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EX-32.0 - EXHIBIT 32.0 - Ocean Shore Holding Co.v409047_ex32-0.htm
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EXCEL - IDEA: XBRL DOCUMENT - Ocean Shore Holding Co.Financial_Report.xls

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

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: 0-53856

 

OCEAN SHORE HOLDING CO.

(Exact name of registrant as specified in its charter)

 

New Jersey   80-0282446
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

1001 Asbury Avenue, Ocean City, New Jersey   08226
(Address of principal executive offices)   (Zip Code)

  

(609) 399-0012

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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 such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     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 for such shorter period that the registrant was required to submit and post such files). Yes x     No ¨

 

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

 

  Large Accelerated Filer ¨   Accelerated Filer x
       
  Non-accelerated Filer ¨   Smaller Reporting Company ¨
  (Do not check if a 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 x

 

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

At May 1, 2015, the registrant had 6,227,927 shares of $0.01 par value common stock outstanding.

 

 
 

 

OCEAN SHORE HOLDING CO.

 

FORM 10-Q

 

INDEX

 

    Page
     
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Unaudited Condensed Consolidated Statements of Financial Condition at March 31, 2015 and December 31, 2014 1
     
  Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2015 and 2014 2
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 3
     
  Notes to Unaudited Condensed Consolidated Financial Statements 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
     
Item 4. Controls and Procedures 34
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 34
     
Item 1A. Risk Factors 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3. Defaults upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36
     
SIGNATURES  

 

 
 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

   March 31,   December 31, 
   2015   2014 
   (Dollars in thousands) 
ASSETS    
     
Cash and amounts due from depository institutions  $7,190   $9,023 
Interest-earning bank balances   79,274    71,284 
           
Cash and cash equivalents   86,464    80,307 
           
Investment securities held to maturity (estimated fair value—$1,161 at March 31, 2015; $1,278 at December 31, 2014)   1,083    1,201 
Investment securities available for sale  (amortized cost— $115,193 at March 31, 2015; $112,205 at December 31, 2014)   113,747    110,116 
Loans—net of allowance for loan losses of $ 3,384 at March 31, 2015 and $3,760 at December 31, 2014   770,261    774,017 
Accrued interest receivable:          
Loans   2,389    2,304 
Investment securities   117    33 
Federal Home Loan Bank stock—at cost   6,039    6,039 
Office properties and equipment—net   12,743    12,870 
Prepaid expenses and other assets   2,430    3,161 
Real estate owned   608    650 
Cash surrender value of life insurance   23,982    23,828 
Net deferred tax asset   4,804    5,062 
Goodwill   4,630    4,630 
Other intangible assets   512    536 
TOTAL ASSETS  $1,029,809   $1,024,754 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Non-interest bearing deposits  $186,760   $98,417 
Interest bearing deposits   606,131    688,661 
Advances from Federal Home Loan Bank   110,000    110,000 
Junior subordinated debentures   7,217    7,217 
Advances from borrowers for taxes and insurance   4,430    4,026 
Accrued interest payable   707    879 
Other liabilities   8,921    9,743 
           
Total liabilities   924,166    918,943 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS’ EQUITY:          
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued        
Common stock, $.01 par value, 25,000,000 shares authorized, 7,307,590 shares issued;  shares outstanding: 6,251,912 at March 31, 2015; 6,393,344 at  December 31, 2014   73    73 
Additional paid-in capital   66,196    66,059 
Retained earnings - partially restricted   58,383    57,055 
Treasury stock—at cost: 1,055,678 at March 31, 2015; 914,246 at December 31, 2014   (14,733)   (12,678)
Common stock acquired by employee benefits plans   (2,554)   (2,639)
Deferred compensation plans trust   (663)   (608)
Accumulated other comprehensive loss   (1,059)   (1,451)
           
Total stockholders’ equity   105,643    105,811 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $1,029,809   $1,024,754 

 

See notes to unaudited condensed consolidated financial statements.

 

1
 

  

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

   Three Months Ended March 31, 
   2015   2014 
   (Dollars in thousands,
except per share data)
 
INTEREST AND DIVIDEND INCOME:          
Taxable interest and fees on loans  $8,172   $8,183 
Taxable interest on mortgage-backed securities   358    352 
Non-taxable interest on municipal securities   1    3 
Taxable interest and dividends on other investment securities   256    333 
           
Total interest and dividend income   8,787    8,871 
           
INTEREST EXPENSE:          
Deposits   613    644 
Borrowings   1,082    1,267 
           
Total interest expense   1,695    1,911 
           
NET INTEREST INCOME   7,092    6,960 
           
PROVISION FOR LOAN LOSSES   153    88 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   6,939    6,872 
           
OTHER INCOME:          
Service charges   507    447 
Cash surrender value of life insurance   154    156 
Other   388    403 
           
Total other income   1,049    1,006 
           
OTHER EXPENSE:          
Salaries and employee benefits   3,299    3,247 
Occupancy and equipment   1,249    1,287 
Federal insurance premiums   138    137 
Advertising   106    89 
Professional services   278    265 
Real estate owned activity   (66)   13 
Charitable contributions   38    38 
Other operating expenses   400    370 
           
Total other expenses   5,442    5,446 
           
INCOME BEFORE INCOME TAXES   2,546    2,432 
           
INCOME TAX EXPENSE   833    845 
           
NET INCOME  $1,713   $1,587 
Other comprehensive income, net of tax:          
           
Unrealized gain (loss) on available for sale securities   387    604 
Unrealized gain (loss) on post retirement life benefit   5     
           
TOTAL COMPREHENSIVE INCOME  $2,105   $2,191 
           
Earnings per share, basic:  $0.29   $0.25 
Earnings per share, diluted:  $0.28   $0.24 

 

See notes to unaudited condensed consolidated financial statements.

 

2
 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Three Months Ended March 31, 
   2015   2014 
   (Dollars in thousands) 
OPERATING ACTIVITIES:          
Net income  $1,713   $1,587 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   266    282 
Provision for loan losses   153    88 
Stock based compensation expense   250    247 
Cash surrender value of life insurance   (154)   (156)
Loss on disposal of office properties and equipment   1    

 
Changes in assets and liabilities which provided (used) cash:          
Accrued interest receivable   (169)   (77)
Prepaid expenses and other assets   734    524 
Accrued interest payable   (172)   (231)
Other liabilities   (817)   191 
Net cash provided by operating activities   1,805    2,455 
INVESTING ACTIVITIES:          
Principal collected on:          
Investment securities available for sale   2,015    3,003 
Investment securities held to maturity   26    50 
Loans originated, net of repayments   3,227    (12,980)
Purchases of:          
Investment securities held to maturity   (402)   (494)
Investment securities available for sale   (5,034)   

 
Office properties and equipment   (96)   (334)
Proceeds from sale of:          
Real estate owned   428    239 
Proceeds from maturities and calls of:          
Investment securities held to maturity   494    2,328 
Investment securities available for sale   

    

 
Cash used for acquisition, net of cash acquired          
Net cash (used in) investing activities   658    (8,188)
FINANCING ACTIVITIES:          
Increase in deposits   5,814    2,778 
Dividends paid   (385)   (411)
Purchase of shares by deferred compensation plans trust   (55)   (14)
Purchase of treasury stock   (2,456)   (2,050)
Stock options exercised   372    9 
Increase in advances from borrowers for taxes and insurance   404    266 
Net cash provided by financing activities   3,694    578 
NET DECREASE IN CASH AND CASH EQUIVALENTS   6,157    (5,155)
CASH AND CASH EQUIVALENTS—Beginning of period   80,307    87,619 
CASH AND CASH EQUIVALENTS—End of period  $86,464   $82,464 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period for:          
Interest  $1,843   $2,134 
Income Taxes  $2,080   $ 
SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS          
Transfers of loans to real estate owned  $387   $81 

 

See notes to unaudited condensed consolidated financial statements.

  

3
 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts presented in the tables, except share and per share amounts, are in thousands)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation - The unaudited condensed consolidated financial statements include the accounts of Ocean Shore Holding Co. (the “Company”) and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions to Form 10-Q, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim information, and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the condensed consolidated financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2014. The results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015 or any other period. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

 

Use of Estimates in the Preparation of Financial Statements - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. The most significant estimates and assumptions relate to the allowance for loan losses, other-than-temporary impairment on investment securities, goodwill and intangible impairment, deferred income taxes and the fair value measurements of financial instruments. Actual results could differ from those estimates under different assumptions and conditions, and the differences may be material to the consolidated financial statements.

 

New Accounting Pronouncements In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure — a consensus of the FASB Emerging Issues Task Force, on January 17, 2014. This ASU clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amended guidance clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. In addition, the amended guidance requires interim and annual disclosures of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amended guidance may be applied prospectively or through a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. The adoption of this accounting guidance did not have a material impact on the Company's consolidated financial statements.

 

4
 

 

In May 2014, the FASB issued ASU 2014-09, which created Accounting Standard Codification (“ASC”) ASC 606 "Revenue from Contracts with Customers," superseding the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. The amendment will be effective for the Company for the first annual period ending after December 15, 2016, including interim periods within that reporting period, and should be applied on a prospective basis. Early adoption of the guidance is not permitted. The Company is currently evaluating the impact of this ASU on its financial position, results of operations and disclosures.

 

In June 2014, the FASB issued ASU 2014-11, an amendment to ASC 860 “Transfers and Servicing.” This ASU requires accounting changes for repurchase to maturity and repurchase financing transactions, respectively, which will be accounted for as a secured borrowing agreement on a prospective basis. The ASU also adds additional disclosure requirements related to these transactions. The amendment will be effective for the Company for the first annual period ending after December 15, 2014. The accounting changes for all transactions affected by this amendment will have the impact recorded as a cumulative-effect adjustment to retained earnings on the date of adoption. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial statements.

 

Also in June 2014, the FASB issued ASU 2014-12, an amendment to ASC 718 “Compensation-Stock Compensation.” This ASU requires that a performance target that affects vesting, and could be achieved after the requisite service period, be treated as a performance condition. Application of existing guidance in ASC 718, as it relates to awards with performance conditions that affect vesting, should continue to be used to account for such awards. The amendment will be effective for the Company for the first reporting period ending after December 15, 2014. Early adoption is permitted. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-14, an amendment to ASC 310-40 “Receivables - Troubled Debt Restructurings by Creditors.” This ASU requires that a government-guaranteed mortgage loan be de-recognized, and that a separate other receivable be recognized, upon foreclosure if the three criteria identified in the ASU are met. Upon foreclosure and meeting the three criteria, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) that is expected to be recovered from the guarantor. The amendment will be effective for the Company for the first reporting period ending after December 15, 2014. The Company adopted this amendment in 2014 on a prospective basis. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial statements.

 

In August 2014, the FASB also issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU requires management to perform an assessment of going concern and provides specific guidance on when and how to assess or disclose going concern uncertainties. The new standard also defines terms used in the evaluation of going concern, such as "substantial doubt." Following application, the Company will be required to perform assessments at each annual and interim period, provide an assessment period of one year from the issuance date, and make disclosures in certain circumstances in which substantial doubt is identified. The amendment will be effective for the Company for the first reporting period ending after December 15, 2016. Earlier application is permitted. The Company does not expect this ASU to have an impact on its financial position, result of operations, or disclosures.

 

5
 

 

2. INVESTMENT SECURITIES

 

Investment securities are summarized as follows:

 

   March 31, 2015 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gain   Loss   Value 
   (Dollars in thousands) 
Held to Maturity                    
Debt Securities - Municipal  $402   $   $   $402 
U.S. Treasury and government sponsored entity mortgage-backed securities   681    78        759 
Totals  $1,083   $78   $   $1,161 
                     
Available for Sale                    
Debt securities:                    
Corporate  $9,612   $89   $(802)  $8,899 
U.S. Treasury and federal agencies   21,224        (76)   21,148 
Equity securities   3    24        27 
U.S. treasury and government sponsored entity mortgage-backed securities   84,354    385    (1,066)   83,673 
Totals  $115,193   $498   $(1,944)  $113,747 

 

   December 31, 2014 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gain   Loss   Value 
   (Dollars in thousands) 
Held to Maturity                    
Debt Securities - Municipal  $494   $   $   $494 
U.S. Treasury and government sponsored entity mortgage-backed securities   707    77        784 
Totals  $1,201   $77   $   $1,278 
                     
Available for Sale                    
Debt securities:                    
Corporate  $9,596   $99   $(856)  $8,839 
U.S. Treasury and federal agencies   21,223    6    (238)   20,991 
Equity securities   3    25        28 
U.S. Treasury and government sponsored entity mortgage-backed securities   81,383    278    (1,403)   80,258 
Totals  $112,205   $408   $(2,497)  $110,116 

 

6
 

 

As of March 31, 2015 and December 31, 2014, the Company had investment securities available for sale with an estimated fair value of $108.8 million and $105.1 million, respectively, pledged as collateral to secure public fund deposits.

 

The following table provides the gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014:

 

   March 31, 2015 
   Less Than 12 Months   12 Months or Longer   Total 
       Gross       Gross       Gross 
   Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized 
   Fair Value   Loss   Fair Value   Loss   Fair Value   Loss 
   (Dollars in thousands) 
Debt securities -                              
Corporate  $   $   $2,882   $(802)  $2,882   $(802)
U.S. Treasury   11,190    (25)   9,924    (51)   21,114    (76)
US treasury and government sponsored entity mortgage- backed securities   4,988    (10)   60,636    (1,056)   65,624    (1,066)
Equity securities                        
Totals  $16,178   $(35)  $73,442   $(1,909)  $89,620   $(1,944)

 

   December 31, 2014 
   Less Than 12 Months   12 Months or Longer   Total 
       Gross       Gross       Gross 
   Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized 
   Fair Value   Loss   Fair Value   Loss   Fair Value   Loss 
   (Dollars in thousands) 
Debt securities -                              
Corporate  $   $   $2,826   $(856)  $2,826   $(856)
U.S. Treasury   4,990    (5)   9,767    (233)   14,757    (238)
US treasury and government sponsored entity mortgage- backed securities   10,133    (17)   66,020    (1,386)   76,153    (1,403)
Equity securities                        
Totals  $15,123   $(22)  $78,613   $(2,475)  $93,736   $(2,497)

 

Management has reviewed its investment securities as of March 31, 2015 and has determined that all declines in fair value below amortized cost are temporary.

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average FICO and weighted average loan-to-value (“LTV”), rating or scoring, credit ratings and market spreads, as applicable.

 

7
 

  

The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that a security in the unrealized loss position is designated to be sold or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, the impairment of such security is concluded to be other than temporary and the entire amount of the unrealized loss will be recorded in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company concludes that the entire amortized cost basis of the security will not be recovered, while the OTTI is concluded to exists, the Company only recognizes currently in earnings the amount of decline in value attributable to credit deterioration, with the remaining component of OTTI presented in other comprehensive income.

 

Corporate Debt Securities - The Company’s investments in the preceding table in corporate debt securities consist of corporate debt securities issued by large financial institutions and single issuer and pooled trust preferred/collateralized debt obligations backed by bank trust preferred capital securities.

 

At March 31, 2015, two single issuer trust preferred securities have been in a continuous unrealized loss position for 12 months or longer. Those securities have aggregate depreciation of 21.8% from the Company’s amortized cost basis. The initial decline of these securities was primarily attributable to depressed market pricing of non-rated issues of trust preferred securities observed during the financial downturn. The unrealized loss position continued to improve, and the current decline of these debt securities is principally attributable to the rising interest rate environment and depressed pricing on lower yielding investments with prolonged maturities, which had an impact for these types of investments. These securities were performing in accordance with their contractual terms as of March 31, 2015, and had paid all contractual cash flows since the Company’s initial investment. Management believes these unrealized losses are not other-than-temporary based upon the Company’s analysis that the securities will perform in accordance with their terms and the Company’s intent not to sell these investments for a period of time sufficient to allow for the anticipated recovery of fair value, which may be maturity. The Company expects recovery of fair value when market conditions have stabilized and that the Company will receive all contractual principal and interest payments related to those investments.

 

United States Treasury, US Federal Agencies and Government Sponsored Enterprise Mortgage-backed Securities - The Company’s investments in the preceding table in United States government sponsored enterprise notes consist of debt obligations of the Federal Home Loan Bank (“FHLB”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Federal National Mortgage Association (“FNMA”). At March 31, 2015 the Company had fourteen agency mortgage-backed securities with unrealized losses for 12 months or longer. Those securities had aggregate depreciation of 1.5% from the Company’s amortized cost basis. These securities were performing in accordance with their contractual terms as of March 31, 2015, and had paid all contractual cash flows since the Company’s initial investment and that the Company expects to receive all contractual principal and interest payments related to those investments. Management believes these unrealized losses are not other-than-temporary based upon the Company’s analysis that the securities will perform in accordance with their terms and the Company’s intent not to sell these investments for a period of time sufficient to allow for the anticipated recovery of fair value, which may be maturity.

 

The amortized cost and estimated fair value of debt securities available for sale and held to maturity at March 31, 2015 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

8
 

 

   March 31, 2015 
   Held to Maturity   Available for Sale Securities 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 
   (Dollars in thousands) 
Due within 1 year  $402   $402   $   $ 
Due after 1 year through 5 years           5,962    6,052 
Due after 5 years through 10 years           11,190    11,165 
Due after 10 years           13,683    12,831 
Total  $402   $402   $30,835   $30,048 

 

Equity securities had a cost of $3 thousand and a fair value of $27 thousand as of March 31, 2015. Mortgage-backed securities had a cost of $84.4 million and a fair value of $83.7 million as of March 31, 2015.

 

3. LOANS RECEIVABLE NET

 

Loans receivable consist of the following:

 

   March 31, 2015   December 31, 2014 
   (Dollars in thousands) 
Real estate - mortgage:          
One-to-four family residential  $584,758   $587,399 
Commercial and multi-family   88,863    89,778 
Total real estate-mortgage   673,621    677,177 
Real estate - construction:          
Residential   17,390    16,030 
Commercial   3,140    4,141 
Total real estate - construction   20,530    20,171 
Commercial   22,054    22,277 
Consumer:          
Home equity   53,539    54,279 
Other consumer loans   364    377 
Total consumer loans   53,903    54,656 
Total loans   770,108    774,281 
Net deferred loan cost   3,537    3,496 
Allowance for loan losses   (3,384)   (3,760)
Net total loans  $770,261   $774,017 

 

The Bank originates loans to customers primarily in its local market area. The ultimate repayment of these loans is dependent to a certain degree on the local economy and real estate market. The intent of management is to hold loans originated and purchased to maturity.

 

9
 

 

Changes in the allowance for loan losses are as follows:

 

   Three months ended March 31, 
   2015   2014 
   (Dollars in thousands) 
Balance, beginning of period  $3,760   $4,199 
Provision for loan loss   153    88 
Charge-offs   (529)   (74)
Recoveries       1 
Balance, end of period  $3,384   $4,214 

 

The provision for loan losses charged to expense is based upon past loan loss experiences, a series of qualitative factors, and an evaluation of losses in the current loan portfolio, including the specific evaluation of impaired loans. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass–rated loans (general pooled allowance) and the criticized and classified loans that continue to perform.

 

Non-performing assets segregated by class of loans are as follows:

 

   March 31, 2015   December 31, 2014 
   (Dollars in thousands) 
Real estate          
One-to-four family residential  $3,425   $3,626 
Commercial and multi-family   1,384    803 
Real estate – construction   143    143 
Commercial       501 
Consumer   350    502 
Non-accrual loans   5,302    5,575 
Troubled debt restructuring, non-accrual   1,117    694 
Total non-performing loans   6,419    6,269 
Real estate owned   608    650 
Total non-performing assets  $7,027   $6,919 

 

A rollforward of the Company’s nonaccretable and accretable yield on loans accounted for under ASU 310-30, Loans and Debts Securities Acquired with Deteriorated Credit Quality, is shown below for the three month periods ended March 31, 2015 and 2014:

 

  

Contractual

Receivable

Amount

  

Nonaccretable

(Yield)/Premium

  

Accretable

(Yield)/Premium

  

Carrying

Amount

 
   (Dollars in thousands) 
Balance at January 1, 2015  $44,216   $(2,540)  $542   $42,218 
Principal reductions   (1,325)           (1,325)
Charge-offs, net   (62)   62         
Accretion of loan discount (premium)           (29)   (29)
Transfer between nonaccretable and accretable yield                
Settlement adjustments                
Balance at March 31, 2015  $42,829   $(2,478)  $513   $40,864 

 

10
 

 

  

Contractual

Receivable

Amount

  

Nonaccretable

(Yield)/Premium

  

Accretable

(Yield)/Premium

  

Carrying

Amount

 
   (Dollars in thousands) 
Balance at January 1, 2014  $50,837   $(3,099)  $746   $48,484 
Principal reductions   (1,375)           (1,375)
Charge-offs, net   (189)   189         
Accretion of loan discount (premium)           (51)   (51)
Transfer between nonaccretable and accretable yield                
Settlement adjustments                
Balance at March 31, 2014  $49,273   $(2,910)  $695   $47,058 

 

An age analysis of past due loans, segregated by class of loans, as of March 31, 2015 and December 31, 2014 are as follows:

 

   30-59 Days
Past Due
  

60-89 Days

Past Due

  

Greater
Than

90 Days

   Total Past
Due
   Current   Total Loans
Receivable
 
   (Dollars in thousands) 
March 31, 2015                              
Real Estate                              
1-4 Family Residential  $1,561   $537   $4,054   $6,152   $578,606   $584,758 
Commercial and Multi-Family   222        1,384    1,606    87,257    88,863 
Construction           143    143    20,387    20,530 
Commercial                   22,054    22,054 
Consumer   237    96    486    819    53,084    53,903 
Total  $2,020   $633   $6,067   $8,720   $761,388   $770,108 
                               
December 31, 2014                              
Real Estate                              
1-4 Family Residential  $2,323   $   $4,255   $6,578   $580,821   $587,399 
Commercial and Multi-Family   831        803    1,634    88,144    89,778 
Construction           143    143    20,028    20,171 
Commercial           501    501    21,776    22,277 
Consumer   485    5    567    1,057    53,599    54,656 
Total  $3,639   $5   $6,269   $9,913   $764,368   $774,281 

 

11
 

 

Impaired loans are set forth the in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
 
   (Dollars in thousands) 
March 31, 2015                    
With no related allowance recorded                    
    Real Estate                    
      1-4 Family Residential  $4,314   $4,563   $   $139 
      Commercial and Multi-Family   1,324    1,324        265 
      Construction   143    143        143 
    Commercial                
    Consumer   940    940        55 
With an allowance recorded                    
    Real Estate                    
      1-4 Family Residential   5,389    5,713    636    317 
      Commercial and Multi-Family   310    310    47    310 
      Construction                
    Commercial   196    196    4    196 
    Consumer   149    194    94    50 
Total                    
    Real Estate                    
      1-4 Family Residential  $9,703   $10,276   $636   $202 
      Commercial and Multi-Family   1,634    1,634    47    272 
      Construction   143    143        143 
    Commercial   196    196    4    196 
    Consumer   1,089    1,134    94    54 
                     
December 31, 2014                    
With no related allowance recorded                    
    Real Estate                    
      1-4 Family Residential  $4,585   $4,622   $   $139 
      Commercial and Multi-Family   1,324    1,324        265 
  Construction   143    143        143 
    Commercial                
    Consumer   970    970        57 
With an allowance recorded                    
    Real Estate                    
      1-4 Family Residential   5,787    6,138    721    340 
      Commercial and Multi-Family                
    Commercial                
    Consumer   702    702    254    351 
Total   181    181    55    90 
    Real Estate                    
      1-4 Family Residential  $10,372   $10,760   $721   $207 
      Commercial and Multi-Family   1,324    1,324        265 
  Construction   143    143        143 
    Commercial   702    702    254    351 
    Consumer   1,151    1,151    55    61 

 

Included in the Company’s loan portfolio are modified commercial loans. Per FASB ASC 310-40, Troubled Debt Restructuring (“TDR”), a modification is one in which the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider, such as providing for a below market interest rate and/or forgiving principal or previously accrued interest; this modification may stem from an agreement or be imposed by law or a court, and may involve a multiple note structure. Generally, prior to the modification, the loans which are modified as a TDR are already classified as non-performing. These loans may only be returned to performing (i.e. accrual status) after considering the borrower’s sustained repayment performance for a reasonable amount of time, generally six months; this sustained repayment performance may include the period of time just prior to the restructuring. As of March 31, 2015, the Company entered into 16 TDR agreements with a total carrying value of $4.1 million of which 7 were not performing totaling $1.1 million. These loans had a specific reserve of $583 thousand. The following table presents an analysis of the Company’s TDR agreements existing as of March 31, 2015 and December 31, 2014, respectively. 

 

12
 

 

   As of March 31, 2015   As of December 31, 2014 
       Outstanding Recorded Investment       Outstanding Recorded Investment 
   Number of
Contracts
  

Pre-

Modification

  

Post-

Modification

   Number of
Contracts
  

Pre-

Modification

  

Post-

Modification

 
         (Dollars in thousands)              (Dollars in thousands)      
1-4 Family Residential   8   $3,316   $3,316    8   $3,335   $3,335 
Commercial Mortgage   2    250    250             
Consumer   5    337    337    4    287    287 
Commercial   1    196    196    1    201    201 
    Total   16   $4,099   $4,099    13   $3,823   $3,823 

  

Federal regulations require us to review and classify our assets on a regular basis. In addition, federal banking regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify an asset as substandard or doubtful we establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.

 

13
 

 

The following table presents classified loans by class of loans as of March 31, 2015 and December 31, 2014.

 

   Real Estate                 
  

1-4 Family

Residential

  

Commercial

and Multi-Family

   Construction   Commercial   Consumer 
   3/31/2015   12/31/2014   3/31/2015   12/31/2014   3/31/2015   12/31/2014   3/31/2015   12/31/2014   3/31/2015   12/31/2014 
   (Dollars in thousands) 
Grade:                                                  
Special Mention  $3,914   $3,948   $563   $572   $   $   $17   $444   $688   $915 
Substandard   8,440    9,370    4,465    4,010    143    143    576    659    1,142    1,189 
Doubtful and Loss                                   14    14 
     Total  $12,354   $13,318   $5,028   $4,582   $143   $143   $593   $1,103   $1,844   $2,118 

 

The following table presents the credit risk profile of loans based on payment activity as of March 31, 2015 and December 31, 2014.

 

   Real Estate                 
  

1-4 Family

Residential

  

Commercial

and Multi-Family

   Construction   Commercial   Consumer 
   3/31/2015   12/31/2014   3/31/2015   12/31/2014   3/31/2015   12/31/2014   3/31/2015   12/31/2014   3/31/2015   12/31/2014 
   (Dollars in thousands 
Performing  $580,602   $583,773   $87,229   $88,975   $20,387   $20,028   $22,054   $21,776   $53,417   $54,154 
Non-Performing   4,156    3,626    1,634    803    143    143        501    486    502 
     Total  $584,758   $587,399   $88,863   $89,778   $20,530   $20,171   $22,054   $22,277   $53,903   $54,656 

 

14
 

 

The following table details activity in the allowance for possible loan losses by portfolio segment for the periods ended March 31, 2015 and December 31, 2014. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

 

   Real Estate             
  

1-4 Family

Residential

  

Commercial

and

Multi-Family

   Construction   Commercial   Consumer   Total 
   (Dollars in thousands) 
March 31, 2015                              
Allowance for credit losses:                              
   Beginning Balance  $2,318   $625   $33   $380   $404   $3,760 
     Charge-offs   (162)           (306)   (61)   (529)
     Recoveries                        
     Provision for loan losses   (32)   (261)   8    247    191    153 
   Ending balance  $2,124   $364   $41   $321   $534   $3,384 
   Ending balance:  individually evaluated for impairment  $636   $47   $   $4   $94   $781 
   Ending balance:  collectively evaluated for impairment  $1,488   $317   $41   $317   $440   $2,603 
Loan Receivables:                              
   Ending balance  $584,758   $88,863   $20,530   $22,054   $53,903   $770,108 
   Ending balance:  individually evaluated for impairment  $9,703   $1,634   $143   $196   $1,089   $12,765 
   Ending balance:  collectively evaluated for impairment  $575,055   $87,229   $20,387   $21,858   $52,814   $757,343 
                               
December 31, 2014                              
Allowance for credit losses:                              
   Beginning Balance  $2,981   $551   $85   $230   $352   $4,199 
     Charge-offs   (538)               (439)   (977)
     Recoveries   1            75        76 
     Provision for loan losses   (126)   74    (52)   75    491    462 
   Ending balance  $2,318   $625   $33   $380   $404   $3,760 
   Ending balance:  individually evaluated for impairment  $721   $   $   $254   $55   $1,030 
   Ending balance:  collectively evaluated for impairment  $1,597   $625   $33   $126   $349   $2,730 
Loan Receivables:                              
   Ending balance  $587,399   $89,778   $20,171   $22,277   $54,656   $774,281 
   Ending balance:  individually evaluated for impairment  $10,372   $1,324   $143   $702   $1,151   $13,692 
   Ending balance:  collectively evaluated for impairment  $577,027   $88,454   $20,028   $21,575   $53,505   $760,589 

 

15
 

 

4. DEPOSITS

 

Deposits consist of the following major classifications:

 

   March 31, 2015       December 31, 2014 
       Weighted       Weighted 
       Average       Average 
   Amount   Interest Rate   Amount   Interest Rate 
   (Dollars in thousands) 
                 
NOW and other demand deposit accounts  $443,050    0.12%  $439,623    0.13%
Passbook savings and club accounts   170,718    0.20%   168,686    0.20%
Subtotal   613,768         608,309      
Certificates with original maturities:                    
    Within one year   38,684    0.29%   42,821    0.29%
    One to three years   118,111    0.94%   113,927    0.92%
    Three years and beyond   22,328    1.68%   22,021    1.73%
Total certificates   179,123         178,769      
Total  $792,891        $787,078      

 

The aggregate amount of certificate accounts in denominations of $100 thousand or more at March 31, 2015 and December 31, 2014 amounted to $63.8 million and $62.8 million, respectively. Currently, deposits in excess of $250 thousand are generally not federally insured.

 

Municipal demand deposit accounts in denominations of $100 thousand or more at March 31, 2015 and December 31, 2014 amounted to $183.3 million and $181.0 million, respectively.

 

5. EARNINGS PER SHARE

 

Basic net income per share is based upon the weighted average number of common shares outstanding, net of any treasury shares, while diluted net income per share is based upon the weighted average number of common shares outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, based upon the treasury stock method using an average market price for the period, and impact of unallocated Employee Stock Ownership Plan (“ESOP”) shares.

 

The calculated basic and dilutive EPS are as follows:

 

   Three Months Ended March 31, 
   2015   2014 
   (Dollars in thousands, except per share data) 
Numerator – Net Income  $1,713   $1,587 
Denominators:          
     Basic average shares outstanding   5,985,347    6,412,342 
     Effect of dilutive common stock equivalents   109,830    110,469 
     Diluted average shares outstanding   6,095,177    6,522,024 
           
Earnings per share:          
     Basic  $0.29   $0.25 
     Diluted  $0.28   $0.24 

 

At March 31, 2015 and 2014, there were 575,142 and 633,319 outstanding anti-dilutive options, respectively, and 53,960 and 82,300 outstanding dilutive non-vested shares, respectively.

 

16
 

 

6.STOCK-BASED COMPENSATION

 

Stock-based compensation is accounted for in accordance with FASB ASC 718, Compensation – Stock Compensation. The Company establishes fair value for its equity awards to determine their cost. The Company recognizes the related expense for employees over the appropriate vesting period, or when applicable, service period. However, consistent with the stock compensation topic of the FASB Accounting Standards Codification, the amount of stock-based compensation recognized at any date must at least equal the portion of the grant date value of the award that is vested at that date and as a result it may be necessary to recognize the expense using a ratable method. In accordance with FASB ASC 505-50, Equity-Based Payments to Non-Employees, the compensation expense for non-employees is recognized on the grant date, or when applicable, the service period.

 

The Company’s 2005 and 2010 Equity-Based Incentive Plans (the “Equity Plans”) authorize the issuance of shares of common stock pursuant to awards that may be granted in the form of stock options to purchase common stock (“options”) and awards of shares of common stock (“stock awards”). The purpose of the Equity Plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, advisory directors, employees and other persons to promote the success of the Company. Under the Equity Plans, options expire ten years after the date of grant, unless terminated earlier under the option terms. A committee of non-employee directors has the authority to determine the conditions upon which the options granted will vest. Options are granted at the then fair market value of the Company’s stock.

 

A summary of the status of the Company’s stock options under the Equity Plans as of March 31, 2015 and 2014 and changes during the three months ended March 31, 2015 and 2014 are presented below:

 

   Three Months Ended
March 31, 2015
   Three Months Ended
March 31, 2014
 
   Number
of shares
  

Weighted
average

exercise price

   Number
of shares
  

Weighted

average

exercise price

 
                     
Outstanding at the beginning of the period   674,391   $12.15    680,200   $12.14 
Granted                
Exercised   28,668    12.97    720    11.53 
Forfeited                
Outstanding at the end of the period   645,723   $12.11    679,480   $12.14 
Exercisable at the end of the period   515,964   $12.07    474,118   $12.24 
Stock options vested or expected to vest (1)   464,368   $12.07    426,706   $12.24 

 

     (1) Includes vested shares and nonvested shares after a forfeiture rate, which is based upon historical data, is applied.

 

The following table summarizes all stock options outstanding under the Equity Plans as of March 31, 2015:

 

   Options Outstanding 
Date Issued  Number of
Shares
   Weighted Average
Exercise Price
   Weighted Average
Remaining
Contractual Life
 
August 10, 2005   244,541   $13.19    0.4 years 
November 21, 2006   16,707   $14.78    1.6 years 
November 20, 2007   18,448   $11.32    2.6 years 
August 18, 2010   219,339   $10.21    5.4 years 
March 15, 2011   13,600   $12.06    6.0 years 
August 17, 2011   49,498   $11.53    6.4 years 
November 19, 2012   17,500   $13.10    7.6 years 
November 19, 2013   66,090   $14.14    8.6 years 
Total   645,723   $12.11    3.8 years 

 

17
 

 

The compensation expense recognized for the three months ended March 31, 2015 was $46 thousand as compared to $46 thousand for the three months ended March 31, 2014.

 

At March 31, 2015, there was $382 thousand of total unrecognized compensation cost related to options granted under the stock option plans. That cost is expected to be recognized over a weighted average period of 2.4 years.

 

Summary of Non-vested Stock Award Activity:

 

  

Three Months ended

March 31, 2015

  

Three Months ended

March 31, 2014

 
   Number of
shares
   Weighted avg
grant date fair
value
   Number of
shares
   Weighted avg
grant date fair
value
 
                 
Beginning of period   54,950   $10.74    83,290   $10.99 
Issued                
Forfeited                
Vested   990   $12.06    990   $12.06 
Outstanding at March 31, 2014
   53,960   $12.73    82,300   $12.29 

 

The compensation expense recognized for the three months ended March 31, 2015 was $81 thousand as compared to $81 thousand for the three months ended March 31, 2014.

 

As of March 31, 2015, there was $509 thousand of total unrecognized compensation costs related to nonvested stock awards. That cost is expected to be recognized over a weighted average period of 2.9 years.

 

7.INCOME TAXES

 

Income tax expense was $833 thousand for an effective tax rate of 32.7% for the three months ended March 31, 2015 compared to $845 thousand for an effective tax rate of 34.7% for the same period in 2014.

 

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. If based on the available evidence in future periods, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a deferred tax valuation allowance would be established. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.

 

Items considered in this evaluation include historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carryforward periods, experience with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The evaluation is based on current tax laws as well as expectations of future performance. At March 31, 2015 and December 31, 2014, no valuation allowance has been recorded for any portfolio of the outstanding deferred tax asset.

 

The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. As of March 31, 2015, the tax years ended December 31, 2011 through 2014 were subject to examination by the Internal Revenue Service, while the tax years ended December 31, 2010 through 2014 were subject to New Jersey examination.

 

18
 

 

8.STOCKHOLDERS’ EQUITY

 

During the first quarter of 2015, the Board of Directors of the Company declared a cash dividend of $0.06 per share, which was paid on February 27, 2015 to stockholders of record as of the close of business on February 6, 2015.

 

On March 3, 2015, the Company announced that its Board of Directors authorized a stock repurchase program under which the Company will repurchase up to 130,000 shares of the Company’s outstanding common stock, or approximately 2% of outstanding shares. At March 31, 2015, 65,600 shares remain to be purchased under this program.

 

The Company repurchased a total of 170,100 shares at a weighted average cost of $14.44 per share during the three months ended March 31, 2015 of which 105,700 shares completed a stock repurchase plan announced on November 19, 2014.

 

No reclassification adjustments were recognized in Accumulated Other Comprehensive Income during the three months ended March 31, 2015 and 2014. A summary of the changes in components of Accumulated Other Comprehensive Income for the three months ended March 31, 2015 and 2014 are presented below:

 

   Unrealized
Gain (Loss) on
Available for
Sale Securities
   Loss on Post
Retirement
Life Benefit
   Accumulated
Other
Comprehensive
Income
 
   (Dollars in thousands) 
Beginning balance - 01/01/2015  $(1,282)  $(169)  $(1,451)
Current period change   644    5    649 
Tax benefit   (257)       (257)
Ending balance – 03/31/2015  $(895)  $(164)  $(1,059)

 

   Unrealized
Gain (Loss) on
Available for
Sale Securities
   Loss on Post
Retirement
Life Benefit
   Accumulated
Other
Comprehensive
Income
 
   (Dollars in thousands) 
Beginning balance – 01/01/2014  $(2,657)  $(10)  $(2,667)
Current period change   1,002        1,002 
Tax benefit   (398)       (398)
Ending balance – 03/31/2014  $(2,053)  $(10)  $(2,063)

 

9.FAIR VALUE MEASUREMENTS

 

The Company accounts for fair value measurement in accordance with FASB ASC 820, Fair Value Measurements and Disclosures.  FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  FASB ASC 820 does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. FASB ASC 820 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FASB ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  FASB ASC 820 also clarifies the application of fair value measurement in a market that is not active.

 

19
 

 

FASB ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

In addition, the Company is to disclose the fair value measurements for financial assets on both a recurring and non-recurring basis.

 

The following tables presents assets that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of March 31, 2015 and December 31, 2014:

 

March 31, 2015  Category Used for Fair Value Measurement 
Assets:  Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Securities available for sale:               
U.S. government sponsored entity mortgage-backed securities  $   $83,673   $ 
U.S. Treasury and federal agencies        21,148     
State and municipal obligations            
Corporate securities       8,899     
Equity securities   27         
  Totals  $27   $113,720   $ 

 

December 31, 2014  Category Used for Fair Value Measurement 
Assets:  Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Securities available for sale:               
U.S. government sponsored entity mortgage-backed securities  $   $80,258   $ 
U.S. Treasury and federal agencies        20,991     
State and municipal obligations            
Corporate securities       8,839     
Equity securities   28         
  Totals  $28   $110,088   $ 

 

In accordance with the fair value measurement and disclosures topic of the FASB Accounting Standards Codification management assessed whether the volume and level of activity for certain assets have significantly decreased when compared with normal market conditions. The Company concluded that there was not a significant decrease in the volume and level of activity with respect to certain investments included in the corporate debt securities and classified as level 2 in accordance with the framework for fair value measurements. Fair value for such securities is obtained from third party broker quotes. The Company evaluated these values to determine that the quoted price is based on current information that reflects orderly transactions or a valuation technique that reflects market participant assumptions by benchmarking the valuation results and assumptions used against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances.

 

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Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans, FHLB stock and loans or bank properties transferred into other real estate owned at fair value on a non-recurring basis.

 

Summary of Non-Recurring Fair Value Measurements

 

        Category Used for Fair Value
Measurement
  

Total

(Losses)

Gains

 
   Total   Level 1   Level 2   Level 3     
   (Dollars in thousands) 
March 31, 2015                         
Assets:                         
Impaired loans  $5,263   $-   $3,321   $1,942   $(66)
Real estate owned   195    -    195    -    (306)
                          
March 31, 2014                         
Assets:                         
Impaired loans  $4,316   $-   $1,686   $2,630   $(236)
Real estate owned   81    -    81    -    (36)

 

Impaired Loans

 

The Company considers a loan to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. Under FASB ASC 310, collateral dependent impaired loans are valued based on the fair value of the collateral, which is based on appraisals, less cost to sell. These adjustments are based upon observable inputs, and therefore, the fair value measurement has been categorized as a level 2 measurement. In some cases, adjustments are made to the appraised values for various factors, including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement.  At March 31, 2015, total loans remeasured at fair value were $5.3 million. Such loans were carried at the value of $5.3 million immediately prior to remeasurement, resulting in the recognition of impairment through earnings for the life of the loans in the amount of $66 thousand. At March 31, 2014, total loans remeasured at fair value were $4.3 million. Such loans were carried at the value of $4.5 million immediately prior to remeasurement, resulting in the recognition of impairment through earnings for the life of the loans in the amount of $236 thousand.

 

Real Estate Owned

 

Once an asset is determined to be uncollectible, the underlying collateral is repossessed and reclassified to foreclosed real estate and repossessed assets. These assets are carried at lower of cost or fair value of the collateral, less cost to sell. These adjustments are based upon observable inputs, and therefore, the fair value measurement has been categorized as a Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors, including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement. Total real estate owned remeasured at fair value for the three months ended March 31, 2015 was $387 thousand, of which $192 thousand was sold. These property were carried at a value of $501 thousand immediately prior to remeasurement, resulting in recognition of impairment through earnings of $306 thousand.

 

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Fair Value of Financial Instruments

 

In accordance with FASB ASC 825-10-50-10, the Company is required to disclose the fair value of financial instruments. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a distressed sale. Fair value is best determined using observable market prices; however, for many of the Company’s financial instruments, no quoted market prices are readily available. In instances where quoted market prices are not readily available, fair value is determined using present value or other techniques appropriate for the particular instrument. These techniques involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange. Different assumptions or estimation techniques may have a material effect on the estimated fair value. The following table summarizes these results:

 

       Category Used For Fair Value 
March 31, 2015  Carrying Amount   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Assets:                    
Cash and cash equivalents  $86,464   $86,464   $   $ 
Investment securities:                    
Held to maturity   1,083        1,161     
Available for sale   113,747    27    113,720     
Loans receivable, net   770,261        790,580     
Federal Home Loan Bank stock   6,039        6,039     
                     
Liabilities:                    
NOW and other demand deposit accounts   443,050        459,341     
Passbook savings and club accounts   170,718        178,547     
Certificates   179,123        179,685     
Advances from Federal Home Loan Bank   110,000        119,396     
Junior subordinated debenture   7,217        6,928     

 

       Category Used For Fair Value 
December 31, 2014  Carrying Amount   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Assets:                    
Cash and cash equivalents  $80,307   $80,307   $   $ 
Investment securities:                    
Held to maturity   1,201        1,278     
Available for sale   110,116    28    110,088     
Loans receivable, net   774,017        791,095     
Federal Home Loan Bank stock   6,039        6,039     
                     
Liabilities:                    
NOW and other demand deposit accounts   439,623        458,328     
Passbook savings and club accounts   168,686        168,893     
Certificates   178,769        179,224     
Advances from Federal Home Loan Bank   110,000        118,777     
Junior subordinated debenture   7,217        7,217     

 

Cash and Cash EquivalentsFor cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

 

22
 

 

Investment and Mortgage-Backed SecuritiesFor investment securities, fair values are based on a combination of quoted prices for identical assets in active markets, quoted prices for similar assets in markets that are either actively or not actively traded and pricing models, discounted cash flow methodologies, or similar techniques that may contain unobservable inputs that are supported by little or no market activity and require significant judgment. For investment securities that do not actively trade in the marketplace, (primarily our investment in trust preferred securities of non-publicly traded companies) fair value is obtained from third party broker quotes. The Company evaluates prices from a third party pricing service, third party broker quotes, and from another independent third party valuation source to determine their estimated fair value. These quotes are benchmarked against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances. For securities classified as available for sale, the changes in fair value are reflected in the carrying value of the asset and are shown as a separate component of stockholders’ equity.

 

Loans Receivable - NetThe fair value of loans receivable is estimated based on the present value using discounted cash flows based on estimated market discount rates at which similar loans would be made to borrowers and reflect similar credit ratings and interest rate risk for the same remaining maturities.

 

FHLB StockAlthough FHLB stock is an equity interest in an FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. While certain conditions are noted that required management to evaluate the stock for impairment, it is currently probable that the Company will realize its cost basis. Management concluded that no impairment existed as of March 31, 2015. The estimated fair value approximates the carrying amount.

 

NOW and Other Demand Deposit, Passbook Savings and Club, and Certificates AccountsThe fair value of NOW and other demand deposit accounts and passbook savings and club accounts is the amount payable on demand at the reporting date. The fair value of certificates is estimated by discounting future cash flows using interest rates currently offered on certificates with similar remaining maturities.

 

Advances from FHLBThe fair value was estimated by determining the cost or benefit for early termination of each individual borrowing.

 

Junior Subordinated DebentureThe fair value was estimated by discounting approximate cash flows of the borrowings by yields estimating the fair value of similar issues.

 

Commitments to Extend Credit and Letters of Credit—The majority of the Bank’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

 

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2015 and December 31, 2014. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since March 31, 2015 and December 31, 2014, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

10. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill totaled $4.6 million at March 31, 2015 as compared to $4.6 million at December 31, 2014. The Company completed its annual goodwill impairment test as of August 1, 2014 and concluded that goodwill was not impaired. At March 31, 2015, no triggering events have occurred from the date of the impairment test that would have impaired goodwill.

 

23
 

 

The core deposit intangible totaled $512 thousand at March 31, 2015 as compared to $536 thousand at December 31, 2014. The core deposit intangible is being amortized over its estimated useful life of approximately 15 years from August 1, 2011.

 

11.REAL ESTATE OWNED

 

Summary of Real Estate Owned (“REO”):

 

   2015   2014 
   Residential   Commercial       Residential   Commercial     
   Property   Property   Total   Property   Property   Total 
   (Dollars in thousands)   (Dollars in thousands) 
Balance, January 1,  $609   $41   $650   $296   $202   $498 
  Transfers into Real Estate Owned   192    195    387    81        81 
   Sales of Real Estate Owned   (429)       (429)   (78)   (161)   (239)
Balance, March 31,  $372   $236   $608   $299   $41   $340 

 

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

 

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

 

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather are statements based on Ocean Shore Holding’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

 

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2014 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Ocean Shore Holding assumes no obligation to update any forward-looking statements.

 

GENERAL

 

Ocean Shore Holding Co. (“Ocean Shore Holding” or the “Company”) is the holding company for Ocean City Home Bank (the “Bank”). The Company’s assets consist of its investment in Ocean City Home Bank and its liquid investments. The Company is primarily engaged in the business of directing, planning, and coordinating the business activities of the Bank.

 

Ocean City Home Bank is a federally chartered savings bank. The Bank operates as a community-oriented financial institution offering a wide range of financial services to consumers and businesses in our market area. The Bank attracts deposits from the general public, small businesses and municipalities and uses those funds to originate a variety of consumer and commercial loans, which we hold primarily for investment.

 

24
 

 

MARKET AREA

 

We are headquartered in Ocean City, New Jersey, and serve the southern New Jersey shore communities through a total of eleven full-service offices, of which nine are located in Atlantic County and two in Cape May County. Our markets are in the southeastern corner of New Jersey, approximately 65 miles east of Philadelphia and 130 miles south of New York.

 

The economy of Atlantic County is dominated by the service sector, of which the gaming industry in nearby Atlantic City is the primary employer. Four of the 12 Atlantic City casinos that were operating as of January 1, 2014 closed during the year and a fifth declared bankruptcy. The casino closings in 2014 resulted in the loss of approximately 8,000 jobs. We do not maintain any branches in Atlantic City, but Atlantic City is within our lending area and some of our borrowers are employed in the gaming industry. We closely monitor the economic environment in our market area and in Atlantic City in particular, and we track our exposure to borrowers who are employed in the gaming industry. In order to mitigate the loss of jobs from casino closures while positioning Atlantic City for future growth in other industries, several other ventures in the area, which are expected to create employment, have been recently announced and are at the final stages of completion. Both a Bass Pro Shop and a $134 million convention center at Harrah’s Resort Atlantic City are expected to open in the spring of 2015. Additionally, The Pier Shops of Caesar were purchased by a Philadelphia developer and will receive a full renovation. Outside of Atlantic City, The Richard Stockton College of New Jersey recently announced its takeover of the FAA Next Gen Research Park. The Research Park will be located on the campus of the Federal Aviation Administration’s William J. Hughes Technical Center in Egg Harbor Township. At full build out, the Research Park consists of seven buildings encompassing 400,000 square feet of research and development facilities. During 2014, the Stockton Aviation Research and Technology Park was selected by the FAA as one of the National test sites for future government use of commercial drones.

 

While Ocean City Home Bank is not engaged in lending to the casino industry, the employment or businesses of many of Ocean City Home Bank’s customers directly or indirectly benefit from the industry. As of March 31, 2015, we had $17.4 million of loans outstanding to borrowers who, at the time of origination, were employed in the gaming industry, representing 2.3% of total loans. Of these loans, less than $3.4 million were made to borrowers who were employed at the time of origination at casinos/hotels that subsequently closed or declared bankruptcy. To date, we have not experienced a significant impact from the downturn in the gaming industry, which has experienced declining revenue and employment since 2006.

 

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2015 AND DECEMBER 31, 2014

 

Total assets of the Company increased $5.0 million to $1,029.8 million at March 31, 2015 from $1,024.8 million at December 31, 2014. Loans receivable, net, decreased $3.7 million, investment and mortgage-backed securities increased $3.5 million and cash and cash equivalents increased by $6.2 million. Asset growth was funded by an increase in deposits of $5.8 million while borrowings were unchanged.

 

Investments

 

Investments and mortgage-backed securities increased $3.5 million to $114.8 million at March 31, 2015 from $111.3 million at December 31, 2014. The increase was the result of investment purchases of $5.4 million and an increase in the available for sale valuation of $633 thousand million offset by repayments, calls and maturities of $2.5 million.

 

25
 

 

Loans

 

Loans receivable, net, decreased $3.7 million, or 0.5%, to $770.3 million at March 31, 2015 from $774.0 million at December 31, 2014. Loan originations and other advances totaled $31.9 million for the three months ended March 31, 2015 compared to $37.4 million originated in the three months ended March 31, 2014. Real estate mortgage loan originations totaled $17.1 million, real estate and commercial construction loan originations totaled $5.8 million, consumer loan originations totaled $3.4 million and commercial loan originations totaled $5.5 million for the first quarter of 2015. Origination activity was offset by $35.6 million of normal loan payments and payoffs, compared to payments and payoffs of $24.6 million in the same period of the prior year.

 

The following table summarizes changes in the loan portfolio in the three months ended March 31, 2015.

 

  

March 31,

2015

  

December 31,

2014

   $ change   % change 
   (Dollars in thousands) 
Real estate – mortgage:                    
One-to four-family residential  $584,758   $587,399   $(2,641)   (0.4)
Commercial and multi-family   88,863    89,778    (915)   (1.0)
Total real estate – mortgage   673,621    677,177    (3,556)   (0.5)
                     
Real estate – construction:                    
Residential   17,390    16,030    1,360    8.5 
Commercial   3,140    4,141    (1,001)   (24.2)
Total real estate – construction   20,530    20,171    359    1.8 
                     
Commercial   22,054    22,277    (223)   (1.0)
                     
Consumer                    
Home equity   53,539    54,279    (740)   (1.4)
Other consumer loans   364    377    (13)   (3.4)
Total consumer loans   53,903    54,656    (753)   (1.4)
                     
Total  loans   770,108    774,281    (4,173)   (0.5)
Net deferred loan cost   3,537    3,496    41    1.2 
Allowance for loan losses   (3,384)   (3,760)   376    (10.0)
Net total loans  $770,261   $774,017    (3,756)   (0.5)

 

Non-Performing Assets

 

Non-performing assets totaled $7.0 million, or 0.68% of total assets, at March 31, 2015 compared to $6.9 million or 0.68% of total assets at December 31, 2014 and $4.9 million, or 0.47% of total assets, at March 31, 2014. The increase from December 31, 2014 was the result of an increase in TDR non-accrual loans of $423 thousand offset by decreases in non-performing loans of $273 thousand and real estate owned of $42 thousand. Non-performing assets consisted of eighteen residential mortgages totaling $3.4 million, four commercial mortgage totaling $1.4 million, one real estate construction loan totaling $143 thousand, five consumer equity loans totaling $350 thousand, seven TDR non-accrual loans totaling $1.1 million and five real estate owned properties totaling $608 thousand. Real estate owned decreased by one property while the total balance decreased $42 thousand at March 31, 2015 to $608 thousand from $650 thousand at December 31, 2014.

 

The allowance for loan losses decreased $376 thousand to $3.4 million, or 0.44% of total net loans, from $3.8 million at December 31, 2014, or 0.49% of total net loans. The decrease in the allowance for loan losses resulted from net charge-offs of $529 thousand offset by an additional to the allowance of $153 thousand. Net charge-offs totaled $529 thousand in 2015 compared to $73 thousand for the same period in 2014. The allowance was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of non-performing loans, growth in the loan portfolio and the current economic conditions. The loss factors used to calculate the allowance were unchanged in March 2015 from December 2014. At March 31, 2015, the specific allowance on loans individually evaluated for impairment was $781 thousand and pooled allowance on the remainder of the loan portfolio was $2.6 million as compared to specific allowance on loans individually evaluated for impairment of $1.0 million and pooled allowance on the reminder of the loan portfolio of $2.8 million at December 31, 2014.

 

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   Three months Ended March 31, 
   2015   2014 
   (Dollars in thousands) 
Allowance for loan losses:          
Allowance at beginning of period  $3,760   $4,199 
Provision for loan losses   153    88 
           
Recoveries       1 
Charge-offs   (529)   (74)
Net (charge-offs) recoveries   (529)   (73)
           
Allowance at end of period  $3,384   $4,214 
Allowance for loan losses as a percent of total loans   0.44%   0.56%
Allowance for loan losses as a percent of non-performing loans   52.7%   93.3%

 

  

March 31,

2015

  

December 31,

2014

 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate - residential  $3,425   $3,626 
Real estate – mortgage loans   1,384    803 
Real estate – commercial and multi-family   143    143 
Commercial       501 
Consumer   350    502 
Total   5,302    5,575 
Troubled debt restructurings – nonaccrual   1,117    694 
Total nonaccrual loans   6,419    6,269 
Real estate owned   608    650 
Total non-performing assets  $7,027   $6,919 
           
Total non-performing loans to total loans   0.83%   0.81%
Total non-performing loans to total assets   0.62%   0.61%
Total non-performing assets to total assets   0.68%   0.68%

 

Deposits

 

Deposits increased by $5.8 million, or 0.7%, to $792.9 million at March 31, 2015 from $787.1 million at December 31, 2014. Non-interest bearing demand deposits increased $88.3 million, interest bearing checking decreased $84.9 million, savings accounts increased by $2.0 million and certificates of deposit increased by $355 thousand. A repricing of interest bearing demand deposits to non-interest bearing demand deposits led to the change of category of those deposits. The Company continued its focus on attracting core deposits, which increased $5.5 million to $613.8 million.

 

27
 

 

The following table summarizes changes in deposits in the three months ended March 31, 2015.

 

   March 31,   December 31,         
   2015   2014   $ change   % change 
   (Dollars in thousands)    
Non-interest-bearing demand deposits  $186,760   $98,417   $88,343    89.8 
Interest-bearing demand deposits   256,290    341,206    (84,916)   (24.9)
Savings accounts   170,718    168,686    2,032    1.2 
Time deposits   179,123    178,770    353    0.2 
Total  $792,891   $787,079    5,812    0.7 

 

Borrowings

 

Federal Home Loan Bank advances were unchanged at $110.0 million at March 31, 2015 from December 31, 2014. Other borrowings were unchanged at $7.2 million at March 31, 2015 from December 31, 2014.

 

Stockholders’ Equity

 

Stockholders’ equity decreased $168 thousand to $105.7 million at March 31, 2015, primarily as a result of $1.7 million of net income, proceeds from exercises of stock options of $371 thousand, an increase in other comprehensive income of $392 thousand and increases in contra benefit plans of $112 thousand offset by dividends paid of $385 thousand and share repurchases of $2.5 million.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

 

Net income was $1.7 million for the three months ended March 31, 2015 as compared to $1.6 million for the three months ended March 31, 2014. The increase of $126 thousand, or 7.9%, in 2015 from 2014 was due primarily to increases in net interest income and other income and decreases in operating expenses and income tax expense offset by an increase in provision for loan losses.

 

  

Three Months Ended

March 31,

 
   2015   2014 
  

(Dollars in thousands,

except per share data)

 
         
Net income  $1,713   $1,587 
Basic earnings per share  $0.29   $0.25 
Diluted earnings per share  $0.28   $0.24 
Return on average assets (annualized)   0.66%   0.62%
Return on average equity (annualized)   6.43%   5.95%

 

28
 

 

Net Interest Income

 

The following table summarizes changes in interest income and interest expense for the three-month periods ended March 31, 2015 and 2014.

 

  

Three Months Ended

March 31,

         
   2015   2014   $ change   % change 
   (Dollars in thousands)    
INTEREST INCOME:                    
Loans  $8,172   $8,183   $(11)   (0.1)
Investment securities   615    688    (73)   (10.6)
Total interest income   8,787    8,871    (84)   (0.9)
                     
INTEREST EXPENSE:                    
Deposits   613    644    (31)   (4.8)
Borrowings   1,082    1,267    (185)   (14.6)
Total interest expense   1,695    1,911    (216)   (11.3)
Net interest income  $7,092   $6,960   $132    1.9 

 

Net interest income increased by $132 thousand, or 1.9%, for the quarter ended March 31, 2015. The interest rate spread and net interest margin of the Company were 3.04% and 3.19% respectively, for the three months ended March 31, 2015, compared to 3.11% and 3.17% for the same period in 2014. The increase in the net interest margin of 2 basis point resulted from an increase in the average balance of interest-earning assets of $11.0 million, a decrease in the average balance of interest-bearing liabilities of $79.1 million and a decrease in the cost of interest-bearing liabilities of 2 basis points offset by a decrease in the yield on interest-earning assets of 9 basis points.

 

Interest income decreased by $84 thousand, or 0.9%, for the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014. The decrease in interest income resulted from a decrease in the average balance of investments of $12.8 million and lower yields on loans of 14 basis points and investments of 1 basis point offset by an increase in the average balance of loans of $23.7 million. The decrease in average balance of investments resulted from investment calls and maturities. The decrease in loan yield resulted from lower rates on new loans originated and payoffs or refinances of higher yielding loans offset by increased loan balances from new originations at lower rates.

 

Interest expense decreased by $216 thousand, or 11.3%, for the quarter ended March 31, 2015 over the same period in 2014. The decrease in interest expense resulted from decreases in the average balance of interest-bearing deposits of $76.1 million, borrowings of $3.1 million and rates paid on FHLB advances of 44 basis points offset by an increase in the cost of deposits of 3 basis points. The decrease in the average balance of interest-bearing deposits resulted primarily from a change in terms to not pay interest on a segment of interest bearing demand deposits while the decrease in the cost of FHLB advances resulted from refinancing of maturing advances to a lower rate.

 

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. The yields and costs are annualized for presentation purposes. For purposes of this table, average balances have been calculated using the average daily balances and nonaccrual loans are only included in average balances. Loan fees are included in interest income on loans and are insignificant. Interest income on loans and investment securities has not been calculated on a tax equivalent basis because the impact would be insignificant.

 

29
 

 

Average Balance Tables                        
   Three Months Ended March 31, 2015   Three Months Ended March 31, 2014 
  

Average

Balance

  

Interest

and

Dividends

  

Yield/

Cost

  

Average

Balance

  

Interest

and

Dividends

  

Yield/

Cost

 
   (Dollars in thousands)       (Dollars in thousands)     
Assets:                              
Interest-earning assets:                              
Loans  $773,955   $8,172    4.22%  $750,205   $8,183    4.36%
Investment securities   114,032    615    2.16%   126,813    688    2.17%
Total interest-earning assets   887,987    8,787    3.96%   877,018    8,871    4.05%
Noninterest-earning assets   150,433              152,687           
Total assets  $1,038,420             $1,029,705           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
Interest-bearing demand deposits  $272,583   $118    0.17%  $336,875   $126    0.15%
Savings accounts   168,857    84    0.20%   169,970    84    0.20%
Certificates of deposit   178,493    411    0.92%   189,139    434    0.92%
Total interest-bearing deposits   619,933    613    0.40%   695,984    644    0.37%
                               
FHLB advances   110,000    925    3.36%   110,000    1,044    3.80%
Subordinated debt   7,217    157    8.67%   10,309    223    8.67%
Total borrowings   117,217    1,082    3.69%   120,309    1,267    4.21%
Total interest-bearing liabilities   737,150    1,695    0.92%   816,293    1,911    0.94%
Noninterest-bearing demand accounts   182,659              95,452           
Other liabilities   12,014              11,214           
Total liabilities   931,823              925,959           
                               
Stockholders’ equity   106,597              106,746           
Total liabilities and stockholders’ equity  $1,038,420             $1,029,705           
                               
Net interest income       $7,092             $6,960      
Interest rate spread             3.04%             3.11%
Net interest margin             3.19%             3.17%
Average interest-earning assets to average interest-bearing liabilities   120.46%             107.44%          

 

Provision for Loan Losses

 

We review the level of the allowance for loan losses on a monthly basis and establish the provision for loan losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the collectability of the loan portfolio. The provision for loan losses was $153 thousand in the three months ended March 31, 2015 compared to $88 thousand in the three months ended March 31, 2014. The provision was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of non-performing loans and the current economic environment.

 

30
 

 

Other Income

 

The following table summarizes other income for the three months ended March 31, 2015 and 2014 and the changes between the periods.

 

  

Three Months Ended

March 31,

     
   2015   2014   % Change 
   (Dollars in thousands)     
OTHER INCOME:               
Service charges  $507   $447    13.4 
Cash surrender value of life insurance   154    156    (1.3)
Other   388    403    (3.7)
Total other income  $1,049   $1,006    4.3 

 

Other income increased $43 thousand, or 4.3%, to $1.0 million for the three-month period ended March 31, 2015 from the same period in 2014. The increase in service charges income of $60 thousand resulted from higher service charges collected on deposit accounts. The decrease in cash surrender value of life insurance income of $2 thousand resulted from slightly lower yields on earned on the insurance. Other income decreased $15 thousand primarily from decreases in fees earned on loans.

 

Other Expense

 

The following table summarizes other expense for the three months ended March 31, 2015 and 2014 and the changes between periods.

 

   Three Months Ended March 31,     
   2015   2014   % Change 
   (Dollars in thousands)     
OTHER EXPENSE:               
Salaries and employee benefits  $3,299   $3,247    1.6 
Occupancy and equipment   1,249    1,287    (3.0)
Federal insurance premiums   138    137    0.7
Advertising   106    89    19.1 
Professional services   278    265    4.9 
Real estate owned expense   (66)   13    N/M 
Other operating expense   438    408    7.4 
Total other expense  $5,442   $5,446    (0.1)

N/M – not measurable

 

Other expenses decreased $4 thousand, or 0.1%, to $5.4 million for the three-month period ended March 31, 2015 from the same period in 2014. Decreases in REO expense of $79 thousand and occupancy and equipment of $38 thousand were offset by increases in salary and benefits, FDIC insurance, advertising, professional services and other expenses of $113 thousand for the first quarter of 2015. The decrease in REO expense resulted from gains on sale of two properties totaling $81 thousand.

 

Income Taxes

 

Income taxes decreased $12 thousand to $833 thousand for an effective tax rate of 32.7% for the three months ended March 31, 2015, compared to $845 thousand for an effective tax rate of 34.7% from the same period in 2014. The decrease in the effective rate was primarily based upon a change in the mix of assets with a tax preference offset by higher net income before taxes.

 

31
 

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of New York. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

 

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2015, cash and cash equivalents totaled $86.5 million. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $24.1 million at March 31, 2015. In addition, at March 31, 2015, we had the ability to borrow a total of approximately $319.5 million from the Federal Home Loan Bank of New York.

 

At March 31, 2015, we had $69.3 million in loan commitments outstanding, which included $23.5 million in undisbursed loans, $29.5 million in unused home equity lines of credit and $16.3 million in commercial lines and letters of credit. Certificates of deposit due within one year of March 31, 2015 totaled $129.7 million, or 72.4% of certificates of deposit. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

At March 31, 2015, the Bank exceeded all of its regulatory capital requirements with Tier 1 leverage capital of $100.6 million, or 9.77% of total adjusted assets, which is above the required level of $41.2 million or 4.0%; common equity Tier 1 risk-based capital of $100.6 million, or 19.13% of total risk-weighted assets which is above the required level of $23.7 million or 4.5%; Tier 1 risk-based capital of $100.6 million, or 19.13% of risk-weighted assets which is above the required level of $31.6 million or 6.0% and total risk-based capital of $103.2 million, or 19.63% of risk-weighted assets, which is above the required level of $42.1 million or 8.0%. The Bank is considered a “well-capitalized” institution under the applicable prompt corrective action regulations.

 

At March 31, 2015, the Company had the following levels of regulatory capital: Tier 1 leverage capital ratio 10.50% of total adjusted assets, common equity Tier 1 risk-based capital ratio of 19.23% of risk-weighted assets; Tier 1 risk-based capital ratio of 20.59% of risk-weighted assets and total risk-based capital ratio 21.08% of risk-weighted assets.

 

MARKET RISK MANAGEMENT

 

Net Interest Income Simulation Analysis

 

We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

 

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

 

32
 

 

The following table reflects changes in estimated net interest income only for the Company:

 

  

At December 31, 2014

Percentage Change in Estimated

Net Interest Income Over

 
   12 Months   24 Months 
     
200 basis point increase in rates   7.84%   8.20%
100 basis point decrease in rates   (1.00)   (2.32)
N/M – not measurable          

 

The 200 and 100 basis point change in rates in the above table is assumed to occur evenly over the following 12 and 24-month periods. Based on the scenario above, net interest income would be positively affected (within our internal guidelines) in the 12-month and 24-month periods if rates rose by 200 basis points and negatively affected (within our internal guidelines) in the 12-month and 24-month periods if rates decreased by 100 basis points.

 

Economic Value of Equity Analysis

 

In addition to a net interest income simulation analysis, we use an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in economic value of equity of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Economic value of equity (EVE) represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 50 to 300 basis point increase or a sustained 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table presents the change in our net portfolio value at December 31, 2014 that would occur in the event of an immediate change in interest rates based on management’s assumptions, with no effect given to any steps that we might take to counteract that change.

 

  

Economic Value of Equity

(Dollars in Thousands)

  

Economic Value of Equity

as % of

Portfolio Value of Assets

 

Basis Point (“bp”)

Change in Rates

  $ Amount   $ Change   % Change   EVE Ratio   Change 
300 bp  $112,389   $(40,625)   (26.55)%   11.75%   (288)bp
200   128,247    (24,767)   (16.19)   12.99    (165)
100   142,283    (10,731)   (7.01)   13.98    (65)
50   148,046    (4,968)   (3.25)   14.34    (29)
0   153,013            14.63     
(50)   155,537    2,524    1.65    14.71    8 
(100)   155,418    2,404    1.57    14.58    (5)

 

The Company uses certain assumptions in assessing its interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

 

33
 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

 

For the three months ended March 31, 2015 and 2014, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The information required by this item is included in Item 2 of this report under “Market Risk Management.”

 

Item 4. Controls and Procedures

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

34
 

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table presents information regarding the Company’s stock repurchases during the three months ended March 31, 2015:

 

Period 

(a)

Total number of

Shares (or Units)

Purchased

  

(b)

Average

Price Paid

per Share

(or Unit)

  

(c)

Total Number of Shares (or

units) Purchased as Part of

Publicly Announced Plans or

Programs (1)

  

(d)

Maximum Number (or Appropriate

Dollar Value) of Shares (or units) that

May Yet Be Purchased Under the

Plans or Programs

 
                 
Month #1
January 1, 2015
through
January 31, 2015
   35,900   $14.31    35,900    69,800 
                     
Month #2
February 1, 2015
through
February 28, 2015
   69,800   $14.36    69,800     
                     
Month #3
March 1, 2015
through
March 31, 2015
   64,400   $14.59    64,400    65,600 
                     
Total   170,100   $14.44    170,100      

 

 

(1)On November 19, 2014, the Company’s Board of Directors approved the repurchase of up to 130,000 shares of the Company’s common stock. This repurchase plan was completed during the quarter ended March 31, 2015 at a cost of $14.34 per share. On March 3, 2015 the Company’s Board of Directors approved the repurchase of up to 130,000 shares of the Company’s common stock.

 

Item 3.Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.Mine Safety Disclosure

 

Not applicable.

 

Item 5.Other Information

 

None.

 

35
 

 

Item 6.Exhibits

 

10.1   Change in Control Agreement by and between Ocean Shore Holding Co., Ocean City Home Bank and Donald Morgenweck (1)
     
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
     
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
     
32.0   Section 1350 Certification of Chief Executive Officer and Chief Financial Office.
     
101.0   The following materials from the Ocean Shore Holding Co. Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Financial Condition, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes.

 

 

(1)Incorporated by reference to Exhibit 10.1 to Form 8-K filed on February 13, 2015, SEC File No. 000-53856.

 

36
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  OCEAN SHORE HOLDING CO.
  (Registrant)

 

Date:  May 7, 2015 /s/ Steven E. Brady
  Steven E. Brady
  President and Chief Executive Officer

 

Date:  May 7, 2015 /s/ Donald F. Morgenweck
  Donald F. Morgenweck
  Chief Financial Officer and Senior Vice President

 

37