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EX-23 - EXHIBIT 23 - Colonial Bankshares Incex23.htm
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EX-31.1 - EXHIBIT 31.1 - Colonial Bankshares Incex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Colonial Bankshares Incex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
 
Commission File Number: 000-51385

 
Colonial Bankshares, Inc.
 
 
(Exact Name of Registrant as Specified in its Charter)
 
 
Federal
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 $0.10 per share
 
The NASDAQ Stock Market, LLC
 
Securities Registered Pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o   No x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such requirements for the past 90 days.
(1)           Yes x   No o                                                                (2)           Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes o No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   o       Accelerated filer   o       Non-accelerated filer   o       Smaller reporting company   x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x
 
As of March 19, 2010 there were 4,440,246 shares outstanding of the registrant’s common stock, including 2,441,716 shares owned by Colonial Bankshares, MHC.  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, 2009 was $12.4 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 enter new markets successfully and capitalize on growth opportunities;
 
our ability to successfully integrate acquired entities, if any;
 
changes in consumer spending, borrowing and savings habits;
 
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
 
changes in our organization, compensation and benefit plans; and
 
 
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changes in the financial condition 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 Bankshares, MHC
 
Colonial Bankshares, MHC is the federally chartered mutual holding company parent of Colonial Bankshares, Inc.  Colonial Bankshares, MHC has not engaged in any significant business activity other than owning a majority of the outstanding shares of common stock of Colonial Bankshares, Inc.  As long as Colonial Bankshares, MHC exists, it will own a majority of the outstanding shares of common stock of Colonial Bankshares, Inc.  The executive offices of Colonial Bankshares, MHC are located at 2745 S. Delsea Drive, Vineland, New Jersey 08360, and its telephone number is (856) 205-0058.  Colonial Bankshares, MHC is subject to comprehensive regulation and examination by the Office of Thrift Supervision.
 
Colonial Bankshares, Inc.
 
Colonial Bankshares, Inc. is the mid-tier stock holding company of Colonial Bank, FSB.  Colonial Bankshares, Inc. is a federally chartered corporation and owns 100% of the outstanding shares of common stock of Colonial Bank, FSB.  Colonial Bankshares, Inc. has not engaged in any significant business activity other than owning all of the shares of common stock of Colonial Bank, FSB.  At December 31, 2009, Colonial Bankshares, Inc. had consolidated assets of $568.5 million, total deposits of $500.4 million and equity of $45.5 million.  Colonial Bankshares, Inc.’s net income for the year ended December 31, 2009 was $1.4 million.  The executive offices of Colonial Bankshares, Inc. are located at 2745 S. Delsea Drive, Vineland, New Jersey 08360, and its telephone number is (856) 205-0058. Colonial Bankshares, Inc. is subject to comprehensive regulation and examination by the Office of Thrift Supervision.
 
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 Delaware operating subsidiary, CB Delaware Investments, Inc., which was formed in September 2006.  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 Thrift Supervision. 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.
 
 
3

 
 
CB Delaware Investments, Inc.
 
CB Delaware Investments, Inc. is a wholly owned subsidiary of Colonial Bank, FSB.  It is a Delaware corporation that was formed in 2006 to invest in and manage investment securities that Colonial Bank, FSB is authorized to hold.
 
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.  In addition, a large airline company recently announced that it would locate a facility at Millville Airport, which will replace many positions lost upon the departure of another company from the same facility.
 
According to the New Jersey Department of Labor and Workforce Development, the population of Cumberland and Gloucester counties, New Jersey grew 7.1% and 12.6%, respectively, from 2000 to December 31, 2009.  The unemployment rates for Cumberland and Gloucester counties were 10.3% and 6.9% as of December 2008, respectively, compared to 14.2% and 10.5% as of December 2009, respectively. This compares to 10.1% for the entire State of New Jersey and 10.0% for the United States as a whole. 
 
U.S. Census Bureau data indicates the median household income as of December 31, 2008 was $50,833 and $70,837 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 2008 and the United States Census Bureau for 2000, the home housing value in Cumberland County, New Jersey was $184,500 as of December 2008 compared to $91,200 for 2000.  Similarly, for Gloucester County, New Jersey, the median home value has increased to $249,300 as of 2008 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, 2009 (the latest date for which information is available), our market share was 16.48% of total deposits in Cumberland County, making us the second largest out of 12 financial institutions in Cumberland County based upon deposit share as of that date.  As of June 30, 2009, our market share was 1.77% of total deposits in Gloucester County, making us the 12th largest out 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.
 
 
4

 
 
Lending Activities
 
General.  We originate one- to four-family residential real estate loans, home equity loans and lines of credit, commercial real estate loans, commercial business loans, construction loans, consumer loans and multi-family mortgage loans.  At December 31, 2009, our gross loan portfolio totaled $324.6 million compared to $305.6 million at December 31, 2008.  As a result of our current regulatory capital position, we are controlling the growth of our commercial real estate loan portfolio and, forwarding the future, we intend to limit all loans (other than one- to four-family residential real estate loans) to 275% of the sum of core capital (generally common stockholders’ equity (including retained earnings) and minority interests in equity accounts of consolidated subsidiaries, less certain intangible assets) plus our allowance for loan losses.
 
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 $151.4 million, or 46.6% of our total loan portfolio, at December 31, 2009.
 
We currently offer fixed-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing with monthly loan payments, and adjustable-rate conventional residential real estate loans with initial fixed-rate terms of one, three, five or seven years that amortize up to 30 years.  One- to four-family residential real estate loans are generally underwritten according to Fannie Mae guidelines, and loans that conform to such guidelines are referred to as “conforming loans.” We generally originate both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which for 2010 is currently $417,000 for single-family homes located in our primary market area.  Private mortgage insurance is required for first mortgage loans with loan-to-value ratios in excess of 80%.  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.  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. At December 31, 2009, our adjustable-rate, one- to four-family residential real estate loan portfolio totaled $19.2 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, 2009, the outstanding balances of home equity loans totaled $32.7 million, or 10.1% of our total loan portfolio, and the outstanding balance of home equity lines of credit totaled $5.2 million, or 1.6% 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 2008.  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.
 
 
5

 
 
Commercial Real Estate Lending.  We also originate real estate loans secured by first liens on commercial real estate.  The commercial real estate properties are predominantly professional offices, churches and hotels and, to a lesser extent, manufacturing and retail facilities and healthcare facilities. We have purchased commercial real estate loan participations through the Thrift Institution Community Investment Council, which originates loans for Community Reinvestment Act purposes.  We have also originated commercial real estate loans as a participant with other lenders.  We emphasize commercial real estate loans with initial principal balances between $100,000 and $2.0 million.  Loans secured by commercial real estate totaled $97.1 million, or 29.9% of our total loan portfolio, at December 31, 2009, and consisted of 241 loans outstanding with an average loan balance of approximately $403,000, although we have originated loans with balances substantially greater 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 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, 2009, we had 200 commercial loans outstanding with an aggregate balance of $17.9 million, or 5.5% of the total loan portfolio.  These totals include 29 unsecured commercial loans with an aggregate outstanding balance of $1.1 million.  As of December 31, 2009, the average commercial loan balance (secured and unsecured loans) was approximately $89,000, although we have originated loans with balances substantially greater than this average.
 
 
6

 
 
Commercial credit decisions are based upon our credit assessment of the loan applicant. We determine the applicant’s ability to repay in accordance with the proposed terms of the loans and we assess the risks involved. We also evaluate the applicant’s credit and business history and ability to manage the loan and its business.  We usually obtain personal guarantees of the principals.  In addition to evaluating the loan applicant’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan.  We supplement our analysis of the applicant’s creditworthiness with credit agency reports of the applicant’s credit history.  We may also check with other banks and conduct trade investigations.  Collateral supporting a secured transaction also is analyzed to determine its marketability.  Commercial business loans generally have higher interest rates than residential loans of like duration because they have a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of any collateral.  Our pricing of commercial business loans is based primarily on the credit risk of the borrower, with due consideration given to borrowers with appropriate deposit relationships and competition.
 
Construction Loans.  We originate construction loans to individuals and builders in our market area.  These loans totaled $14.1 million, or 4.3% of our total loan portfolio, at December 31, 2009.  At December 31, 2009, we had 33 construction loans outstanding with an average balance of $427,000.  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.

 
7

 

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,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                                                             
Real estate loans:
                                                           
One- to four-family residential
  $ 151,352       46.6 %   $ 145,329       47.6 %   $ 114,745       47.3 %   $ 102,328       51.1 %   $ 77,738       48.8 %
Home equity loans and lines of credit
    37,892       11.7       41,293       13.5       40,264       16.6       38,074       19.0       33,067       20.8  
Multi-family
    4,108       1.3       4,942       1.6       5,609       2.3       2,492       1.2       1,676       1.1  
Commercial
    97,075       29.9       81,983       26.8       55,606       22.9       39,186       19.6       31,392       19.7  
Construction
    14,093       4.3       12,223       4.0       10,137       4.2       8,371       4.2       6,267       3.9  
Commercial
    17,864       5.5       17,177       5.6       12,600       5.2       7,337       3.7       6,880       4.3  
Consumer and other
    2,223       0.7       2,616       0.9       3,752       1.5       2,427       1.2       2,258       1.4  
                                                                                 
Total loans receivable
    324,607       100.0 %     305,563       100.0 %     242,713       100.0 %     200,215       100.0 %     159,278       100.0 %
Deferred loan fees
    (394 )             (307 )             (281 )             (323 )             (336 )        
Allowance for loan losses
    (2,606 )             (2,105 )             (1,392 )             (1,373 )             (1,168 )        
                                                                                 
Total loans receivable, net
  $ 321,607             $ 303,151             $ 241,040             $ 198,519             $ 157,774          

 
8

 

Loan Portfolio Maturities and Yields.  The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2009.  Demand loans, 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,
                                               
2010                            
  $ 3,086       5.18 %   $ 6,663       3.85 %   $ 3,397       6.34 %   $ 14,248       5.81 %
2011                            
    590       7.29 %     1,746       5.17 %           %     4,912       4.82 %
2012                            
    3,942       7.21 %     1,840       6.29 %           %     6,507       6.76 %
2013 to 2014                            
    11,461       6.13 %     10,347       5.62 %     30       8.08 %     41,682       5.94 %
2015 to 2019                            
    10,668       5.14 %     5,522       5.21 %     214       6.99 %     20,206       6.09 %
2020 to 2024                            
    13,174       5.35 %     10,956       5.85 %           %     7,029       6.17 %
2024 and beyond                            
    108,431       5.90 %     818       3.11 %     467       5.61 %     2,491       8.08 %
                                                                 
Total                  
  $ 151,352       5.84 %   $ 37,892       5.27 %   $ 4,108       6.30 %   $ 97,075       5.97 %
 
   
Construction
   
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,
                                               
2010                            
  $ 14,093       5.52 %   $ 4,037       5.16 %   $ 226       8.45 %   $ 45,750       5.39 %
2011                            
          %     822       5.41 %     323       8.86 %     8,393       5.28 %
2012                            
          %     3,296       6.03 %     664       7.41 %     16,249       6.70 %
2013 to 2014                            
          %     6,105       5.58 %     579       5.74 %     70,204       5.89 %
2015 to 2019                            
          %     3,604       5.99 %     180       5.95 %     40,394       5.72 %
2020 to 2024                            
          %           %           %     31,159       5.71 %
2024 and beyond                            
          %           %     251       7.09 %     112,458       5.89 %
                                                                 
Total                  
  $ 14,093       5.52 %   $ 17,864       5.64 %   $ 2,223    
 
%
  $ 324,607       5.81 %
 
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2009 that are contractually due after December 31, 2010.
 
     
Due After December 31, 2010
 
     
Fixed
   
Adjustable
   
Total
 
     
(In thousands)
 
 
Real estate loans:
                 
 
One- to four-family residential
  $ 130,590     $ 17,676     $ 148,266  
 
Home equity loans and lines of credit
    31,229             31,229  
 
Multi-family
    711             711  
 
Commercial
    82,827             82,827  
 
Commercial
    13,827             13,827  
 
Consumer and other
    1,997             1,997  
                           
 
Total loans
  $ 261,181     $ 17,676     $ 278,857  
 
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 2009, we sold $4.2 million in loans.  We have not purchased any whole loans in recent periods.  We are an approved loan seller and seller/servicer for Fannie Mae.  We may continue to sell conforming loans in the future.  Currently, we do not retain the servicing rights for the conforming loans we sell.
 
Loan Approval Authority and Underwriting.  Our board of directors grants lending authority to our Management Loan Committee and to individual executive officers and loan officers.  Our lending activities are subject to written policies established by the board of directors.  These policies are reviewed periodically.
 
The Management Loan Committee may approve loans in accordance with applicable loan policies, including our policy governing loans to one borrower.  This policy limits the aggregate dollar amount of credit that may be extended to any one borrower and related entities.  The Management Loan Committee may approve secured loans in amounts up to $300,000, and unsecured loans in amounts up to $100,000.
 
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 reviewed by our loan underwriting personnel.  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 $394,000 and $307,000 at December 31, 2009 and 2008, respectively.
 
Loans to One Borrower.  At December 31, 2009, our five largest aggregate amounts loaned to any borrower and related interests totaled $5.6 million, $5.3 million, $5.2 million, $5.0 million and $4.9 million. At December 31, 2009, these loans were all performing according to their terms.  Under federal banking regulations, at December 31, 2009 our maximum loan-to-one borrower limit was $5.9 million.  See “Supervision and Regulation—Federal Banking Regulation—Loans to One Borrower” for a discussion of applicable regulatory limitations.
 
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.
 
 
10

 
 
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.  As of December 31, 2009, we had no loans that were past due 90 days or more and still accruing.  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.
 
The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
 
 
11

 
 
   
Loans Delinquent For
       
   
30-89 Days
   
90 Days and Over
   
Total
 
   
Number
   
Amount
   
Number
   
Amount
   
Number
   
Amount
 
   
(Dollars in thousands)
 
                                     
At December 31, 2009
                                   
Real estate loans:
                                   
One- to four-family residential
    9     $ 1,085       23     $ 4,023       32     $ 5,108  
Home equity loans and lines of credit
    5       193       5       215       10       408  
Multi-family
                                   
Commercial
    8       1,384       4       535       12       1,919  
Construction
                2       487       2       487  
Commercial
                1       15       1       15  
Consumer and other
    17       113       1       2       18       115  
Total
    39     $ 2,775       36     $ 5,277       75     $ 8,052  
                                                 
At December 31, 2008
                                               
Real estate loans:
                                               
One- to four-family residential
    10     $ 1,574       1     $ 382       11     $ 1,956  
Home equity loans and lines of credit
    5       117       4       290       9       407  
Multi-family
                                   
Commercial
    3       753       4       511       7       1,264  
Construction
                                   
Commercial
                2       13       2       13  
Consumer and other
    15       80       2       73       17       153  
Total
    33     $ 2,524       13     $ 1,269       46     $ 3,793  
                                                 
At December 31, 2007
                                               
Real estate loans:
                                               
One- to four-family residential
    1     $ 82       4     $ 682       5     $ 764  
Home equity loans and lines of credit
    4       78       1       10       5       88  
Multi-family
                                   
Commercial
                1       252       1       252  
Construction
                                   
Commercial
    2       197       3       118       5       315  
Consumer and other
    7       18       2       22       9       40  
Total
    14     $ 375       11     $ 1,084       25     $ 1,459  
                                                 
At December 31, 2006
                                               
Real estate loans:
                                               
One- to four-family residential
    1     $ 52       2     $ 167       3     $ 219  
Home equity loans and lines of credit
    5       253       2       22       7       275  
Multi-family
                                   
Commercial
                                   
Construction
                1       44       1       44  
Commercial
                                   
Consumer and other
    7       115                   7       115  
Total
    13     $ 420       5     $ 233       18     $ 653  
                                                 
At December 31, 2005
                                               
Real estate loans:
                                               
One- to four-family residential
    1     $ 41       2     $ 37       3     $ 78  
Home equity loans and lines of credit
    4       147       1       39       5       186  
Multi-family                               
                                   
Commercial                               
                                   
Construction                               
                                   
Commercial
                                   
Consumer and other
    11       209       1       4       12       213  
Total                               
    16     $ 397       4     $ 80       20     $ 477  
 
 
12

 
 
Nonperforming Assets.  The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.  As of December 31, 2009, we had nine loans totaling $4.8 million that were considered 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 four commercial real estate loans, construction and multi-family loans with outstanding balances totaling $4.1 million, three one- to four-family residential real estate loans with outstanding balances totaling $711,000, and two consumer loans with immaterial outstanding balances.  We had no troubled debt restructurings as of December 31, 2008, 2007, 2006 or 2005.
 
   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
                               
Non-accrual loans:
                             
Real estate loans:
                             
One- to four-family residential
  $ 4,023     $ 1,015     $ 764     $ 167     $ 37  
Home equity loans and lines of credit
    215       290       10       22       39  
Multi-family
                             
Commercial
    535       511       252              
Construction
    487                   44        
Commercial
    15       13       118              
Consumer and other
    2       73       22             4  
Total                                           
    5,277       1,902       1,166       233       80  
                                         
Accruing loans 90 days or more past due:
                                       
Real estate loans:
                                       
One- to four-family residential
                             
Home equity loans and lines of credit
                             
Multi-family
                             
Commercial
                             
Construction
                             
Commercial
                             
Consumer and other
                             
Total accruing loans 90 days or more past due
                             
                                         
Total non-performing loans
    5,277       1,902       1,166       233       80  
                                         
Foreclosed real estate                                                
          113                    
Other non-performing assets                                                
                             
                                         
Total non-performing assets                                                
  $ 5,277     $ 2,015     $ 1,166     $ 233     $ 80  
                                         
Ratios:
                                       
Total non-performing loans to total loans
    1.63 %     0.62 %     0.48 %     0.12 %     0.05 %
Total non-performing loans to total assets
    0.93 %     0.36 %     0.25 %     0.06 %     0.02 %
Total non-performing assets to total assets
    0.93 %     0.38 %     0.25 %     0.06 %     0.02 %
 
The amount of the allowance for loan losses allocated to the $5.3 million of non-performing loans at December 31, 2009, noted above, was $400,000.
 
  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.  As of December 31, 2009, we had $11.7 million of assets designated as special mention.
 
 
13

 
 
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, 2009 and 2008.  The classified assets total at December 31, 2009 includes $5.3 million of nonperforming loans.
                 
    At December 31,  
    2009     2008  
    (In thousands)  
Classified assets:
               
Substandard                                          
  $ 10,746     $ 1,984  
Doubtful                                          
           
Loss                                          
           
Total classified assets                                       
  $ 10,746     $ 1,984  
Special mention                                            
  $ 11,660     $ 8,479  
 
At December 31, 2009, substandard assets consisted primarily of (i) 20 residential mortgage loans with a principal balance of $3.3 million, (ii) six commercial real estate loan relationships with principal balances totaling $3.2 million and (iii) four investment securities with a book value of $3.6 million and a par value of $5.4 million.   The collateral for the commercial real estate loan relationships was valued at $5.4 million as of December 31, 2009.  At December 31, 2009, special mention assets consisted primarily of (i) 11 residential mortgage loans with outstanding balances totaling $1.5 million and (ii) six commercial real estate loan relationships with outstanding balances totaling $9.9 million.  The collateral for the commercial real estate loan relationships was valued at $14.5 million as of December 31, 2009.  Included in the special mention commercial real estate loans are two relationships with outstanding balances totaling $8.3 million, and collateral valued at $12.0 million as of December 31, 2009.  The investment securities are not considered in determining the provision or allowance for loan losses.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Operating Results for the Years Ended December 31, 2009 and 2008—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)
adjustments to historical loss experience (unallocated allowances), maintained to cover uncertainties that affect our estimate of probable losses for each loan type.
 
 
14

 
 
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.
 
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.
 
For a discussion of how we determined the allowance for loan losses as of December 31, 2009 and 2008, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Operating Results for the Years Ended December 31, 2009 and December 31, 2008—Provisions for Loan Losses.”
 
 
15

 
 
The following table sets forth activity in our allowance for loan losses for the years indicated.
 
   
At or For the Years Ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
                               
Balance at beginning of year
  $ 2,105     $ 1,392     $ 1,373     $ 1,168     $ 990  
                                         
Charge-offs:
                                       
Real estate loans:
                                       
One- to four-family residential
          (11 )                  
Home equity loans and lines of credit
    (34 )     (2 )                  
Multi-family
                             
Commercial
          (5 )     (62 )            
Construction
                             
Commercial
    (9 )                        
Consumer and other
    (74 )     (32 )     (6 )     (10 )     (31 )
Total charge-offs
    (117 )     (50 )     (68 )     (10 )     (31 )
                                         
Recoveries:
                                       
Real estate loans:
                                       
One- to four-family residential
          3                    
Home equity loans and lines of credit
                      15        
Multi-family
                             
Commercial
          4                    
Construction
                             
Commercial
                             
Consumer and other
    3             3       21       5  
Total recoveries
    3       7       3       36       5  
                                         
Net recoveries (charge-offs)
    (114 )     (43 )     (65 )     26       (26 )
Provision for loan losses
    615       756       84       179       204  
                                         
Balance at end of year
  $ 2,606     $ 2,105     $ 1,392     $ 1,373     $ 1,168  
                                         
Ratios:
                                       
Net recoveries (charge-offs) to average loans outstanding
    (0.04 )%     (0.02 )%     (0.03 )%     0.01 %     (0.03 )%
Allowance for loan losses to non-performing loans at end of year
    49.38 %     110.67 %     119.38 %     589.27 %     1,460.00 %
Allowance for loan losses to total loans at end of year
    0.81 %     0.69 %     0.57 %     0.69 %     0.73 %
 
 
16

 
 
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,
 
   
2009
   
2008
   
2007
 
   
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
  $ 418       16.0 %     46.6 %   $ 273       13.0 %     47.6 %   $ 115       8.3 %     47.3 %
Home equity loans and lines of credit
    42       1.6       11.7       57       2.7       13.5       40       2.9       16.6  
Multi-family
    10       0.4       1.3       16       0.7       1.6       70       5.0       2.3  
Commercial
    1,010       38.8       29.9       863       41.0       26.8       825       59.3       22.9  
Construction
    157