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COBK > SEC Filings for COBK > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for COLONIAL FINANCIAL SERVICES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COLONIAL FINANCIAL SERVICES, INC.


13-Nov-2012

Quarterly Report


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

Forward-Looking Statements

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

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U. S. Government, including policies of the U. S. Treasury and the Federal Reserve Board, the quality and composition of our loan or investment portfolios, demand for our loan products, deposit flows, competition, demand for financial services in our market area, changes in real estate values in our area, and changes in relevant accounting principles and guidelines. Additional factors that could affect our results may be discussed in our Form 10-K under Part I, Item 1A-"Risk Factors" in other reports filed with the Securities and Exchange Commission.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, the evaluation of other-than-temporary impairment of investments securities, the valuation of and our ability to realize deferred tax assets and the measurement of fair value.

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

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



The allowance for loan losses consists of specific, general and unallocated components. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses.

The allowance for losses on loans is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management's evaluation of the collectability of the loan portfolio. The allowance is adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in our lending policies and procedures, changes in current general economic conditions and business conditions affecting our primary lending areas, credit quality trends, collateral values, loans volumes and concentrations, seasoning of the loan portfolio, loss experience, and duration of the current business cycle. The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.

The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Future provisions for loan losses may include an unallocated component as we re-evaluate our estimates including, but not limited to changes in economic conditions in our market area, declines in local property values and concentrations of risk. Included in our estimate and evaluation is an analysis of our mortgage loans, both current and delinquent, that may have private mortgage insurance. With the recent downgrades of insurance companies, this is another factor management will review as it assesses its allowance for loan losses.

Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters. Historically, we believe our estimates and assumptions have proven to be relatively accurate. Nevertheless, because a small number of non-performing loans could result in net charge-offs significantly in excess of the estimated losses inherent in our loan portfolio, additional provisions to the allowance for loan losses may be required that would adversely impact earnings for future periods. In addition, the OCC and the Board of Governors of the Federal Reserve System, as an integral part of their examination processes, periodically review our allowance for loan losses. They may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods

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



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

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

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

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets increased $26.5 million, or 4.4%, to $630.3 million at September 30, 2012, from $603.8 million at December 31, 2011. The increase was mainly the result of increases in cash and cash equivalents, investment securities available-for-sale and real estate owned offset by decreases in investment securities held-to-maturity, loans receivable and office properties and equipment.



Net loans receivable decreased $3.2 million, or 1.1%, to $294.4 million at September 30, 2012 from $297.6 million at December 31, 2011. Commercial real estate loans decreased $5.7 million to $89.2 million at September 30, 2012 from $94.9 million at December 31, 2011. Construction and land loans decreased $5.3 million to $7.7 million at September 30, 2012 from $13.0 million at December 31, 2011. One- to four-family residential real estate loans increased $8.2 million to $147.3 million at September 30, 2012 from $139.1 million at December 31, 2011. Home equity loans and lines of credit decreased $3.7 million to $28.9 million at September 30, 2012 from $32.6 million at December 31, 2011. Commercial loans increased by $1.3 million to $23.2 million at September 30, 2012 from $21.9 million at December 31, 2011. We currently have an internal limit for our loans (other than one- to four-family residential real estate loans) which is 275% of the sum of core capital (generally Colonial Bank's common stockholder's equity including retained earnings and minority interest in equity accounts of consolidated subsidiaries, less certain intangible assets) plus our allowance for loan losses. Included in the net loans receivable are nonaccrual loans which decreased to $5.4 million at September 30, 2012 from $6.2 million at December 31, 2011.

Real estate owned totaled $6.9 million and $3.1 million at September 30, 2012 and December 31, 2011, respectively. We completed the foreclosure process or received deed-in-lieu of foreclosure on 24 properties, 12 of which were residential one- to four-family properties, six of which were nonresidential properties and six of which were construction and land loans, and we sold two residential one- to four-family properties. The activity in the real estate owned category includes three previously disclosed possible shovel-ready branch locations in the amount of $2.4 million that were moved from the office property and equipment category.

Securities available-for-sale increased $14.5 million, or 6.3%, to $243.0 million at September 30, 2012 from $228.5 at December 31, 2011. This increase was the result of purchases in the amount of $122.3 million offset by calls, maturities and sales in the amount of $76.3 million, and $30.5 in principal amortization. Securities held-to-maturity decreased by $4.8 million, to $33.2 million at September 30, 2012 from $38.0 million at December 31, 2011. This decrease was the result of calls and maturities in the amount of $13.9 million and principal amortization of $229,000 offset by purchases in the amount of $9.2 million.

Deposits increased $35.7 million, or 6.9%, to $556.4 million at September 30, 2012 from $520.7 million at December 31, 2011. NOW accounts increased $31.6 million, or 24.0%, to $163.5 million at September 30, 2012 from $131.9 million at December 31, 2011. Savings accounts increased $3.5 million to $108.5 million at September 30, 2012 from $105.0 million at December 31, 2011. Super NOW accounts increased by $3.0 million to $42.2 million at September 30, 2012 from $39.2 million at December 31, 2011. Non-interest bearing demand accounts increased by $14.4 million to $40.3 million at September 30, 2012 from $25.9 million at December 31, 2011. Certificates of deposit decreased by $16.3 million to $131.3 million at September 30, 2012 from $147.6 million at December 31, 2011. We did not aggressively price our certificates of deposit upon maturity, but some certificate of deposit customers remained with us by opening other types of deposit accounts.

Federal Home Loan Bank borrowings totaled $2.0 million at September 30, 2012 and $10.0 million at December 31, 2011.



Total stockholders' equity decreased $1.5 million to $70.2 million at September 30, 2012 from $71.7 million at December 31, 2011. This decrease was mainly attributable to a net loss of $789,000 and a reduction in additional paid in capital due to stock repurchases in the amount of $943,000.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and September 30, 2011

General. We experienced net income of $475,000 for the three months ended September 30, 2012 compared to net income of $981,000 for the three months ended September 30, 2011. The principal reasons for the decrease in net income were a decrease in net interest income, a decrease in non-interest income and an increase in non-interest expense.

Interest Income. Interest income decreased $909,000 to $5.3 million for the three months ended September 30, 2012 from $6.2 million for the three months ended September 30, 2011. The decrease in interest income resulted from a decrease of $735,000 in interest income on loans and a decrease of $174,000 in interest income on securities.

Interest income on loans decreased $735,000 to $3.9 million for the three months ended September 30, 2012 from $4.6 million for the three months ended September 30, 2011. The average balance of loans decreased $22.0 million to $291.9 million for the three months ended September 30, 2012 from $306.9 million for the three months ended September 30, 2011 and the average yield decreased to 5.36% for the three months ended September 30, 2012 from 6.06% for the three months ended September 30, 2011.

Interest income on securities decreased by $174,000 to $1.4 million for the three months ended September 30, 2012 from $1.6 million for the three months ended September 30, 2011. The decrease in interest income on securities was due to a decrease in the average yield on taxable and tax-exempt securities of 42 basis points to 2.12% for the three months ended September 30, 2012 from 2.54% for the three months ended September 30, 2011, offset by an increase in the average balance of taxable and tax-exempt securities to $264.6 million for the three months ended September 30, 2012 from $247.4 million for the three months ended September 30, 2011. The yields on tax-exempt securities are not tax-affected.

Interest Expense. Interest expense decreased $433,000 to $1.3 million for the three months ended September 30, 2012 from $1.7 million for the three months ended September 30, 2011.

Interest expense on interest-bearing deposits decreased by $427,000 to $1.3 million for the three months ended September 30, 2012 from $1.7 million for the three months ended September 30, 2011. The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 1.01% for the three months ended September 30, 2012 from 1.43% for the three months ended September 30, 2011, offset by an increase in the average balance of interest-bearing deposits to $509.0 million for the three months ended September 30, 2012 from $478.2 million for the three months ended September 30, 2011. We experienced increases in the average balances of savings accounts, money market deposit accounts and NOW and Super-NOW accounts. We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended September 30, 2012, reflecting lower market rates.



Interest expense on borrowings decreased $6,000 to $10,000 for the three months ended September 30, 2012 from $16,000 for the three months ended September 30, 2011. This decrease was primarily due to a $6.0 million decrease in the average balance of borrowings to $2.0 million for the three months ended September 30, 2012 from $8.0 million for the three months ended September 30, 2011 offset by an increase in the average rate paid on borrowings to 2.00% for the three months ended September 30, 2012 from 0.80% for the three months ended September 30, 2011. We have decreased our outstanding borrowings because our net increase in deposits and the proceeds received from the sales, calls, maturities and amortization of securities, discussed above, exceeded our cash needs to fund loan originations and investment securities purchases.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable credit losses inherent in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluation of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower's ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

During the three months ended September 30, 2012, the Company charged off $291,000 in loans, which included $242,000 on residential one- to four-family loans, $17,000 on commercial real estate loans, $27,000 on construction and land loans and $5,000 on consumer loans. The charge-offs on real estate loans were due to reduced valuations upon re-appraisals of the underlying collateral for such loans. The charge-offs during this quarter are included in our risk-weighted historical loss rates based on the nature, type and industry sector of the loan. The historical loan rates are then incorporated in calculating the general component of our allowance for loan loss by loan category.

Based on our evaluation of the above factors, we recorded a provision for loan losses of $329,000 for the three months ended September 30, 2012 and a provision for loan losses of $398,000 for the three months ended September 30, 2011. The allowance for loan losses was $3.0 million, or 1.01% of total loans, at September 30, 2012, compared to $4.4 million, or 1.44% of total loans, at September 30, 2011. Our balance of loans we evaluated individually for impairment was $28.3 million at September 30, 2012 and $30.1 million at December 31, 2011. At September 30, 2012 and 2011, we maintained unallocated allowances for loan losses of $500,000.

To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate at September 30, 2012 and 2011. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio (including residential and commercial real estate loans) could result in material increases in our provisions for loan losses.



Non-interest Income. Non-interest income was $425,000 for the three months ended September 30, 2012 and $485,000 for the three months ended September 30, 2011. Fees and service charges on deposit accounts decreased by $16,000 to $294,000 for the three months ended September 30, 2012 from $310,000 for the three months ended September 30, 2011. Gains on the sale of loans totaled $1,000 for the three months ended September 30, 2011 and we had no such gains on sales of loans during the three months ended September 30, 2012. For the three months ended September 30, 2012, there was a net gain on the sale and call of investment securities in the amount of $22,000 compared to a net gain of $82,000 for the three months ended September 30, 2011. Earnings on bank owned life insurance totaled $88,000 for the three months ended September 30, 2012 and $90,000 for the three months ended September 30, 2011.

Non-interest Expense. Non-interest expense increased $249,000 to $3.4 million for the three months ended September 30, 2012 from $3.2 million for the three months ended September 30, 2011. Compensation and benefits expense increased by $57,000 to $1.8 million for the three months ended September 30, 2012 from $1.7 million for the three months ended September 30, 2011. Occupancy and equipment expense decreased $14,000 to $396,000 for the three months ended September 30, 2012 from $410,000 for the three months ended September 30, 2011. Federal deposit insurance premiums decreased $93,000 to $148,000 for the three months ended September 30, 2012 from $241,000 for the three months ended September 30, 2011. Data processing fees increased by $22,000 to $237,000 for the three months ended September 30, 2012 from $215,000 for the three months ended September 30, 2011. Professional fees decreased $26,000 mainly due to a reduction in legal fees as it relates to collection efforts on loans. Net real estate owned expense totaled $247,000 for the three months ended September 30, 2012. This amount included a write-down of a real estate owned property that totaled $174,000.

Income Tax Expense. We recorded an income tax expense of $216,000 for the three months ended September 30, 2012, compared to an income tax expense of $426,000 for the three months ended September 30, 2011. Our effective tax rates for the three months ended September 30, 2012 and 2011 were 31.3% and 30.3%, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2012 and September 30, 2011

General. Net income decreased $3.2 million to a net loss of $789,000 for the nine months ended September 30, 2012 from net income of $2.4 million for the nine months ended September 30, 2011. The principal reason for the decrease was an increase in the provision for loan losses to $5.1 million offset by a decrease in income tax expense of $1.5 million.

Interest Income. Interest income decreased $2.1 million to $16.3 million for the nine months ended September 30, 2012 from $18.3 million for the nine months ended September 30, 2011. The decrease in interest income resulted from a $1.7 million decrease in interest income on loans and a $341,000 decrease in interest income on securities.

Interest income on loans decreased $1.7 million to $11.9 million for the nine months ended September 30, 2012 from $13.6 million for the nine months ended September 30, 2011. The average balance of loans decreased by $18.9 million to $294.0 million for the nine months ended September 30, 2012 from $312.9 million for the nine months ended September 30, 2011 and the average yield decreased 41 basis points to 5.38% for the nine months ended September 30, 2012 from 5.79% for the nine months ended September 30, 2011.



Interest income on securities decreased $341,000 to $4.4 million for the nine months ended September 30, 2012 from $4.8 million for the nine months ended September 30, 2011. This decrease was due to a decrease in the average yield on investment securities to 2.20% for the nine months ended September 30, 2012 from 2.66% for the nine months ended September 30, 2011, which was offset by an increase in the average balance of investment securities to $268.6 million for the nine months ended September 30, 2012 from $239.5 million for the nine months ended September 30, 2011.

Interest Expense. Interest expense decreased $1.3 million to $4.2 million for the nine months ended September 30, 2012 from $5.5 million for the nine months ended September 30, 2011.
Interest expense on interest-bearing deposits decreased by $1.3 million to $4.2 million for the nine months ended September 30, 2012 from $5.4 million for the nine months ended September 30, 2011. The decrease in interest expense on interest-bearing deposits was due to a decrease in the average rate paid on interest-bearing deposits to 1.09% for the nine months ended September 30, 2012 from 1.50% for the nine months ended September 30, 2011 which was offset by an increase in the average balance of interest-bearing deposits to $510.1 million . . .

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