,277
Performing troubled debt restructurings:
Real estate loans:
One- to four-family residential		3,464			4,246			3,818			855			525
Multi-family		-			-			-			645			742
Commercial		4,186			8,240			13,184			13,051			2,096
Construction and land		2,091			3,841			1,655			1,369			1,426
Home equity loans and lines of credit		45			46			363			-			-
Commercial		-			384			750			-			-
Consumer		-			-			7			9			18
Total performing troubled debt restructurings		9,786			16,757			19,777			15,929			4,807
Total non-performing assets and performing troubled debt restructurings	$	26,604		$	35,243		$	29,022		$	26,925		$	10,084
Ratios:
Total non-performing loans to total loans		4.79	%		4.35	%		2.03	%		3.31	%		1.63	%
Total non-performing loans to total assets		2.33	%		2.11	%		1.02	%		1.82	%		0.93	%
Total non-performing assets to total assets		2.88	%		2.96	%		1.53	%		1.86	%		0.93	%

The amount of the allowance for loan losses allocated to the $13.6 million of non-performing loans at December 31, 2013, noted above, was $1.8 million. See discussion on page 16 regarding charge-offs on impaired loans.

For the year ended December 31, 2013, gross interest income that would have been recorded had our non-accruing loans and troubled debt restructurings been current in accordance with their original and restructured terms was $717,000 and $565,000, respectively. We recognized $152,000 and $543,000, respectively, of interest income on such loans during the year.

We will also grant concessions that we do not consider troubled debt restructurings.

	At December 31,
	2014			2013			2012			2011			2010
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential	$	5,126		$	5,162		$	2,553		$	3,726		$	5,574
Multi-family		-			-			-			-			-
Commercial		593			5,215			6,889			1,645			4,337
Construction and land		1,046			1,233			325			383			384
Home equity loans and lines of credit		620			715			628			363			106
Commercial		-			1,235			2,742			36			288
Consumer		-			-			2			-			31
Total non-accrual loans		7,385			13,560			13,139			6,153			10,720

Accruing loans 90 days or more past due:
All loans		-			-			-			-			-

Total non-performing loans		7,385			13,560			13,139			6,153			10,720

Real estate owned		2,220			3,258			5,347			3,092			276

Total non-performing assets		9,605			16,818			18,486			9,245			10,996

Performing troubled debt restructurings:
Real estate loans:
One- to four-family residential		3,430			3,464			4,246			3,818			855
Multi-family		-			-			-			-			645
Commercial		2,121			4,186			8,240			13,184			13,051
Construction and land		2,028			2,091			3,841			1,655			1,369
Home equity loans and lines of credit		45			45			46			363			-
Commercial		-			-			384			750			-
Consumer		-			-			-			7			9

Total performing troubled debt restructurings		7,624			9,786			16,757			19,777			15,929

Total non-performing assets and performing troubled debt restructurings	$	17,229		$	26,604		$	35,243		$	29,022		$	26,925

Ratios:
Total non-performing loans to total loans		2.71	%		4.79	%		4.35	%		2.03	%		3.31	%
Total non-performing loans to total assets		1.36	%		2.33	%		2.11	%		1.02	%		1.82	%
Total non-performing assets to total assets		1.77	%		2.88	%		2.96	%		1.53	%		1.86	%

The amount of the allowance for loan losses allocated to the $7.4 million of non-performing loans at December 31, 2014, noted above, was $565,000. See discussion on page 16 regarding charge-offs on impaired loans.

For the year ended December 31, 2014, gross interest income that would have been recorded had our non-accruing loans and troubled debt restructurings been current in accordance with their original and restructured terms was $658,000 and $341,000, respectively. We recognized $126,000 and $329,000, respectively, of interest income on such loans during the year.

Classification of Assets. 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.

The allowance for loan losses represents amounts that have been established to recognize losses inherent in the loan portfolio that are both probable and reasonably estimable at the date of the financial statements. When we classify problem assets as loss, we charge-off such amounts. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table sets forth our amounts of classified assets and assets designated as special mention as of December 31, ~~2013~~2014 and ~~2012~~2013. The classified assets totals at December 31, ~~2013~~2014 and ~~2012~~2013 include $137.64 million and $13.16 million, respectively, of nonperforming loans.

	At December 31,
	2013		2012
	2014		2013
	(In thousands)
Classified assets:
Substandard	$	2111,~~850~~213	$	2721,~~015~~850
Doubtful		~~2,444~~-		~~127~~2,444
Loss		-		-
Total classified assets	$	2411,~~294~~213	$	2724,~~142~~294
Special mention	$	92,~~324~~928	$	49,~~167~~324

At December 31, ~~2013~~2014, substandard assets consisted primarily of (i) 6963 residential mortgage loans with a recorded investment of $96.41 million, (ii) 2116 home equity loans with a recorded investment totaling $~~846~~744,000, (iii) 1410 commercial real estate loan relationships with a recorded investment totaling $73.82 million, and (iv) ~~five~~6 construction and land loans with a recorded investment totaling $31.52 million ~~and (v) three commercial loans with a recorded investment of $340,000~~. At December 31, ~~2013~~2014, special mention assets consisted primarily of (i) ~~eighteen~~2 residential mortgage loans with a recorded investment totaling $~~1.8 million~~207, ~~(ii) three home equity loans with a recorded investment totaling $108,~~000, (~~iii~~ii) ~~ten~~6 commercial real estate loan relationships with a recorded investment totaling $32.7 million and (viii) ~~two~~one consumer ~~loans~~loan with principal ~~balances~~balance of $2045,000.

At December 31, ~~2012~~2013, substandard assets consisted primarily of (i) 7169 residential mortgage loans with a recorded investment of $89.54 million, (ii) ~~three~~21 home equity loans with a recorded investment totaling $~~578~~846,000, (iii) 1814 commercial real estate loan relationships with a recorded investment totaling $107.08 million, (iv) ~~eight~~five construction and land loans with a recorded investment totaling $43.65 million, and (v) ~~four~~three commercial loans with a recorded investment of $~~3.4 million~~340, ~~and (vi) two consumer loans totaling $8,~~000. ~~The collateral for the commercial real estate loan relationships classified as substandard was valued at $17.2 million as of December 31, 2012.~~ At December 31, ~~2012~~2013, special mention assets consisted primarily of (i) ~~eight~~eighteen residential mortgage loans with a recorded investment totaling $1.58 million, (ii) ~~two~~three home equity loans with a recorded investment totaling $60108,000, (iii) ~~three~~ten commercial real estate loan relationships with a recorded investment totaling $~~897~~3.7 million,~~000,~~ (iv) ~~four~~one commercial ~~loans~~loan with a recorded investment totaling $13.67 million, and (v) ~~one~~two consumer ~~loan~~loans with principal balances of $5920,000. At December 31, 2013, doubtful assets consisted of two commercial loans with a recorded investment of $2.4 million.

1415

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Operating Results for the Years Ended December 31, ~~2013~~2014 and ~~2012~~2013—Provision for Loan Losses” and “—Allowance for Loan Losses.”

Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists of three components:

(1)

specific allowances established for (a) any impaired commercial real estate, commercial, construction and multi-family mortgage loans or (b) non-accrual residential real estate loans, in either case where the recorded investment in the loan exceeds the measured value of the loan;

(2)

general allowances for loan losses for each loan type based on historical loan loss experience; and

(3)

unallocated maintained to cover uncertainties that affect our estimate of probable losses.

The adjustments to historical loss experience are based on our evaluation of several factors, including:

●

levels of, and trends in, charge-offs and recoveries;

●

national and local economic trends and conditions;

●

trends in volume and terms of loans, including any credit concentrations in the loan portfolio; and

●

experience, ability, and depth of lending management and other relevant staff.

We evaluate the allowance for loan losses based upon the combined total of the specific, historical loss and general components. Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

We consider commercial loans, commercial real estate loans and construction loans to be riskier than one- to four-family residential mortgage loans. Commercial loans involve a higher risk of default than residential loans of like duration since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of collateral, if any. Commercial real estate loans also have greater credit risks compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Construction loans have greater credit risk than permanent mortgage financing. The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

1516

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.

We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. 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. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their evaluation of information available to them at the time of their examination.

The allowance for loan losses was $54.93 million, or 21.0758% of total loans, at December 31, ~~2013~~2014, compared to $45.19 million, or 12.3707% of total loans, at December 31, ~~2012~~2013. The allowance for loan losses represented 4358.214% of nonperforming loans at December 31, ~~2013~~2014 and 3143.62% of nonperforming loans at December 31, ~~2012~~2013, as nonperforming loans ~~increased~~decreased to $137.64 million at December 31, ~~2013~~2014 from $13.16 million at December 31, ~~2012~~2013. Loans delinquent 30 days or greater decreased to $115.90 million at December 31, ~~2013~~2014 from $1511.19 million at December 31, ~~2012~~2013.

For further discussion regarding how we determined the allowance for loan losses as of December 31, ~~2013~~2014 and ~~2012~~2013, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Operating Results for the Years Ended December 31, ~~2013~~2014 and December 31, ~~2012~~2013—Provisions for Loan Losses.”

The following table sets forth activity in our allowance for loan losses for the years indicated.

	At or For the Years Ended December 31,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Balance at beginning of year	$	4,146		$	5,027		$	3,543		$	2,606		$	2,105
Charge-offs:
Real estate loans:
One- to four-family residential		(217	)		(2,108	)		(262	)		(223	)		—
Home equity loans and lines of credit		(258	)		(184	)		(13	)		—			(34	)
Multi-family		-			—			—			—			—
Commercial		(1,826	)		(4,652	)		(87	)		(144	)		—
Construction and land		(37	)		(49	)		(33	)		—			—
Commercial		(1,965	)		(450	)		—			(15	)		(9	)
Consumer and other		(14	)		(20	)		(12	)		(38	)		(74	)
Total charge-offs		(4,317	)		(7,463	)		(407	)		(420	)		(117	)
Recoveries:
Real estate loans:
One- to four-family residential		58			43			18			—			—
Home equity loans and lines of credit		-			2			—			—			—
Multi-family		-			—			—			—			—
Commercial		-			—			—			5			—
Construction and land		54			—			—			—			—
Commercial		203			33			6			—			—
Consumer and other		10			8			7			12			3
Total recoveries		325			86			31			17			3
Net charge-offs		(3,992	)		(7,377	)		(376	)		(403	)		(114	)
Provision for loan losses		5,699			6,496			1,860			1,340			615
Balance at end of year	$	5,853		$	4,146		$	5,027		$	3,543		$	2,606
Ratios:
Net charge-offs to average loans outstanding		(1.37	)%		(2.50	)%		(0.12	)%		(0.12	)%		(0.04	)%
Allowance for loan losses to non-performing loans at end of year		43.16	%		31.55	%		81.70	%		33.05	%		49.38	%
Allowance for loan losses to total loans at end of year		2.07	%		1.37	%		1.66	%		1.09	%		0.80	%

~~Allocation of Allowance for Loan Losses.~~ The following ~~tables~~table ~~set~~sets forth ~~the~~activity ~~allowance for loan losses allocated by loan category, the percent of the allowance to the total allowance and the percent of loans~~ in ~~each~~our ~~category to total loans at the dates indicated. The~~ allowance for loan losses ~~allocated~~for tothe ~~each~~years ~~category is not necessarily indicative of future losses in any particular category~~indicated.

	At December 31,
	At or For the Years Ended December 31,
	2013									2012									2011
	2014			2013			2012			2011			2010
	Amount			Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount			Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans
	(Dollars in thousands)
	(Dollars in thousands)
Balance at beginning of year	$	5,853		$	4,146		$	5,027		$	3,543		$	2,606
Real estate loans:
Charge-offs:
One- to four-family residential	$	1,650			28.2	%		52.9	%	$	692			16.7	%		49.2	%	$	1,220		24.3	%		46.4	%
Real estate loans:
Home equity loans and lines of credit		275			4.7			9.4			277			6.7			9.5			114		2.3			10.7
One- to four-family residential		(526	)		(217	)		(2,108	)		(262	)		(223	)
Multi-family		3			0.1			0.1			6			0.1			0.1			27		0.5			0.2
Home equity loans and lines of credit		(102	)		(258	)		(184	)		(13	)		—
Commercial		1,222			20.9			28.1			1,107			26.7			29.9			2,400		47.8			33.7
Multi-family		-			-			—			—			—
Construction and land		90			1.5			3.1			138			3.3			3.2			34		0.6			1.4
Commercial		(234	)		(1,826	)		(4,652	)		(87	)		(144	)
Commercial		1,843			31.5			6.1			405			9.8			7.7			713		14.2			7.2
Construction and land		(76	)		(37	)		(49	)		(33	)		—
Consumer and other		20			0.3			0.3			21			0.5			0.4			19		0.4			0.4
Commercial		(2,389	)		(1,965	)		(450	)		—			(15	)
Unallocated		750			12.8			-			1,500			36.2			-			500		9.9			—
Consumer and other		-			(14	)		(20	)		(12	)		(38	)
Total allowance for loan losses	$	5,853			100.0	%		100.0	%	$	4,146			100.0	%		100.0	%	$	5,027		100.0	%		100.0	%
Total charge-offs		(3,327	)		(4,317	)		(7,463	)		(407	)		(420	)
Recoveries:
Real estate loans:
One- to four-family residential		70			58			43			18			—
Home equity loans and lines of credit		30			-			2			—			—
Multi-family		-			-			—			—			—
Commercial		909			-			—			—			5
Construction and land		-			54			—			—			—
Commercial		671			203			33			6			—
Consumer and other		55			10			8			7			12
Total recoveries		1,735			325			86			31			17
Net charge-offs		(1,592	)		(3,992	)		(7,377	)		(376	)		(403	)
Provision for loan losses		33			5,699			6,496			1,860			1,340
Balance at end of year	$	4,294		$	5,853		$	4,146		$	5,027		$	3,543
Ratios:
Net charge-offs to average loans outstanding		(0.59	)%		(1.37	)%		(2.50	)%		(0.12	)%		(0.12	)%
Allowance for loan losses to non-performing loans at end of year		58.14	%		43.16	%		31.55	%		81.70	%		33.05	%
Allowance for loan losses to total loans at end of year		1.58	%		2.07	%		1.37	%		1.66	%		1.09	%

	At December 31,
	2010								2009
	Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	580		16.4	%		43.3	%	$	418		16.0	%		46.6	%
Home equity loans and lines of credit		35		1.0			10.9			42		1.6			11.7
Multi-family		27		0.8			1.0			10		0.4			1.3
Commercial		1,800		50.8			35.2			1,010		38.8			29.9
Construction and land		65		1.8			1.8			157		6.0			4.3
Commercial		406		11.4			7.2			283		10.9			5.5
Consumer and other		130		3.7			0.6			164		6.3			0.7
Unallocated		500		14.1			—			522		20.0			—
Total allowance for loan losses	$	3,543		100.0	%		100.0	%	$	2,606		100.0	%		100.0	%

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the percent of the allowance to the total allowance and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category.

	At December 31,
	2014								2013								2012
	Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	640		14.9	%		55.3	%	$	1,650		28.2	%		52.9	%	$	692		16.7	%		49.2	%
Home equity loans and lines of credit		239		5.5			8.9			275		4.7			9.4			277		6.7			9.5
Multi-family		50		1.2			1.7			3		0.1			0.1			6		0.1			0.1
Commercial		627		14.6			24.1			1,222		20.9			28.1			1,107		26.7			29.9
Construction and land		176		4.1			3.0			90		1.5			3.1			138		3.3			3.2
Commercial		1,229		28.6			6.7			1,843		31.5			6.1			405		9.8			7.7
Consumer and other		8		0.2			0.3			20		0.3			0.3			21		0.5			0.4
Unallocated		1,325		30.9			-			750		12.8			-			1,500		36.2			-

Total allowance for loan losses	$	4,294		100.0	%		100.0	%	$	5,853		100.0	%		100.0	%	$	4,146		100.0	%		100.0	%

	At December 31,
	2011								2010
	Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	1,220		24.3	%		46.4	%	$	580		16.4	%		43.3	%
Home equity loans and lines of credit		114		2.3			10.7			35		1.0			10.9
Multi-family		27		0.5			0.2			27		0.8			1.0
Commercial		2,400		47.8			33.7			1,800		50.8			35.2
Construction and land		34		0.6			1.4			65		1.8			1.8
Commercial		713		14.2			7.2			406		11.4			7.2
Consumer and other		19		0.4			0.4			130		3.7			0.6
Unallocated		500		9.9			—			500		14.1			—

Total allowance for loan losses	$	5,027		100.0	%		100.0	%	$	3,543		100.0	%		100.0	%

Securities Activities

Our securities investment policy is established by our board of directors. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management strategy. Our Asset/Liability Management Committee, which consists of senior management, oversees our investing strategies. The board of directors reviews the Asset/Liability Management Committee’s activities and strategies, and evaluates on an ongoing basis our investment policy and objectives. Our Asset/Liability Management Committee is responsible for making securities portfolio decisions in accordance with established policies. Our chief executive officer and our chief financial officer have the authority to purchase and sell securities within specific guidelines established by the investment policy. In addition, all transactions are reviewed by the Asset/Liability Management Committee at least monthly.

Our current investment policy generally permits securities investments in debt securities issued by the U.S. Government and U.S. Government agencies, municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of U.S. Government agencies and U.S. Government sponsored enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank. Securities in these categories are classified as “investment securities” for financial reporting purposes. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as collateralized mortgage obligations (“CMOs”) issued or backed by securities issued by these government agencies or government-sponsored enterprises. Also permitted are investments in securities issued or backed by the Small Business Administration, United States Department of Agriculture and mortgage-related mutual funds. As of December 31, ~~2013~~2014, we held no asset-backed securities (securities collateralized by automobile loans, credit card receivables and home equity loans), no preferred securities issued by either Fannie Mae or Freddie Mac and no private-label mortgage backed securities. Our current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approach is to increase overall investment securities yields, manage interest rate risk, ensure adequate liquidity for loan demand, deposit fluctuations and other changes to our balance sheet, and provide collateral for our long-term debt needs.

At December 31, ~~2013~~2014, we did not have any securities from an issuer (other than securities issued by the U. S. Governments or by its agencies) that had an aggregate book value of more than 10% of our consolidated stockholders’ equity.

FASB ASC Topic 320-10-25, “Accounting for Certain Investments in Debt and Equity Securities,” requires that, at the time of purchase and at each balance sheet date thereafter, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent. Securities available-for-sale are reported at fair value, while securities held to maturity are reported at amortized cost. We do not have a trading portfolio. ~~The~~During ~~increase~~2014, inthe ~~interest~~Company ~~rates~~reclassified ~~during~~its ~~2013~~held ~~reduced~~to maturity portfolio as available-for-sale. In accordance with regulatory and accounting requirements, the ~~market~~Company ~~value~~is ofprohibited ~~our~~from ~~investment~~classifying ~~portfolio~~security purchases as held to maturity for a period of two years.

Effective December 10, 2013, pursuant to the Dodd-Frank Act, federal banking and securities regulators issued final rules to implement Section 619 of the Dodd-Frank Act (the “Volcker Rule”). Generally, subject to a transition period and certain exceptions, the Volcker Rule restricts insured depository institutions and their affiliated companies from engaging in short-term proprietary trading of certain securities, investing in funds with collateral comprised of less ~~that~~than 100% loans if such funds are not registered with the Securities and Exchange Commission and from engaging in hedging activities that do not hedge a specific identified risk. After the transition period, the Volcker Rule prohibitions and restrictions will apply to banking entities unless an exception applies. We are currently analyzing the impact of the Volcker Rule on our investment portfolio, and if any changes are required to our investment strategies that could negatively affect our earnings. The Volcker Rule has had no impact on our investment portfolio or earnings.

Mortgage-Backed Securities. We invest in government-sponsored enterprise (“GSE”) mortgage-backed securities to generate positive interest rate spreads with minimal administrative expense, lower credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae, and increase liquidity. We invest primarily in mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. At December 31, 2013, our mortgage-backed securities portfolio had a fair value of $15.5 million, and consisted of pass-through securities.

Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (government sponsored enterprises, such as Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as Colonial Bank, FSB, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater or lesser than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield on such securities. We review prepayment estimates for our mortgage-backed securities at the time of purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio.

Collateralized Mortgage Obligations. Government-sponsored enterprise collateralized mortgage obligations (CMO’s) are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. Our practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative trade-offs between lifetime interest rate caps, prepayment risk and interest rates. At December 31, 2013, our collateralized mortgage obligation portfolio had a fair value of $61.6 million.

Corporate Debt Securities and Municipal Bonds. At December 31, 2013, we held $5.9 million in corporate debt securities, at fair value, $4.5 million of which were classified as available for sale and $1.4 million of which were classified as held to maturity. At December 31, 2013, we held $22.6 million in bonds issued by states and political subdivisions, $15.9 million of which were classified as held to maturity at amortized cost and $6.7 million of which were classified as available for sale at fair value. Included in this total are bond anticipation notes and tax anticipation notes (all of which have terms of one year or less), issued by municipalities in the State of New Jersey. Although corporate debt securities and municipal bonds may offer a higher yield than a U.S. Treasury or agency security of comparable duration, these securities also have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this potential risk, we generally limit investments in corporate bonds to securities rated in one of the four highest categories by at least one nationally recognized rating agency, and to a total investment of no more than $1.0 million per issuer. We also generally limit investments in municipal bonds to issues that are insured unless the issuer is a local government entity within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In, addition our investment policy imposes an investment limitation of $1.5 million per municipal bond and a limitation equal to our loan-to-one borrower limitation for bond anticipation notes and tax anticipation notes.

Equity Securities. At December 31, 2013, our equity securities consisted of Federal Home Loan Bank of New York common stock and mutual funds. We hold the Federal Home Loan Bank of New York common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank of New York’s advance program. There is no market for the common stock, but it is the current practice of the Federal Home Loan Bank of New York to redeem shares at par value. The aggregate fair value of our Federal Home Loan Bank of New York common stock as of December 31, 2013 was $702,000 based on its par value. No unrealized gains or losses have been recorded because the par value of the common stock represents its fair value. Our mutual funds consist solely of Shay Asset Management Funds and Wilmington Prime Money Market Fund.

~~U.S.~~Mortgage-Backed ~~Government Agency~~ Securities. AtWe ~~December~~invest ~~31,~~in ~~2013,~~government-sponsored weenterprise ~~held~~(“GSE”) ~~U.S.~~mortgage-backed ~~government~~securities ~~agency~~to ~~securities~~generate ~~available~~positive ~~for~~interest ~~sale~~rate spreads with aminimal ~~fair~~administrative ~~value~~expense, oflower ~~$136.8~~credit ~~million.~~risk ~~Generally,~~as ~~these~~a ~~securities~~result ~~have~~of ~~short-~~the toguarantees ~~medium-term~~provided ~~maturities~~by ~~(one~~Freddie toMac, ~~five~~Fannie ~~years)~~Mae and ~~may~~Ginnie ~~have~~Mae, ~~call~~and orincrease ~~step-up features~~liquidity. ~~While~~We ~~these~~invest ~~securities~~primarily ~~generally~~in ~~provide~~mortgage-backed ~~lower~~securities ~~yields~~issued ~~than~~or ~~other~~guaranteed ~~investments~~by ~~such~~Fannie asMae, ~~mortgage-backed~~Freddie ~~securities~~Mac, ~~our~~and ~~current~~Ginnie ~~investment~~Mae. At ~~strategy~~December is31, to2014, ~~maintain~~our ~~investments~~mortgage-backed insecurities ~~such~~portfolio ~~instruments~~had toa ~~the~~fair ~~extent~~value ~~appropriate~~of ~~for~~$55.3 ~~liquidity purposes~~million, ~~as collateral for borrowings,~~ and ~~for~~consisted ~~prepayment~~of ~~protection~~pass-through securities.

~~Other~~Mortgage-~~Than-Temporary~~backed ~~Impairment~~securities are created by pooling mortgages and issuing a security collateralized by the pool of ~~Securities~~mortgages with an interest rate that is less than the interest rate on the underlying mortgages. ~~For~~Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (government sponsored enterprises, such as Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the ~~years~~participation ~~ended~~interests ~~December~~in 31the form of securities to investors, ~~2013~~such as Colonial Bank, FSB, and ~~2012~~guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater or lesser than the prepayment rate estimated at the time of purchase, ~~there~~which ~~was~~may norequire ~~charge~~adjustments ~~against~~to ~~operating~~the ~~results~~amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield on such securities. We review prepayment estimates for ~~other~~our mortgage-~~than-temporarily~~backed ~~impaired~~securities at the time of purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio.

Collateralized Mortgage Obligations. Government-sponsored enterprise collateralized mortgage obligations (CMO’s) are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. Our practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative trade-offs between lifetime interest rate caps, prepayment risk and interest rates. At December 31, 2014, our collateralized mortgage obligation portfolio had a fair value of $57.8 million.

Municipal Bonds. At December 31, 2014, we held $4.0 million in bonds issued by states and political subdivisions, which were classified as available for sale at fair value. Although municipal bonds may offer a higher yield than a U.S. Treasury or agency security of comparable duration, these securities also have a higher risk of default due to adverse changes in the creditworthiness of the issuer. In recognition of this potential risk, we generally limit investments in municipal bonds to issues that are insured unless the issuer is a local government entity within our service area. Such local entity obligations generally are not rated, and are subject to internal credit reviews. In, addition our investment policy imposes an investment limitation of $1.5 million per municipal bond and a limitation equal to our loan-to-one borrower limitation for bond anticipation notes and tax anticipation notes.

Equity Securities. At December 31, 2014, our equity securities consisted of Federal Home Loan Bank of New York common stock and mutual funds. We hold the Federal Home Loan Bank of New York common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank of New York’s advance program. There is no market for the common stock, but it is the current practice of the Federal Home Loan Bank of New York to redeem shares at par value. The aggregate fair value of our Federal Home Loan Bank of New York common stock as of December 31, 2014 was $503,000 based on its par value. No unrealized gains or losses have been recorded because the par value of the common stock represents its fair value. Our mutual funds consist solely of Shay Asset Management Funds.

U.S. Government Agency Securities. At December 31, 2014, we held U.S. government agency securities available for sale with a fair value of $86.9 million. Generally, these securities have short- to medium-term maturities (one to five years) and may have call or step-up features. While these securities generally provide lower yields than other investments such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes, as collateral for borrowings, and for prepayment protection.

Small Business Administration (SBA) Securities . At December 31, 2014, we held SBA securities available for sale with a fair value of $17.2 million. Generally, these securities have medium to long-term maturities (five years or greater) with fixed or adjustable rates. These securities are unconditionally guaranteed as to timely principal and interest payments by the full faith and credit of the U. S. government.

Other-Than-Temporary Impairment of Securities. For the years ended December 31, 2014 and 2013, there was no charge against operating results for other-than-temporarily impaired securities.

The following table sets forth the composition of our securities portfolio (excluding Federal Home Loan Bank of New York common stock) at the dates indicated.

At December 31,

2013

2012

2011

2014

2013

2012

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Amortized Cost

Fair Value

(In thousands)

Securities available-for-sale:

GSE mortgage-backed securities

1454,~~794~~519

1555,~~463~~306

3214,~~340~~794

3415,~~721~~463

4832,~~355~~340

5134,~~803~~721

GSE collateralized mortgage obligations

6458,~~120~~574

6157,~~622~~826

5064,~~846~~120

5261,~~134~~622

5950,~~607~~846

6052,~~970~~134

U.S. Government obligations

~~141~~88,~~836~~315

~~136~~86,~~783~~944

~~126~~141,~~524~~836

~~127~~136,~~053~~783

91126,~~203~~524

91127,~~553~~053

Corporate debt obligations

~~4,493~~-

~~4,501~~-

64,~~603~~493

64,~~753~~501

96,~~573~~603

96,~~668~~753

Mutual funds

~~903~~850

~~945~~892

~~4,909~~903

~~4,948~~945

74,~~743~~909

74,~~787~~948

Municipal debt obligations

64,~~828~~038

64,~~719~~012

6,~~171~~828

6,~~256~~719

46,~~977~~171

56,~~075~~256

SBA pools

117,~~097~~255

117,~~093~~255

1,~~427~~097

1,~~439~~093

1,~~681~~427

1,~~687~~439

Total securities available-for-sale

~~234~~223,~~071~~551

~~227~~222,~~126~~235

~~228~~234,~~820~~071

~~233~~227,~~304~~126

~~223~~228,~~139~~820

~~228~~233,~~543~~304

Securities held-to-maturity:

GSE mortgage-backed securities

~~188~~-

~~208~~-

~~429~~188

~~469~~208

~~782~~429

~~859~~469

Corporate debt obligations

~~1,193~~-

~~1,396~~-

1,~~192~~193

1,~~502~~396

1,~~191~~192

1,~~465~~502

Municipal debt obligations

~~15,910~~-

~~16,278~~-

2815,~~318~~910

2816,~~953~~278

3628,~~019~~318

3628,~~355~~953

Total securities held-to-maturity

~~17,291~~-

~~17,882~~-

2917,~~939~~291

3017,~~924~~882

3729,~~992~~939

3830,~~679~~924

The following tables show the gross unrealized losses and fair value, and the length of time that individual securities have been in a continuous unrealized loss position, for our available-for-sale investment securities at the dates indicated.

	At December 31, 2014
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)

GSE mortgage-backed securities	$	15,902	$	48	$	-	$	-	$	15,902	$	48
GSE collateralized mortgage obligations		3,428		81		31,281		861		34,709		942
U. S. Government obligations		41,466		490		43,460		899		84,926		1,389
Corporate debt obligations		-		-		-		-		-		-
Municipal debt obligations		871		10		834		22		1,705		32
SBA pools		4,445		62		-		-		4,445		62
Total	$	66,112	$	691	$	75,575	$	1,782	$	141,687	$	2,473

	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)

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
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
Total	$	179,939	$	7,431	$	9,385	$	561	$	189,324	$	7,992

21At December 31, 2013, there were no held-to-maturity investment securities with gross unrealized losses.

	At December 31, 2012
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
GSE mortgage-backed securities	$	42	$	1	$	1,508	$	29	$	1,550	$	30
GSE collateralized mortgage obligations		706		1		287		1		993		2
U. S. Government obligations		30,705		163		-		-		30,705		163
Corporate debt obligations		496		1		-		-		496		1
Municipal debt obligations		1,539		9		-		-		1,539		9
SBA pools		101		1		-		-		101		1
Total	$	33,589	$	176	$	1,795	$	30	$	35,384	$	206

At December 31, 2014, there were 42 securities in the less-than-twelve-months unrealized loss category and 45 securities in the twelve-months-or-more unrealized loss category for the available-for-sale portfolio. Included in the 42 securities in the less-than-twelve month category for available-for-sale securities are: (a) 21 U. S. government obligations; (b) four municipal debt obligations; (c) four SBA pools; (d) ten mortgage-backed securities; and (f) three collateralized mortgage obligations. Included in the 45 securities in the twelve-months-or-more category are: (a) 23 U. S. government obligations; (b) three municipal debt obligations; and (c) 19 collateralized mortgage obligation.

At December 31, 2013 and 2012, there were no held-to-maturity investment securities with gross unrealized losses.

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

At December 31, 2012, there were 27 securities in the less-than-twelve-months unrealized loss category and three securities in the twelve-months-or-more unrealized loss category for the available-for-sale portfolio. Included in the 27 securities in the less-than-twelve month category for available-for-sale securities are: (a) 16 U. S. Government securities, 14 of which have been in a loss position for one month, one was in a loss position for three months and one was in a loss position for five months; (b) one corporate debt obligation which has been in a loss position for one month; (c) six municipal debt obligations, one of which was in a loss position for two months and five were in a loss position for one month; (d) two SBA pools, both of which have been in a loss position for one month; (e) one mortgage-backed security which has been in a loss position for one month; and (f) one collateralized mortgage obligation which has been in a loss position for one month. Included in the three securities in the twelve-months-or-more category are: (a) two mortgage-backed securities; and (b) one collateralized mortgage obligation.

As of December 31, 2013 and 2012, management believed that the unrealized losses of the securities noted above were primarily dependent on movements in market interest rates. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service, pools of loans from the Small Business Administration and pools of loans from a government-sponsored enterprise. Management believes that these fair values will recover as the underlying portfolios mature. We did not intend to sell and expect that it is not more likely than not that we would be required to sell these investment securities prior to an anticipated recovery in fair value. Accordingly, management did not believe any individual unrealized loss as of December 31, 2013 and 2012, represented an other-than-temporary impairment.

Portfolio Maturities and Yields. The composition and maturities of the investment debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2013 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have been adjusted to a tax-equivalent basis, assuming a federal income tax rate of 34.0%. At December 31, 2013, the non-tax adjusted weighted average yield on total state and municipal securities was 1.08%.

	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years					More than Ten Years					Total Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)
Securities available for sale:
Mortgage-backed securities	$	-		-	%	$	174		6.05	%	$	795		4.42	%	$	13,825		3.50	%	$	14,794	$	15,463		3.58	%
Collateralized mortgage obligations		-		-			3,992		1.82			9,291		1.90			50,837		1.87			64,120		61,622		1.87
U.S. government obligations		-		-			58,452		0.85			83,384		1.45			-		-			141,836		136,783		1.20
Corporate debt obligations		2,498		1.01			1,995		0.89			-		-			-		-			4,493		4,501		0.96
Mutual funds		903		1.80			-		-			-		-			-		-			903		945		1.80
Municipal debt obligations		-		-			2,718		4.17			4,110		3.97			-		-			6,828		6,719		4.05
SBA pools		-		-			-		-			202		2.88			895		0.63			1,097		1,093		1.04
Total securities available for sale	$	3,401		1.22	%	$	67,331		1.06	%	$	97,782		1.63	%	$	65,557		2.20	%	$	234,071	$	227,126		1.62	%
Securities held to maturity:
Mortgage-backed securities	$	9		6.11	%	$	36		6.86	%	$	2		6.00	%	$	141		5.21	%	$	188	$	208		5.58	%
Corporate debt obligations		-		-			996		7.13			-		-			197		6.44			1,193		1,396		7.02
Municipal debt obligations		12,266		1.41			510		7.33			1,666		7.33			1,468		7.89			15,910		16,278		2.82
Total securities held to maturity	$	12,275		1.41	%	$	1,542		7.19	%	$	1,668		7.33	%	$	1,806		7.53	%	$	17,291	$	17,882		3.14	%

As of December 31, 2014 and 2013, management believed that the unrealized losses of the securities noted above were primarily dependent on movements in market interest rates. These investment securities are comprised of securities that are rated investment grade by at least one bond credit rating service, pools of loans from the Small Business Administration and pools of loans from a government-sponsored enterprise. Management believes that these fair values will recover as the underlying portfolios mature. We did not intend to sell and expect that it is not more likely than not that we would be required to sell these investment securities prior to an anticipated recovery in fair value. Accordingly, management did not believe any individual unrealized loss as of December 31, 2014 and 2013, represented an other-than-temporary impairment.

Portfolio Maturities and Yields. The composition and maturities of the investment debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2014 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have been adjusted to a tax-equivalent basis, assuming a federal income tax rate of 34.0%. At December 31, 2014, the non-tax adjusted weighted average yield on total state and municipal securities was 2.54%.

	One Year or Less				More than One Year through Five Years				More than Five Years through Ten Years				More than Ten Years				Total Securities
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)

Securities available for sale:
Mortgage-backed securities	$	-	-	%	$	259	4.64	%	$	96	2.50	%	$	54,164	2.42	%	$	54,519	$	55,306	2.43	%
Collateralized mortgage obligations		-	-			2,634	1.84			7,404	1.89			48,536	1.80			58,574		57,826	1.81
U.S. government obligations		-	-			58,856	1.27			29,459	1.70			-	-			88,315		86,944	1.41
Corporate debt obligations		-	-			-	-			-	-			-	-			-		-	-
Mutual funds		850	1.23			-	-			-	-			-	-			850		892	1.23
Municipal debt obligations		306	4.55			1,855	3.77			1,877	3.80			-	-			4,038		4,012	3.85
SBA pools		-	-			-	-			185	2.88			17,070	2.18			17,255		17,255	2.19
Total securities available for sale	$	1,156	2.11	%	$	63,604	1.38	%	$	39,021	1.84	%	$	119,770	2.13	%	$	223,551	$	222,235	1.87	%

Securities held to maturity:
Mortgage-backed securities	$	-	-	%	$	-	-	%	$	-	-	%	$	-	-	%	$	-	$	-	-	%
Corporate debt obligations		-	-			-	-			-	-			-	-			-		-	-
Municipal debt obligations		-	-			-	-			-	-			-	-			-		-	-
Total securities held to maturity	$	-	-	%	$	-	-	%	$	-	-	%	$	-	-	%	$	-	$	-	-	%

Sources of Funds

General. Deposits, borrowings, repayments and prepayments of loans and securities, proceeds from sales of securities, proceeds from maturing securities and cash flows from operations are the primary sources of our funds for use in lending, investing and for other general purposes.

Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of certificates of deposit, savings accounts, NOW accounts, checking accounts, money market deposit accounts, club accounts and individual retirement accounts. We provide commercial checking accounts for businesses, municipalities and school boards. In addition, we provide low-cost checking account services for our customers.

Our deposits are obtained predominantly from the areas in which our branch offices are located. We rely on our customer service and competitive pricing to attract and retain these deposits. We accept certificates of deposit in excess of $100,000 for which we may provide preferential rates. At December 31, ~~2013~~2014, we had no brokered certificates of deposits. In addition, at December 31, ~~2013~~2014, we had $~~143~~142.72 million in deposits from municipalities and school boards within the State of New Jersey.

The following tables set forth the distribution of total deposit accounts, by account type, at the dates indicated.

	At December 31,
	2013								2012								2011
	2014								2013								2012
	Balance		Percent			Weighted Average Rate			Balance		Percent			Weighted Average Rate			Balance		Percent			Weighted Average Rate
	(Dollars in thousands)
Deposit type:
Non-interest bearing demand	$	4248,~~739~~341		810.1917	%		-	%	$	3942,~~301~~739		78.0919	%		-	%	$	4239,~~568~~301		87.1809	%		-	%
Savings		~~111~~85,~~219~~913		2118.3107			0.5633			~~106~~111,~~469~~219		1921.2231			0.6556			~~105~~106,~~045~~469		2019.1722			10.2665
NOW accounts		~~152~~150,~~279~~415		2931.1764			0.4241			~~168~~152,~~150~~279		3029.3517			0.8242			~~115~~168,~~169~~150		2230.1235			0.8482
Super NOW accounts		4337,~~740~~466		87.3888			0.3526			4443,~~548~~740		8.0438			0.5435			3944,~~198~~548		78.5304			0.8254
Money market deposit		6356,~~811~~545		1211.2290			0.4031			7263,~~051~~811		1312.0022			0.6340			7172,~~145~~051		13.6600			0.8763
Total transaction accounts		~~413~~378,~~788~~680		79.2766			0.4031			~~430~~413,~~519~~788		7779.7027			0.6440			~~373~~430,~~125~~519		7177.6670			0.9164
Certificates of deposit		~~108~~96,~~239~~700		20.7334			1.4544			~~123~~108,~~571~~239		2220.3073			1.6045			~~147~~123,~~578~~571		2822.3430			1.8960
Total deposits	$	~~522~~475,~~027~~380		100.00	%		0.6253	%	$	~~554~~522,~~090~~027		100.00	%		0.8662	%	$	~~520~~554,~~703~~090		100.00	%		10.1986	%

As of December 31, ~~2013~~2014, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $3936.28 million. The following table sets forth the maturity of those certificates of deposit as of December 31, ~~2013~~2014.

Certificates of Deposits in Amounts Greater than or Equal to $100,000	At December 31, ~~2013~~2014
	(In thousands)
Three months or less	$	25,~~761~~951
Over three months through six months		34,~~111~~136
Over six months through one year		85,~~027~~733
Over one year to three years		916,~~200~~916
Over three years		164,~~086~~016
Total	$	3936,~~185~~752

24At December 31, 2014, $46.1 million of our certificates of deposit had maturities of one year or less.

At December 31, 2013, $51.0 million of our certificates of deposit had maturities of one year or less. We monitor activity in these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.26

Borrowings. Our borrowings consist of short-term and long-term Federal Home Loan Bank advances. The following table sets forth information concerning the borrowing balances and interest rates at the dates and for the years indicated.

	At or For the Year Ended December 31,
	2013			2012			2011
	2014			2013			2012
	(Dollars in thousands)
Balance at end of year	$	-		$	-		$	~~10,045~~-
Average balance during year	$	74,~~557~~445		$	17,~~836~~557		$	61,~~235~~836
Maximum outstanding at any month end	$	3424,~~020~~670		$	234,~~000~~020		$	142,~~430~~000
Weighted average interest rate at end of year		-	%		-	%		~~0.42~~-	%
Average interest rate during year		0.38	%		10.9138	%		1.8991	%

At December 31, ~~2013~~2014, there was no outstanding balance of borrowings from the FHLB.

At December 31, ~~2013~~2014, we had the ability to borrow approximately $~~174~~162.95 million under our credit facilities with the Federal Home Loan Bank of New York of which no balance was outstanding.

Employees

As of December 31, ~~2013~~2014, we had ~~100~~93 full-time employees and 169 part-time employees. The employees are not represented by a collective bargaining unit and we believe we have a good working relationship with our employees.

Subsidiary Activities

~~COBK~~Cohansey ~~Investments~~Bridge, LLC ~~(formerly called COBK Investments, Inc.)~~ is a wholly owned subsidiary of Colonial Bank, FSB. It is a ~~Delaware~~New Jersey corporation that was formed in ~~2013~~2012 to invest ~~in and manage investment securities that Colonial Bank, FSB is authorized to~~ hold~~. COBK~~ ~~Investments, Inc. was dissolved in September 2013. At December 31, 2013, COBK Investments, LLC had $150.0 million in assets,~~ and ~~Colonial~~sell ~~Bank,~~foreclosed ~~FSB~~real ~~had an equity investment of $11~~estate.~~8 million in COBK Investments, LLC.~~

COBK Investments, LLC was a wholly owned subsidiary of Colonial Bank, FSB that was liquidated in August 2014.

FEDERAL AND STATE TAXATION

Tax Allocation

Colonial Bank, FSB, Colonial Financial Services, Inc. and ~~COBK~~Cohansey ~~Investments~~Bridge, LLC have established a method for allocating and for reimbursing the payment of their consolidated tax liability.

Federal Taxation

General. Colonial Financial Services, Inc., Colonial Bank, FSB, ~~and~~ COBK Investments, LLC and Cohansey Bridge, LLC are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. Colonial Financial Services Inc.’s and Colonial Bank, FSB’s federal tax returns are not currently under audit, and have not been audited during the past five years. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the applicable tax rules.

Method of Accounting. For federal income tax purposes, Colonial Financial Services, Inc. currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.

Bad Debt Reserves. Historically, Colonial Bank, FSB has been subject to special provisions in the tax law regarding allowable tax bad debt deductions and related reserves. Tax law changes were enacted in 1996, pursuant to the Small Business Protection Act of 1996 (the “1996 Act”), that eliminated the use of the percentage of taxable income method for tax years after 1995 and required recapture into taxable income over a six-year period of all bad debt reserves accumulated after 1987. Colonial Bank, FSB recaptured approximately $50,000 of reserves over the six-year period ended December 31, 2002.

Currently, the Colonial Financial Services, Inc. consolidated group uses the specific charge off method to account for bad debt deductions for income tax purposes.

Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to November 1, 1988 were subject to recapture into taxable income if Colonial Bank, FSB failed to meet certain thrift asset and definitional tests.

At December 31, ~~2013~~2014, our total federal pre-1988 base year reserve was approximately $1.5 million. However, under current law, base-year reserves remain subject to recapture if Colonial Bank, FSB makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.

Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of AMT may be used as credits against regular tax liabilities in future years. Colonial Financial Services, Inc. and Colonial Bank, FSB have been subject to the AMT but currently have no such amounts available as credits for carryover.

Net Operating Loss Carryovers. Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. However, subject to certain limitations, the carryback period for net operating losses incurred in 2008 or 2009 (but not both years) was expanded to five years. At December 31, ~~2013~~2014, Colonial Bank, FSB had no net operating loss carryforwards for federal income tax purposes.

Corporate Dividends-Received Deduction. Colonial Financial Services, Inc. may exclude from its federal taxable income 100% of dividends received from Colonial Bank, FSB as a wholly owned subsidiary.

Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. At December 31, ~~2013~~2014, Colonial Financial Services, Inc. and its subsidiaries have federal capital loss carryforwards of approximately $195,000 expiring ~~from~~in ~~2014 through~~ 2015. The Company expects to fully realize the benefit of such carryforwards through tax planning strategies.

State Taxation

Colonial Bank, FSB currently files New Jersey Corporation Business tax returns for banking and financial corporations. Generally, the income of savings institutions in New Jersey is subject to the New Jersey Corporation Business tax at the rate of 9% on its “entire net income,” which generally means federal taxable income before net operating loss and special deductions, subject to certain adjustments (including addition of interest income on state and municipal obligations). With the formation of CB Delaware Investments Inc. (now known as COBK Investments, Inc.) in 2006 and the transfer of investment securities to it, the taxable state income of Colonial Bank, FSB had been substantially reduced. With the reduction, Colonial Bank, FSB is in a net operating loss position for state tax purposes and may utilize state net operating loss carryforwards to reduce future state income taxes, though there is no guarantee that these carryforwards will be utilized before they expire. In September 2013, Colonial Bank FSB dissolved COBK Investments, Inc. and formed COBK Investments, LLC which returns the investment income to the Bank as taxable state income.

26At December 31, 2014, Colonial Bank, FSB has New Jersey net operating loss carryforwards of $19.2 million, of which $3.2 million expires in 2015 and the balance expires from 2029 through 2032. New Jersey net operating losses occurring for periods before January 1, 2009 can be carried forward for seven succeeding years and net operating losses accruing for periods after January 1, 2009 may be carried forward 20 succeeding tax years. At December 31, 2014, the Company has recorded a valuation allowance of approximately $324,000 against the deferred tax assets attributable to the New Jersey net operating loss carryforwards.

At December 31, 2013, Colonial Bank, FSB has New Jersey net operating loss carryforwards of $20.2 million, of which $5.5 million expires from 2014 through 2015 and the balance expires from 2029 through 2032. New Jersey net operating losses occurring for periods before January 1, 2009 can be carried forward for seven succeeding years and net operating losses accruing for periods after January 1, 2009 may be carried forward 20 succeeding tax years. At December 31, 2013, the Company has recorded a valuation allowance of approximately $305,000 against the deferred tax assets attributable to the New Jersey net operating loss carryforwards.28

At December 31, ~~2013~~2014, Colonial Bank, FSB had New Jersey capital loss carryforwards of $115,000. For New Jersey purposes, capital losses can be carried back three years and carried forward five succeeding years. At December 31, ~~2013~~2014, the Company has recorded a full valuation allowance of $712,000 for the state capital loss carryforwards.

Colonial Financial Services, Inc. is not currently under audit with respect to their state income tax returns and their state income tax returns have not been audited for the past five years. Colonial Bank, FSB is not currently under audit with respect to their state income tax returns.

SUPERVISION AND REGULATION

General

Colonial Bank, FSB is examined and supervised by the Office of the Comptroller of the Currency and is subject to examination by the Federal Deposit Insurance Corporation. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Colonial Bank, FSB also is a member of and owns stock in the Federal Home Loan Bank of New York, which is one of the twelve regional banks in the Federal Home Loan Bank System. Colonial Bank, FSB is also regulated to a lesser extent by the Board of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters. The Office of the Comptroller of the Currency examines Colonial Bank, FSB and prepares reports for the consideration of its board of directors on any operating deficiencies. Colonial Bank, FSB’s relationship with its depositors and borrowers is also regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Colonial Bank, FSB’s mortgage documents.

As a savings and loan holding company, Colonial Financial Services, Inc. is required to comply with the rules and regulations of the Federal Reserve Board, and is required to file certain reports with and be subject to examination by the Federal Reserve Board. Colonial Financial Services, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Reserve Board or Congress, could have a material adverse impact on Colonial Financial Services, Inc. and Colonial Bank, FSB and their operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes in the regulation of federal savings banks such as Colonial Bank, FSB. Under the Dodd-Frank Act, the Office of Thrift Supervision has been eliminated and responsibility for the supervision and regulation of federal savings banks has been transferred to the Office of the Comptroller of the Currency, which is the agency that is currently primarily responsible for the regulation and supervision of national banks. Responsibility for the regulation and supervision of savings and loan holding companies, such as Colonial Financial Services, Inc. has been transferred to the Federal Reserve Board, which currently supervises bank holding companies. Additionally, a new Consumer Financial Protection Bureau has been established as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau has assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function previously assigned to federal banking regulators, and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as Colonial Bank, FSB, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the primary enforcement authority of, their primary regulator rather than the Consumer Financial Protection Bureau.

2729

Set forth below is a brief description of certain regulatory requirements that are or will be applicable to Colonial Financial Services, Inc. and Colonial Bank, FSB. The description below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Colonial Financial Services, Inc. and Colonial Bank, FSB.

Regulatory Agreement and Capital Requirements

On May 30, 2013, Colonial Bank, FSB entered into an agreement with the Office of the Comptroller of the Currency. The agreement provides, among other things, that within specified time frames:

●

Colonial Bank, FSB must establish a Compliance Committee to monitor and coordinate Colonial Bank, FSB’s adherence to the agreement and submit reports to the Office of the Comptroller of the Currency;

●

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

●

Colonial Bank, FSB must submit for review and non-objection by the Office of the Comptroller of the Currency a three-year written capital plan;

●

Colonial Bank, FSB must submit for review and non-objection by the Office of the Comptroller of the Currency a three-year strategic plan;

●

Colonial Bank, FSB must implement a profit plan to improve and sustain Colonial Bank, FSB’s earnings;

●

Colonial Bank, FSB 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;

●

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

●

Colonial Bank, FSB must implement a written program to improve credit risk management; and

●

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

On May 30, 2013, Colonial Bank, FSB was notified by the Office of the Comptroller of the Currency that it established minimum capital ratios for Colonial Bank, FSB 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 December 31, ~~2013~~2014, Colonial Bank, FSB’s ratios for these items were 911.7406%, 1923.1957% and 2024.4583%, respectively.

2830

Failure to comply with the regulatory capital ratios can result in Colonial Bank, FSB being required to submit a revised capital plan for the Office of the Comptroller of the Currency’s review and non-objection as well as imposition of a revised enforcement order.

Holding Company Board Resolutions

In July 2013, Colonial Financial Services, Inc. adopted board resolutions as requested by the Federal Reserve Board. The resolutions provide, among other things, that within specified time frames:

●

Colonial Financial Services, Inc. must serve as a source of strength to Colonial Bank, FSB, including assuring compliance with the regulatory agreement and other supervisory actions;

●

Colonial Financial Services, Inc. must submit to the Federal Reserve Bank of Philadelphia a written plan to strengthen board oversight related to financial and risk management

●

Colonial Financial Services, Inc. may not pay dividends, incur debt or repurchase its stock without prior written approval from the Federal Reserve Bank of Philadelphia; and

●

Colonial Bank, FSB must submit to the Federal Reserve Bank of Philadelphia a capital plan.

Failure to comply with the board resolutions could result in enforcement action by the Federal Reserve Board.

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the Office of the Comptroller of the Currency. Under these laws and regulations, Colonial Bank, FSB may invest in mortgage loans secured by residential and nonresidential real estate, commercial business loans and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Colonial Bank, FSB also may establish subsidiaries that may engage in activities not otherwise permissible for Colonial Bank, FSB, including real estate investment and securities and insurance brokerage. The Dodd-Frank Act authorized the payment of interest on commercial checking accounts, effective July 21, 2011.

Capital Requirements. Office of the Comptroller of the Currency regulations require savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.

The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of the Comptroller of the Currency, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the purchaser’s recourse to the savings bank. Colonial Bank, FSB does not typically engage in asset sales.

2931

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 to executive officers 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 also implements the Dodd-Frank Act’s directive to apply to savings and loan holding companies consolidated capital requirements that are not less stringent than those applicable to their subsidiary institutions. The final rule iswas effective January 1, 2015. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.

In accordance with OTS regulations, at the time of the mutual-to-stock conversion, the Company substantially restricted retained earnings by establishing a liquidation account. The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their accounts at Colonial Bank, FSB after conversion. The Bank established a parallel liquidation account to support the Company’s liquidation account in the event the Company does not have sufficient assets to fund its obligations under its liquidation account. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts. In the event of a complete liquidation of Colonial Bank, FSB or the Company, each account holder will be entitled to receive a distribution in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

At December 31, ~~2013~~2014, Colonial Bank, FSB’s capital exceeded all applicable requirements.

Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, ~~2013~~2014, Colonial Bank, FSB was in compliance with the loans-to-one-borrower limitations.

Qualified Thrift Lender Test. As a federal savings bank, Colonial Bank, FSB must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Colonial Bank, FSB must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 months. A savings bank that fails the qualified thrift lender test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL Test potentially subject to agency enforcement action for a violation of law.

Capital Distributions. Office of the Comptroller of the Currency regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings bank must file an application for approval of a capital distribution if:

●

the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years;

●

the savings bank would not be at least adequately capitalized following the distribution;

3032

●

the distribution would violate any applicable statute, regulation, agreement or Office of the Comptroller of the Currency-imposed condition; or

●

the savings bank is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings bank that is a subsidiary of a holding company must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

The Federal Reserve Board or Office of the Comptroller of the Currency may disapprove a notice or application if:

●

the savings bank would be undercapitalized following the distribution;

●

the proposed capital distribution raises safety and soundness concerns; or

●

the capital distribution would violate a prohibition contained in any statute, regulation, agreement with a federal banking regulatory agency or any formal or informal enforcement action.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution, if after making such distribution the institution would be undercapitalized.

Liquidity. A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.

Community Reinvestment Act and Fair Lending Laws. All savings banks have a responsibility under the Community Reinvestment Act and related regulations of the Office of the Comptroller of the Currency to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the Office of the Comptroller of the Currency is required to assess the association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice. Colonial Bank, FSB received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Colonial Bank, FSB. Colonial Financial Services, Inc. will be an affiliate of Colonial Bank, FSB. In general, loan transactions between an insured depository institution and its affiliate are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliate are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the association. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The Office of the Comptroller of the Currency requires savings banks to maintain detailed records of all transactions with affiliates.

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Colonial Bank, FSB’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Colonial Bank, FSB’s capital. In addition, extensions of credit in excess of certain limits must be approved by Colonial Bank, FSB’s board of directors.

Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.

Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the Office of the Comptroller of the Currency is required and authorized to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank is placed in one of the following five categories based on the savings bank’s capital:

●

well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

●

adequately capitalized (at least 4% leverage capital (3% for savings banks with a composite examination rating of 1), 4% Tier 1 risk-based capital and 8% total risk-based capital);

●

undercapitalized (less than 4% leverage capital (3% for savings banks with a composite examination rating of 1), 4% Tier 1 risk-based capital or 8% total risk-based capital);

●

significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); or

●

critically undercapitalized (less than 2% tangible capital).

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Generally, the Office of the Comptroller of the Currency is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the Office of the Comptroller of the Currency within 45 days of the date a savings bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the savings bank will engage in while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings bank. Any holding company for the savings bank required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of a savings bank’s assets at the time it was notified or deemed to be undercapitalized by the Office of the Comptroller of the Currency, or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the Office of the Comptroller of the Currency notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of the Comptroller of the Currency has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The Office of the Comptroller of the Currency may also take any one of a number of discretionary supervisory actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, ~~2013~~2014, Colonial Bank, FSB met the criteria for being considered “well-capitalized.”

In connection with the final capital rule described earlier, the federal banking agencies have adopted revisions, effective January 1, 2015, to the prompt corrective action framework. Under the revised prompt corrective action requirements, insured depository institutions would be required to meet the following in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (3) a total risk-based capital ratio of 10% (unchanged from current rules) and (4) a Tier 1 leverage ratio of 5% (unchanged from the current rules). We anticipate that the Bank will meet the requirements for being considered “well capitalized.”

Insurance of Deposit Accounts. Colonial Bank, FSB’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Federal deposit insurance per account owner has been raised to $250,000.

Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by Federal Deposit Insurance Corporation regulations. The Federal Deposit Insurance Corporation may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.

Assessment rates previously ranged from seven to 77.5 basis points of assessable deposits. The Dodd-Frank Act required the Federal Deposit Insurance Corporation to revise its procedures to base its assessments upon total assets less tangible equity instead of deposits. The Federal Deposit Insurance Corporation finalized a rule, effective April 1, 2011, that changed the assessment range to 2.5 to 45 basis points of total assets less tangible equity.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the quarter ended December 31, ~~2013~~2014 equaled 0.6415 basis points of total assets less tangible capital.

3335

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has recently exercised that discretion by establishing a long range fund ratio of 2%.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Colonial Bank, FSB. We cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. Colonial Bank, FSB is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of New York, Colonial Bank, FSB is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, ~~2013~~2014, Colonial Bank, FSB was in compliance with this requirement.

Qualified Mortgages and Retention of Credit Risk. The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage”“ definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

●

excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

●

interest-only payments;

●

negative-amortization; and

●

terms longer than 30 years.

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive/and or time consuming to make these loans, which could limit our growth or profitability.

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain not less than 5% of the credit risk for any asset that is not a “qualified residential mortgage.” The regulatory agencies have issued a proposed rule to implement this requirement. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations (as described above). Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.

3436

Federal Reserve System

Federal Reserve Board regulations require savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, ~~2013~~2014, Colonial Bank, FSB was in compliance with these reserve requirements.

Other Regulations

Interest and other charges collected or contracted for by Colonial Bank, FSB are subject to state usury laws and federal laws concerning interest rates. Colonial Bank, FSB’s operations are also subject to federal laws applicable to credit transactions, such as the:

●

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

●

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

●

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

●

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

●

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

●

Truth in Savings Act; and

●

Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Colonial Bank, FSB also are subject to the:

●

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

●

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

●

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

●

The USA PATRIOT Act, which requires savings banks to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

3537

●

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

Colonial Financial Services, Inc. is a unitary savings and loan holding company, subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over Colonial Financial Services, Inc. and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Colonial Bank, FSB.

Colonial Financial Services, Inc.’s activities are limited to those activities permissible for financial holding companies or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial activities or complementary to a financial activity. The Dodd-Frank Act added that any savings and loan holding company that engages in activities permissible for a financial holding company must meet the qualitative requirements for a bank holding company to be a financial holding company and conduct the activities in accordance with the requirements that would apply to a financial holding company’s conduct of the activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c) (8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings institution or holding company thereof, without prior written approval of the Federal Reserve Board. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources and future prospects of the savings institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions will apply to savings and loan holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.

3638

Dividends and Stock Repurchases. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend. The guidance also provides for prior regulatory review where the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory review prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of Colonial Financial Services, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Federal Securities Laws

Colonial Financial Services, Inc. common stock is registered with the Securities and Exchange Commission. Colonial Financial Services, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Our Chief Executive Officer and Chief Financial Officer are required to certify, among other things, that our quarterly and annual reports do not contain any untrue statement of a material fact.

3739

ITEM 1A. Risk Factors

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

ITEM 2. Properties

The following table provides certain information with respect to our banking offices as of December 31, ~~2013~~2014:

Location	Owned or Leased	Net Book Value of Real Property
		(In thousands)
Main Office:
2745 S. Delsea Drive Vineland, New Jersey 08360	Owned	$	4,~~752~~586
Branch Offices:
85 West Broad Street Bridgeton, New Jersey 08302	Owned	$	~~371~~368
339 Main Street Cedarville, New Jersey 08311	Owned	$	~~261~~245
1107 North High Street Millville, New Jersey 08332	Owned	$	~~238~~211
227 Bridgeton Pike Mantua, New Jersey 08051	Owned	$	~~477~~440
271 Lambs Road Sewell, New Jersey 08080	Owned	$	~~299~~274
Route 77 and Big Oak Road Upper Deerfield Township, New Jersey 08302	Owned	$	~~758~~665
1771 South Lincoln Avenue Vineland, New Jersey 08361	Owned	$	~~319~~291
125 West Landis Avenue Vineland, New Jersey 08360	Owned	$	~~350~~330

The net book value of our premises, land and equipment was approximately $7.84 million at December 31, ~~2013~~2014.

ITEM 3. Legal Proceedings

As of December 31, ~~2013~~2014, we are currently involved in ~~two~~a ~~lawsuits~~lawsuit by a former ~~employees~~employee. On March 4, 2013, Denise Davis filed a civil action against Colonial Federal Savings Bank and John Does 1-5 and 6-10 in Superior Court of New Jersey Cumberland County pursuant to the New Jersey Law Against Discrimination requesting compensatory damages, punitive damages, interest, cost of suit, attorneys’ fees, enhanced attorney’s fees, equitable reinstatement, equitable back pay and equitable front pay. Ms. Davis claims to have suffered both non-economic losses for pain, embarrassment, upset and humiliation, as well as economic losses related to unemployment due to her termination.

On January 6, 2014, Richard Dapp, former Chief Lending Officer, filed a civil action against Colonial Bank, FSB in Superior Court of New Jersey Cumberland County to remedy violations of his employment contract. Mr. Dapp is suing to be made whole for any and all pay and benefits he would have received had it not been for our contractual violations of his employment contract and the costs and expenses of this action and a reasonable attorney’s fees.40

We are vigorously defending the ~~claims~~claim. At this time, we are unable to predict an outcome, favorable or unfavorable, or to estimate the amount of any potential loss.

Except as noted above, we were not involved in any other pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involve amounts that we believe are immaterial to our consolidated financial condition, results of operations and cash flows.

ITEM 4. Mine Safety Disclosures

Not applicable

3941

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the Nasdaq Global Market under the symbol “COBK.” As of December 31, ~~2013~~2014, we had fifteen registered market makers, ~~403~~375 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 3,~~853~~860,~~058~~209 shares outstanding. The following table sets forth market price and dividend information for our common stock.

Year Ended December 31, 2014	High		Low		Cash Dividends Declared
First Quarter	$	13.50	$	10.30	$	-
Second Quarter	$	13.94	$	11.01	$	-
Third Quarter	$	13.97	$	12.72	$	-
Fourth Quarter	$	13.40	$	12.79	$	-
Year Ended December 31, 2013	High		Low		Cash Dividends Declared
First Quarter	$	13.75	$	13.06	$	-
Second Quarter	$	14.30	$	13.30	$	-
Third Quarter	$	17.00	$	13.24	$	-
Fourth Quarter	$	14.41	$	12.94	$	-
Year Ended December 31, 2012	High		Low		Cash Dividends Declared
First Quarter	$	12.55	$	11.85	$	-
Second Quarter	$	13.38	$	12.75	$	-
Third Quarter	$	13.47	$	12.90	$	-
Fourth Quarter	$	13.47	$	12.76	$	-

Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue.

There were no sales of unregistered securities during the quarter ended December 31, ~~2013~~2014.

There were no ~~repurchases~~active ofstock ~~shares~~repurchase programs of common stock during the quarter and year ended December 31, ~~2013~~2014. The repurchase program was announced on February 16, 2012. The repurchase program was for 198,951 shares and to date had repurchased 81,870 shares. On August 15, 2013, the Board of Directors terminated the Company’s stock repurchase program.

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ITEM 6. Selected Financial Data

At December 31,

2013

2012

2011

2010

2009

2014

2013

2012

2011

2010

(In thousands)

Selected Financial Condition Data:

Total assets

~~583~~541,~~157~~624

~~623~~583,~~596~~157

~~603~~623,~~814~~596

~~590~~603,~~342~~814

~~568~~590,~~541~~342

Cash and amounts due from banks

2316,~~404~~686

2623,~~418~~404

726,~~893~~418

187,~~982~~893

1518,~~882~~982

Investment securities held to maturity

~~17,291~~-

2917,~~939~~291

3729,~~992~~939

3837,~~214~~992

4138,~~032~~214

Investment securities available for sale

~~227~~222,~~126~~235

~~233~~227,~~304~~126

~~228~~233,~~543~~304

~~183~~228,~~311~~543

~~166~~183,~~378~~311

Loans receivable, net

~~276~~267,~~154~~789

~~297~~276,~~182~~154

297,~~570~~182

~~319~~297,~~987~~570

~~321~~319,~~607~~987

Deposits

~~522~~475,~~027~~380

~~554~~522,~~090~~027

~~520~~554,~~703~~090

~~512~~520,~~836~~703

~~500~~512,~~366~~836

Borrowings

~~10,045~~-

710,~~000~~045

217,~~300~~000

Stockholders’ equity

5963,~~163~~837

6859,~~037~~163

7168,~~685~~037

6971,~~412~~685

4569,~~517~~412

For the Years Ended December 31,

2013

2012

2011

2010

2009

2014

2013

2012

2011

2010

(In thousands)

Selected Operating Data:

Interest income

1815,~~129~~536

2118,~~407~~129

2421,~~067~~407

2624,~~292~~067

2726,~~355~~292

Interest expense

32,~~848~~651

53,~~431~~848

75,~~154~~431

97,~~216~~154

139,~~514~~216

Net interest income

1412,~~281~~885

1514,~~976~~281

1615,~~913~~976

1716,~~076~~913

1317,~~841~~076

Provision for loan losses

~~5,699~~33

65,~~496~~699

16,~~860~~496

1,~~340~~860

~~615~~1,340

Net interest income after provision for loan losses

812,~~582~~852

98,~~480~~582

159,~~053~~480

15,~~736~~053

1315,~~226~~736

Non-interest income

2,~~755~~326

12,~~844~~755

1,~~809~~844

1,~~574~~809

~~267~~1,574

Non-interest expense

1413,~~799~~971

14,~~395~~799

1214,~~376~~395

1112,~~747~~376

11,~~661~~747

Income (loss) before income taxes

(31,~~462~~207

)

(3,~~071~~462

)

4(3,~~486~~071

)

54,~~563~~486

15,~~832~~563

Income tax expense (benefit)

~~(1,637~~672

)

(1,~~322~~637

)

(1,~~179~~322

)

1,~~693~~179

~~392~~1,693

Net income (loss)

~~(1,825~~535

)

(1,~~749~~825

)

3(1,~~307~~749

)

3,~~870~~307

13,~~440~~870

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	At or For the Years Ended December 31,
	2013			2012			2011			2010			2009
	2014			2013			2012			2011			2010
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets		(0.3010	)%		(0.2830	)%		(0.5528	)%		0.6755	%		0.2667	%
Return on average equity		(20.8785	)%		(2.4687	)%		4(2.6446	)%		64.8364	%		36.3483	%
Interest rate spread (1)		2.4647	%		2.7446	%		2.9074	%		32.0590	%		23.5205	%
Net interest margin (2)		2.54	%		2.8354	%		32.0683	%		3.2106	%		23.7121	%
Efficiency ratio (3)		8691.8785	%		8086.7887	%		6680.0778	%		6266.9907	%		8262.6699	%
Noninterest expense to average total assets		2.4269	%		2.2942	%		2.0629	%		2.0206	%		2.1202	%
Average interest-earning assets to average interest-bearing liabilities		~~111~~114.6234	%		~~109~~111.7962	%		~~112~~109.9279	%		~~109~~112.3392	%		~~107~~109.2833	%
Asset Quality Ratios:
Non-performing assets as a percent of total assets		21.8877	%		2.9688	%		12.5396	%		1.8653	%		01.9386	%
Non-performing loans as a percent of total loans		42.7971	%		4.3579	%		24.0335	%		32.3103	%		13.6331	%
Allowance for loan losses as a percent of non-performing loans		4358.1614	%		3143.5516	%		8131.7055	%		3381.0570	%		4933.3805	%
Allowance for loan losses as a percent of total loans		21.0758	%		12.3707	%		1.6637	%		1.0966	%		01.8009	%
Net charge-offs to average loans outstanding		(10.3759	)%		(21.5037	)%		(02.1250	)%		(0.12	)%		(0.0412	)%
Capital Ratios:
Total risk-based capital (to risk weighted assets)		2024.4583	%		20.5545	%		1920.9955	%		1819.3999	%		1218.6039	%
Tier 1 risk-based capital (to risk weighted assets)		1923.1957	%		19.3019	%		19.2730	%		1719.6427	%		1117.9464	%
Tangible capital (to tangible assets)		911.7406	%		109.0074	%		10.8200	%		10.4482	%		710.1744	%
Tier 1 leverage (core) capital (to adjusted tangible assets)		911.7406	%		109.0074	%		10.8200	%		10.4482	%		710.1744	%
Equity to total assets		1011.1579	%		10.9115	%		1110.8791	%		11.7687	%		811.0176	%
Other Data:
Number of full service offices		9			9			9			9			9
Dividends declared per share	$	—		$	—		$	—		$	—		$	—
Earnings (loss) per share:
Basic and diluted (4)	$	(0.49	)	$	(0.46	)	$	0.83		$	0.97		$	0.36
Basic and diluted	$	0.14		$	(0.49	)	$	(0.46	)	$	0.83		$	0.97

(1)	Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.

(2)	The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

(3)	The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.

~~(4) Information for December 31, 2009 has been adjusted for the 0.9399-for-one exchange from the mutual-to-stock conversion of Colonial Bankshares MHC.~~44

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 investment securities, the valuation of and our ability to realize deferred tax assets and the measurement of fair values of financial instruments.

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

We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for losses on loans. The allowance for losses on loans is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision for loan losses based on our evaluation of the probable losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan ~~collectibility~~collectability as of the reporting date. Our evaluation, which includes a review of all loans on which full ~~collectibility~~collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. 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. For example, over the past three years, our allowance for loan losses as a percentage of total loans outstanding has ranged from 1.37% to 2.07%, while our net charge-offs as a percentage of average loans outstanding has ranged from (0.12%) to (21.5037%). 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, you should not place undue reliance on the accuracy of past estimates.

The analysis of the allowance for loan losses has three components: specific allocations, general allocations and an unallocated component. 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 general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allowance. The principal assumption used in deriving the allowance for loan losses is the estimate of loss content for each risk rating. To illustrate, if recent loss experience dictated that the projected loss ratios changed by 10% (of the estimate) across all risk ratings, the allocated allowance as of December 31, ~~2013~~2014 would have changed by approximately $~~205~~158,000. Actual loan losses may be significantly more than the allowances we have established, which could have a material negative effect on our financial results. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. 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.

4345

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

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 December 31, ~~2013~~2014 and ~~2012~~2013

Total assets decreased $4041.46 million, or 67.51%, to $~~583~~541.26 million at December 31, ~~2013~~2014 from $~~623~~583.62 million at December 31, ~~2012~~2013. The decrease was the result of decreases in cash and cash and amounts due from banks, investment securities available-for-sale, investment securities held-to-maturity, net loans receivable, real estate owned, Federal Home Loan Bank stock, office properties and equipment, net deferred tax asset and accrued interest receivable, offset by increases in bank-owned life insurance ~~and the net deferred tax asset~~.

Net loans receivable decreased by $218.04 million, or 73.10%, to $~~276~~267.28 million at December 31, ~~2013~~2014 from $~~297~~276.2 million at December 31, ~~2012~~2013. One- to four-family residential real estate loans increased $~~1.1 million~~776,000, or 0.75%, to $~~149~~150.75 million at December 31, ~~2013~~2014 from $~~148~~149.7 million at December 31, ~~2012~~2013. Commercial real estate loans decreased $1014.50 million, or 1117.76%, to $7965.6 million at December 31, ~~2013~~2014 from $9079.16 million at December 31, ~~2012~~2013. Home equity loans and lines of credit decreased $2.21 million, or 78.70%, to $2624.43 million at December 31, ~~2013~~2014 from $2826.74 million at December 31, ~~2012~~2013. Construction and land loans decreased $~~1.0 million~~559,000, or 106.5%, to $8.71 million at December 31, ~~2013~~2014 from $98.7 million at December 31, ~~2012~~2013. Commercial loans ~~decreased~~increased $~~6.0 million~~921,000, or 255.93%, to $1718.32 million at December 31, ~~2013~~2014 from $2317.3 million at December 31, ~~2012~~2013.

Investment securities available for sale decreased $64.29 million, or 2.71%, to $~~227~~222.12 million at December 31, ~~2013~~2014 from $~~233~~227.31 million at December 31, ~~2012~~2013. The decrease was the result of sales in the amount of $2557.06 million of investment securities available for sale, $4117.09 million in calls and maturities of investment securities available for sale, ~~a decrease in the market value of investment securities available for sale of~~ $1122.~~4 million, $28.~~2 million in principal amortization and accretion of discounts and premiums in the amount of $19703,000 offset by purchases of $9975.48 million of mortgage-backed and investment securities available for sale, an increase in the market value of investment securities available for sale of $5.6 million and transfers from the held to maturity portfolio in the amount of $10.0 million. In addition, securities held to maturity decreased $1217.63 million, or 42100.20% to $170.30 million at December 31, ~~2013~~2014 from $2917.93 million at December 31, ~~2012~~2013. The decrease in securities held to maturity was the result of principal amortization of $~~244~~36,000 and $287.23 million in calls and maturities of investment securities held to maturity, ~~offset~~and bythe ~~purchases~~transfers ofto ~~$15.6~~the ~~million~~available ~~and~~to ~~accretion~~sale ofportfolio ~~discounts and premiums~~ in the amount of $~~188,000~~10.0 million.

4446

Other assets ~~increased~~decreased by $58294,000 to $43.07 million at December 31, ~~2013~~2014 from $34.90 million at December 31, ~~2012~~2013. The ~~increase~~decrease was mainly due to the ~~increase~~decrease in prepaid income taxes. Cash and amounts due from banks decreased by $36.07 million to $2316.47 million at December 31, ~~2013~~2014 from $2623.4 million at December 31, ~~2012~~2013.

We invest in bank-owned life insurance to provide a funding source for benefit plan obligations. Bank-owned life insurance also generally provides non-interest income that is nontaxable. Federal regulations generally limit the investment in bank-owned life insurance to 25% of the sum of Colonial Bank, FSB’s tier 1 capital and its allowance for loan losses. At December 31, ~~2013~~2014, this limit was $1516.70 million. The Bank is the owner of the policies and shares proceeds of the policies in a split dollar arrangement with the beneficiary of the insured employee or director. The amount of the split dollar arrangement is equal to three times the annual base salary of the insured at the time of his or her death less $50,000 for an employee and $250,000 for a director. ~~During 2012, we increased our coverage of life insurance on key personnel from $10.8 million at December 31, 2012 to $14.2 million at December 31, 2013.~~

Deposits decreased $3246.16 million, or 5.8.9%, to $~~522~~475.04 million at December 31, ~~2013~~2014 from $~~554~~522.10 million at December 31, ~~2012~~2013. NOW accounts decreased $151.9 million, or 91.42%, to $~~152~~150.34 million at December 31, ~~2013~~2014 from $~~168~~152.23 million at December 31, ~~2012~~2013. Money market deposit accounts decreased $87.23 million, or 11.4%, to $6356.85 million at December 31, ~~2013~~2014 from $7263.18 million at December 31, ~~2012~~2013. Savings accounts ~~increased~~decreased $425.83 million, or 422.58%, to $~~111~~85.29 million at December 31, ~~2013~~2014 from $~~106~~111.52 million at December 31, ~~2012~~2013. Certificates of deposit decreased $1511.35 million, or 1210.46%, to $~~108~~96.27 million at December 31, ~~2013~~2014 from $~~123~~108.62 million at December 31, ~~2012~~2013. Non-interest bearing demand accounts increased $35.46 million, or 813.81% to $4248.73 million at December 31, ~~2013~~2014 from $3942.37 million at December 31, ~~2012~~2013. Super NOW accounts decreased $~~808~~6.2 million,~~000,~~ or 114.82%, to $4337.75 million at December 31, ~~2013~~2014 from $4443.57 million at December 31, ~~2012~~2013.

There were no borrowings outstanding as of December 31, ~~2013~~2014 and ~~2012~~2013, as we have not required excess liquidity to fund our operations.

Total stockholders’ equity ~~decreased~~increased $84.86 million to $5963.28 million at December 31, ~~2013~~2014 from $6859.02 million at December 31, ~~2012~~2013. This ~~decrease~~increase was attributable to a net ~~loss~~income of $~~1.8~~535,000 ~~million~~ and aan ~~decrease~~increase in other comprehensive income of $73.47 million ~~as well as stock repurchases in the amount of $134,000~~. Accumulated other comprehensive income ~~decreased~~increased by $73.47 million to a loss of $~~4.5~~790,000 ~~million~~ at December 31, ~~2013~~2014 from ~~income~~a loss of $24.95 million at December 31, ~~2012~~2013 as a result of a decrease in unrealized ~~gains~~losses on investment securities available for sale. Because of interest rate volatility, accumulated other comprehensive income (loss) could materially fluctuate for future interim periods and years depending on economic and interest rate conditions.

Average Balance Sheet

The following table sets forth average balances, average yields and costs, and certain other information for the years indicated. Tax-equivalent yield adjustments have not been made for tax-exempt securities. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

4547

	For the Years Ended December 31,
	2013									2012											2011
	2014								2013										2012
	Average Balance			Interest Income/ Expense		Yield/ Cost			Average Balance	~~Average Balance~~			Interest Income/ Expense	~~Interest Income/ Expense~~		Yield/ Cost	~~Yield/ Cost~~		Average Balance		~~Average Balance~~		Interest Income/ Expense		~~Interest Income/ Expense~~		Yield/ Cost		~~Yield/ Cost~~
								~~(Dollars in thousands)~~	(Dollars in thousands)
Interest-earning assets:
Loans	$	~~290~~269,~~975~~858		$	1312,~~616~~071	4.47	~~4.68~~%	%	$	$290,975	~~294,828~~		$	$13,616	~~15,682~~	4.68	%	~~5.32~~	%$	294,828	$	~~310,045~~	$	15,682	$	~~17,781~~	5.32	%		~~5.74~~	%
Securities:
Taxable		~~248~~227,~~221~~360			43,~~060~~274	1.44	~~1.64~~%	%		248,221	~~238,255~~			4,060	~~5,117~~	1.64	%	~~2.15~~	%	238,255		~~211,249~~		5,117		~~5,656~~	2.15	%		~~2.68~~	%
Tax-exempt		239,~~576~~071			~~453~~191	2.11	~~1.92~~%	%		23,576	~~30,501~~			453	~~608~~	1.92	%	~~1.99~~	%	30,501		~~30,846~~		608		~~630~~	1.99	%		~~2.04~~	%
Total interest-earning assets		~~562~~506,~~772~~289			1815,~~129~~536	3.07	~~3.22~~%	%		562,772	~~563,584~~			18,129	~~21,407~~	3.22	%	~~3.81~~	%	563,584		~~552,140~~		21,407		~~24,067~~	3.81	%		~~4.36~~	%
Noninterest-earning assets		5048,~~623~~233								50,623	~~64,408~~									64,408		~~48,642~~
Total assets	$	~~613~~554,~~395~~522							$	$613,395	~~627,992~~								$	627,992	$	~~600,782~~
Interest-bearing liabilities:
Savings accounts	$	~~108~~85,~~803~~820			~~632~~284	0.33	~~0.58~~%	%	$	$108,803	~~107,725~~			632	~~774~~	0.58	%	~~0.72~~	%$	107,725	$	~~106,483~~		774		~~1,380~~	0.72	%		~~1.30~~	%
NOW accounts		~~204~~194,~~865~~385			~~1,185~~735	0.38	~~0.58~~%	%		204,865	~~194,450~~			1,185	~~1,633~~	0.58	%	~~0.84~~	%	194,450		~~145,854~~		1,633		~~1,490~~	0.84	%		~~1.02~~	%
Money market deposits		6755,~~425~~237			~~287~~164	0.30	~~0.43~~%	%		67,425	~~70,241~~			287	~~532~~	0.43	%	~~0.76~~	%	70,241		~~70,900~~		532		~~778~~	0.76	%		~~1.10~~	%
Certificates of deposit		~~115~~102,~~527~~904			1,~~715~~451	1.41	~~1.48~~%	%		115,527	~~139,068~~			1,715	~~2,457~~	1.48	%	~~1.77~~	%	139,068		~~159,508~~		2,457		~~3,387~~	1.77	%		~~2.12~~	%
Total interest-bearing deposits		~~496~~438,~~620~~346			32,~~819~~634	0.60	~~0.77~~%	%		496,620	~~511,484~~			3,819	~~5,396~~	0.77	%	~~1.05~~	%	511,484		~~482,745~~		5,396		~~7,035~~	1.05	%		~~1.46~~	%
Borrowings		74,~~557~~445			2917	0.38	~~0.38~~%	%		7,557	~~1,836~~			29	35	0.38	%	~~1.91~~	%	1,836		~~6,235~~		35		~~119~~	1.91	%		~~1.89~~	%
Total interest-bearing liabilities		~~504~~442,~~177~~791			32,~~848~~651	0.60	~~0.76~~%	%		504,177	~~513,320~~			3,848	~~5,431~~	0.76	%	~~1.06~~	%	513,320		~~488,980~~		5,431		~~7,154~~	1.06	%		~~1.46~~	%
Noninterest-bearing liabilities		4548,~~649~~781								45,649	~~43,575~~									43,575		~~40,553~~
Total liabilities		~~549~~491,~~826~~572								549,826	~~556,895~~									556,895		~~529,533~~
Equity		6362,~~569~~950								63,569	~~71,097~~									71,097		~~71,249~~
Total liabilities and equity	$	~~613~~554,~~395~~522							$	$613,395	~~627,992~~								$	627,992	$	~~600,782~~
Net interest income				$	1412,~~281~~885								$	$14,281	~~15,976~~								$	15,976	$	~~16,913~~
Interest rate spread (1)						2.47	~~2.46~~%	%								2.46	%	~~2.74~~	%								2.74	%		~~2.90~~	%
Net interest-earning assets (2)	$	5863,~~595~~498							$	$58,595	~~50,264~~								$	50,264	$	~~63,160~~
Net interest margin (3)						2.54	~~2.54~~%	%								2.54	%	~~2.83~~	%								2.83	%		~~3.06~~	%
Average interest-earning assets to average interest-bearing liabilities		~~111~~114.6234	%							111.62	~~109.79~~%	%								109.79	%	~~112.92~~	%

(1)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(2) Net interest-earning assets ~~represents~~represent total interest-earning assets less total interest-bearing liabilities.

(3)	Net interest margin represents net interest income divided by average total interest-earning assets.

4648

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

	Years Ended December 31, 2013 vs. 2012									Years Ended December 31, 2012 vs. 2011
	Years Ended December 31, 2014 vs. 2013									Years Ended December 31, 2013 vs. 2012
	Increase (Decrease) Due to						Net			Increase (Decrease) Due to						Net
	Volume			Rate						Volume			Rate
	(In thousands)
Interest-earning assets:
Loans	$	(~~203~~961	)	$	(~~1,863~~584	)	$	(21,~~066~~545	)	$	(~~853~~203	)	$	(1,~~246~~863	)	$	(2,~~099~~066	)
Securities:
Taxable		~~225~~(324	)		(~~1,282~~462	)		(~~1,057~~786	)		~~976~~225			(1,~~515~~282	)		(~~539~~1,057	)
Tax-exempt		(~~134~~310	)		~~(21~~48	)		(~~155~~262	)		(7134	)		(1521	)		(22155	)
Total interest-earning assets		(~~112~~1,595	)		(~~3,166~~998	)		(32,~~278~~593	)		~~116~~(112	)		(23,~~776~~166	)		(23,~~660~~278	)
Interest-bearing liabilities:
Savings accounts		8(115	)		(~~150~~233	)		(~~142~~348	)		168			(~~622~~150	)		(~~606~~142	)
NOW accounts		93(58	)		(~~541~~392	)		(~~448~~450	)		~~304~~93			(~~161~~541	)		~~143~~(448	)
Money market deposit		(2046	)		(~~225~~77	)		(~~245~~123	)		(720	)		(~~239~~225	)		(~~246~~245	)
Certificates of deposit		(~~382~~181	)		(~~360~~83	)		(~~742~~264	)		(~~404~~382	)		(~~526~~360	)		(~~930~~742	)
Total interest-bearing deposits		(~~301~~400	)		(~~1,276~~785	)		(1,~~577~~185	)		(91301	)		(1,~~548~~276	)		(1,~~639~~577	)
Borrowings		(812	)		2-			(612	)		(848	)		-2			(846	)
Total interest-bearing liabilities		(~~309~~412	)		(~~1,274~~785	)		(1,~~583~~197	)		(~~175~~309	)		(1,~~548~~274	)		(1,~~723~~583	)
Net change in interest income	$	~~197~~(1,183	)	$	(~~1,892~~213	)	$	(1,~~695~~396	)	$	~~291~~197		$	(1,~~228~~892	)	$	(~~937~~1,695	)

Comparison of Operating Results for the Years Ended December 31, ~~2013~~2014 and December 31, ~~2012~~2013

General. We experienced a net ~~loss~~income of $~~1.8~~535,000 ~~million~~ for the year ended December 31, ~~2013~~2014 compared to a net loss of $1.78 million for the year ended December 31, ~~2012~~2013. The principal reason for the ~~loss~~increase in income for the year ended December 31, ~~2013~~2014 was a reduction in the provision for loan losses of $5.7 million. Also, net interest income decreased by $1.74 million to $1412.39 million for the year ended December 31, ~~2013~~2014 from $1614.03 million for the year ended December 31, ~~2012~~2013, ~~and~~ non-interest ~~expense~~income ~~increased~~decreased by $~~404~~429,000 to $142.83 million for the year ended December 31, ~~2013~~2014 from $142.48 million for the year ended December 31, ~~2012. Also,~~2013

Filing Compare · Colonial Financial Services, Inc.