10-K 1 t81833_10k.htm FORM 10-K

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2014
OR
☐ 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 ☐   No ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ☐   No ☒
 
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 ☒   No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes ☒   No ☐
 
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.  ☐
 
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   ☐ Accelerated filer   ☐ Non-accelerated filer   ☐ Smaller reporting company   ☒
           
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐   No ☒
 
As of March 1, 2015 there were 3,866,745 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, 2014, was $44.4 million.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
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;
 
 
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
 
 
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;
 
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changes in the level of government support for housing finance;
 
 
significant increases in our loan losses;
 
 
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, 2014, Colonial Financial Services, Inc. had 3,860,209 shares outstanding and a market capitalization of approximately $51.7 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).
 
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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. (which was dissolved in August 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
 
COBK Investments, LLC was a wholly owned subsidiary of Colonial Bank, FSB.  It was a Delaware corporation that was formed in September 2013 to invest in and manage investment securities that Colonial Bank, FSB is authorized to hold.  It was liquidated in August 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.
 
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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 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 0.3% and 0.7%, respectively, from April 2010 to June 2013.  The unemployment rates for Cumberland and Gloucester counties were 9.2% and 6.4% as of December 2014, respectively, compared to 10.5% and 6.9% as of December 2013, respectively. This compares to 6.2% for the entire State of New Jersey and 5.6% for the United States as a whole as of December 31, 2014.
 
U.S. Census Bureau data indicates the median household income as of December 31, 2013 was $50,750 and $74,524 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 2013 and the U. S. Census Bureau for 2000, the median home value in Cumberland County, New Jersey was $158,800 as of December 2013 compared to $91,200 for 2000.  Similarly, for Gloucester County, New Jersey, the median home value has increased to $207,900 as of 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, 2014 (the latest date for which information is available), our market share was 15.30% 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, 2014, our market share was 1.80% of total deposits in Gloucester County, making us the 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.
 
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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, 2014, the outstanding balance of home equity loans totaled $18.9 million, or 6.9% of our total loan portfolio, and the outstanding balance of home equity lines of credit totaled $5.4 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.
 
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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.
 
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, 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 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.
 
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Construction and Land Loans.  We originate construction and land loans to individuals and builders in our market area.  These loans totaled $8.1 million, or 3.0% of our total loan portfolio, at December 31, 2014.  At December 31, 2014, we had 35 construction and land loans outstanding with an average balance of $232,000.  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.
 
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Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio, by type of loan, at the dates indicated.
                                                                       
   
At December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
                                                             
Real estate loans:
                                                           
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 %
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  
Multi-family
    4,618     1.7       284     0.1       397     0.1       102           3,124     1.0  
Commercial
    65,644     24.1       79,601     28.1       90,143     29.9       96,737     32.0       114,242     35.2  
Construction and land
    8,106     3.0       8,665     3.1       9,683     3.2       9,470     3.1       5,944     1.8  
Commercial
    18,223     6.7       17,302     6.1       23,345     7.7       21,890     7.2       23,253     7.2  
Consumer and other
    773     0.3       834     0.3       1,043     0.4       1,295     0.4       1,783     0.6  
                                                                       
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        
 
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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  

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.
 
9
 

 

 
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 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 $750,000, and unsecured loans in amounts up to $300,000 with an aggregate exposure not to exceed $1.5 million.   The Board Management Loan Committee may approve loans up to the Bank’s legal lending limit so long as unanimous approval is obtained.  The full Board of Directors may approve all loans in 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 $107,000 at December 31, 2014 and 2013, respectively.
 
Loans to One Borrower.  At December 31, 2014, our five largest aggregate amounts loaned to any borrower and related interests were: (i) a $7.9 million relationship which is collateralized by six commercial properties; (ii) a $5.7 million relationship which is collateralized by two multi-family units, two single family dwellings and two letters of credit; (iii) a $4.5 million relationship which is collateralized by two commercial properties and two single family dwellings; (iv) a $4.5 million relationship collateralized by four commercial properties, commercial vehicles and equipment; and (v) a $3.7 million relationship collateralized by four commercial properties and two single family dwellings. The balances noted above include the unused portion of credit lines.  At December 31, 2014, these loans were all performing according to their original terms.  Under federal banking regulations, at December 31, 2014 our maximum regulatory loan-to-one borrower limit was $8.9 million.  See “Supervision and Regulation—Federal Banking Regulation—Loans to One Borrower” for a discussion of applicable regulatory limitations.
 
10
 

 

 
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.
 
11
 

 

 
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, 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  
 
12
 

 

 
Nonperforming Assets.  The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.  We will not advance 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 granted 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.
 
13
 

 

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.
 
14
 

 

 
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, 2014 and 2013.  The classified assets totals at December 31, 2014 and 2013 include $7.4 million and $13.6 million, respectively, of nonperforming loans.
 
   
At December 31,
 
   
2014
   
2013
 
   
(In thousands)
 
       
Classified assets:
           
Substandard
  $ 11,213     $ 21,850  
Doubtful
    -       2,444  
Loss
    -       -  
Total classified assets
  $ 11,213     $ 24,294  
Special mention
  $ 2,928     $ 9,324  

At December 31, 2014, substandard assets consisted primarily of (i) 63 residential mortgage loans with a recorded investment of $6.1 million, (ii) 16 home equity loans with a recorded investment totaling $744,000, (iii) 10 commercial real estate loan relationships with a recorded investment totaling $3.2 million, and (iv) 6 construction and land loans with a recorded investment totaling $1.2 million.  At December 31, 2014, special mention assets consisted primarily of (i) 2 residential mortgage loans with a recorded investment totaling $207,000, (ii) 6 commercial real estate loan relationships with a recorded investment totaling $2.7 million and (iii) one consumer loan with principal balance of $45,000.

At December 31, 2013, substandard assets consisted primarily of (i) 69 residential mortgage loans with a recorded investment of $9.4 million, (ii) 21 home equity loans with a recorded investment totaling $846,000, (iii) 14 commercial real estate loan relationships with a recorded investment totaling $7.8 million, (iv) five construction and land loans with a recorded investment totaling $3.5 million and (v) three commercial loans with a recorded investment of $340,000.  At December 31, 2013, special mention assets consisted primarily of (i) eighteen residential mortgage loans with a recorded investment totaling $1.8 million, (ii) three home equity loans with a recorded investment totaling $108,000, (iii) ten commercial real estate loan relationships with a recorded investment totaling $3.7 million, (iv) one commercial loan with a recorded investment totaling $3.7 million and (v) two consumer loans with principal balances of $20,000.  At December 31, 2013, doubtful assets consisted of two commercial loans with a recorded investment of $2.4 million.
 
15
 

 


See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Operating Results for the Years Ended December 31, 2014 and 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.
 
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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 $4.3 million, or 1.58% of total loans, at December 31, 2014, compared to $5.9 million, or 2.07% of total loans, at December 31, 2013.  The allowance for loan losses represented 58.14% of nonperforming loans at December 31, 2014 and 43.2% of nonperforming loans at December 31, 2013, as nonperforming loans decreased to $7.4 million at December 31, 2014 from $13.6 million at December 31, 2013.  Loans delinquent 30 days or greater decreased to $5.0 million at December 31, 2014 from $11.9 million at December 31, 2013.
 
For further discussion regarding how we determined the allowance for loan losses as of December 31, 2014 and 2013, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Operating Results for the Years Ended December 31, 2014 and December 31, 2013—Provisions for Loan Losses.”
 
17
 

 


The following table sets forth activity in our allowance for loan losses for the years indicated.
 
   
At or For the Years Ended December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(Dollars in thousands)
 
                               
Balance at beginning of year
  $ 5,853     $ 4,146     $ 5,027     $ 3,543     $ 2,606  
                                         
Charge-offs:
                                       
Real estate loans:
                                       
One- to four-family residential
    (526 )     (217 )     (2,108 )     (262 )     (223 )
Home equity loans and lines of credit
    (102 )     (258 )     (184 )     (13 )      
Multi-family
    -       -                    
Commercial
    (234 )     (1,826 )     (4,652 )     (87 )     (144 )
Construction and land
    (76 )     (37 )     (49 )     (33 )      
Commercial
    (2,389 )     (1,965 )     (450 )           (15 )
Consumer and other
    -       (14 )     (20 )     (12 )     (38 )
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 %
 
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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 %
 
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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, 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, 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.  During 2014, the Company reclassified its held to maturity portfolio as available-for-sale.  In accordance with regulatory and accounting requirements, the Company is prohibited from classifying security purchases as held to maturity for a period of two years.  
 
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 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.
 
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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, 2014, our mortgage-backed securities portfolio had a fair value of $55.3 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, 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.
 
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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,
 
   
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
  $ 54,519     $ 55,306     $ 14,794     $ 15,463     $ 32,340     $ 34,721  
GSE collateralized mortgage obligations
    58,574       57,826       64,120       61,622       50,846       52,134  
U.S. Government obligations
    88,315       86,944       141,836       136,783       126,524       127,053  
Corporate debt obligations
    -       -       4,493       4,501       6,603       6,753  
Mutual funds
    850       892       903       945       4,909       4,948  
Municipal debt obligations
    4,038       4,012       6,828       6,719       6,171       6,256  
SBA pools
    17,255       17,255       1,097       1,093       1,427       1,439  
Total securities available-for-sale
  $ 223,551     $ 222,235     $ 234,071     $ 227,126     $ 228,820     $ 233,304  
                                                 
Securities held-to-maturity:
                                               
GSE mortgage-backed securities
  $ -     $ -     $ 188     $ 208     $ 429     $ 469  
Corporate debt obligations
    -       -       1,193       1,396       1,192       1,502  
Municipal debt obligations
    -       -       15,910       16,278       28,318       28,953  
Total securities held-to-maturity
  $ -     $ -     $ 17,291     $ 17,882     $ 29,939     $ 30,924  

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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