Attached files
| file | filename |
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| EX-31.2 - EXHIBIT 31.2 - Ocean Shore Holding Co. | v433276_ex31-2.htm |
| EX-23.0 - EXHIBIT 23.0 - Ocean Shore Holding Co. | v433276_ex23-0.htm |
| EX-21.0 - EXHIBIT 21.0 - Ocean Shore Holding Co. | v433276_ex21-0.htm |
| EX-31.1 - EXHIBIT 31.1 - Ocean Shore Holding Co. | v433276_ex31-1.htm |
| EX-32.0 - EXHIBIT 32.0 - Ocean Shore Holding Co. | v433276_ex32-0.htm |
| EX-10.14 - EXHIBIT 10.14 - Ocean Shore Holding Co. | v433276_ex10-14.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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 (State or other jurisdiction of incorporation or organization) |
80-0282446 (I.R.S. Employer Identification No.)
|
|
1001 Asbury Avenue, Ocean City, New Jersey (Address of principal executive offices) |
08226 (Zip Code) |
Registrant’s telephone number, including area code: (609) 399-0012
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, par value $0.01 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ¨ | Accelerated Filer x | |
| Non-accelerated Filer ¨ | Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).
Yes ¨ No x
The aggregate market value of the common stock held by non-affiliates as of June 30, 2015 was $81,376,105, based on a closing price of $14.84.
The number of shares outstanding of the registrant’s common stock as of March 1, 2016 was 6,411,678.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
INDEX
This report contains forward-looking statements, which may include expectations for our operations and business and our assumptions for those expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Some of these factors are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For a discussion of other factors, refer to the “Risk Factors” section in this report.
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. The Company’s most significant asset is its investment in 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.
Our Web site address is www.ochome.com. We make available on our Web site, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Information on our Web site should not be considered a part of this Form 10-K.
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. Atlantic City operated eight casinos during 2015 with a combined employment of just over 23,000 people. Both the Borgata and Tropicana Casinos are undergoing major renovations in 2016. The Borgata will invest over $50 million into a new outdoor pool, nightclub, fine dining restaurant and 250,000 square feet of convention space. Tropicana will invest $25 million into the renovation of 500 hotel rooms and updated casino floor space. Atlantic City saw an increase in convention traffic resulting, in part, from the opening of a $134 million convention center at Harrah’s Resort. Convention bookings increased 23% from 2014 to 2015 as 218 conventions brought in over 450,000 attendees. 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 recently been announced or at the final stages of completion. A Bass Pro Shop opened in 2015. The Pier Shops of Caesars received a $50 million renovation and were reopened as the Playground, a 500,000 square-foot shopping and entertainment complex. Major Atlantic City development was announced at the end of 2015. If approved, Atlantic City would become home to a Stockton University satellite campus, a new South Jersey Gas headquarters and an 886-space parking garage upon project completion in 2018.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. Outside of Atlantic City, the FAA Technical Center continues to be a major employer in the region with nearly 2,000 people employed by the FAA and supporting contractors. Development of the Aviation and Research Development Park (Next Gen) has progressed since forming collaboration with Stockton University. Once completed, the complex will contain a combination of operational facilities, services, laboratory systems and simulators that can create the operational environment in a way that any researcher can conduct realistic and relevant research in an effort to gain insight, analyses, or validation of advanced aviation concepts, applications, and services. Additional development outside of Atlantic City includes a 100 unit housing complex in downtown Egg Harbor City and 135 unit mixed-use development in downtown Pleasantville.
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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 December 31, 2015, we had $16.5 million of loans outstanding to borrowers who, at the time of origination, were employed in the gaming industry, representing 2.1% of total loans. Of these loans, less than $3.3 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 New Jersey gaming industry, which has experienced declining revenue and employment since 2006.
The economy of Cape May County is dominated by the tourism industry, as the county’s shore area has been a summer vacation destination for over 100 years. Major Cape May County projects currently in progress or recently completed consist of improvements to beaches and road infrastructure. Major beach replenishment projects have been ongoing in Ocean City, Strathmere and Sea Isle City. They are scheduled for completion at the beginning of the 2016 summer season. Many visitors maintain second homes in the area which are used seasonally, and there is an active rental market as well as hotels and motels serving other visitors to the area.
Competition
We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the many financial institutions operating in our market area. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies that have entered the mortgage market, such as insurance companies, securities companies and specialty finance companies.
Several large banks operate in our market area, including Bank of America, PNC Bank, Wells Fargo & Company, and TD Bank. These institutions are significantly larger than us and, therefore, have significantly greater resources. According to data provided by the Federal Deposit Insurance Corporation, as of June 30, 2015, we had a deposit market share of 10.4% in Atlantic County, which represented the 4th largest deposit market share, respectively, out of 16 banks with offices in the county. In Cape May County, at that same date we had a deposit market share of 9.3%, which represented the 6th largest market share out of 12 banks with offices in the county.
We expect competition to remain intense in the future as a result of continuing legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.
Lending Activities
One- to Four-Family Residential Loans. Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes in our market area. We offer fixed-rate and adjustable-rate mortgage loans with terms up to 30 years. Interest rates and payments on our adjustable-rate mortgage loans generally adjust periodically after an initial fixed period that ranges from one to 10 years.
Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.
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In order to attract borrowers, we have developed products and policies to provide flexibility in times of changing interest rates. For example, some of our adjustable-rate loans permit the borrower to convert the loan to a fixed-rate loan. In addition, for a fixed fee plus a percentage of the loan amount, we will allow the borrower to modify a loan’s interest rate, term or program to equal the current rate for the desired loan product.
While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers will prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding balances.
Because of our location on the South Jersey shore, many of the properties securing our residential mortgages are second homes or rental properties. At December 31, 2015, 41.2% of our one- to four-family mortgage loans were secured by second homes and 15.7% were secured by rental properties. If the property is a second home, our underwriting emphasizes the borrower’s ability to repay the loan out of current income. If the property is a rental property, we focus on the anticipated income from the property. Interest rates on loans secured by rental properties are typically 1/2% higher than comparable loans secured by primary or secondary residences. Although the industry generally considers mortgage loans secured by rental properties or second homes to have a higher risk of default than mortgage loans secured by the borrower’s primary residence, we generally have not experienced credit problems on these types of loans.
We generally do not make conventional loans with loan-to-value ratios exceeding 95% and generally make loans with a loan-to-value ratio in excess of 80% only when secured by first and/or second liens on owner-occupied one- to four-family residences or private mortgage insurance. When the residence securing the loan is not the borrower’s primary residence, loan-to-value ratios are limited to 80% when secured by a first lien or 90% when secured by a first and second lien or private mortgage insurance. We require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance for loans on property located in a flood zone, before closing the loan.
In an effort to provide financing for low and moderate income and first-time buyers, we offer a special home buyer’s program. We offer fixed-rate residential mortgage loans through the program to qualified individuals and originate the loans using modified underwriting guidelines, including reduced fees and loan conditions.
We have not originated subprime loans (i.e., mortgage loans aimed at borrowers who do not qualify for market interest rates because of problems with their credit history). We briefly offered “alt-A” loans (i.e., mortgage loans aimed at borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income), but have discontinued that practice and have few such loans in our portfolio.
Commercial and Multi-Family Real Estate Loans. We offer fixed-rate and adjustable-rate mortgage loans secured by commercial real estate. In the past, we originated loans secured by multi-family properties and we still have a few in our portfolio. Our commercial real estate loans are generally secured by condominiums, small office buildings and owner-occupied commercial properties located in our market area.
We originate fixed-rate and adjustable-rate commercial real estate loans for terms up to 25 years. Interest rates and payments on adjustable-rate loans typically adjust every five years after a five-year initial fixed period to a rate typically 2 ½ to 3 ½% above the five-year constant maturity Treasury index. In some instances, there is an adjustment period or a lifetime interest rate cap. Loans are secured by mortgage liens and amounts generally do not exceed 80% of the property’s appraised value.
In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. In addition, with respect to commercial real estate rental properties, we will also consider the term of the lease and the nature and financial strength of the tenants. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. Environmental surveys are generally required for commercial real estate loans of $500,000 or more.
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Construction Loans. We originate loans to individuals and, to a lesser extent, builders to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including condominiums, apartment buildings and owner-occupied properties used for businesses. Our construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 months. At the end of the construction phase, the loan generally converts to a permanent mortgage loan. Loans generally can be made with a maximum loan-to-value ratio of 90% on residential construction and 80% on commercial construction. Before making a commitment to fund a residential construction loan, we require an appraisal of the property by an independent licensed appraiser. We also require an inspection of the property before disbursement of funds during the term of the construction loan.
Commercial Loans. We make commercial business loans to a variety of professionals, sole proprietorships and small businesses in our market area. We offer term loans for capital improvements, equipment acquisition and long-term working capital. These loans are secured by business assets other than real estate, such as business equipment and inventory, and are originated with maximum loan-to-value ratios of 80%. We originate lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the business can borrow funds for planned equipment purchases. We also offer time notes, letters of credit and loans guaranteed by the Small Business Administration. Time notes are short-term loans and will only be granted on the basis of a defined source of repayment of principal and interest from a specific foreseeable event.
When making commercial business loans, we
consider the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the
debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the
customer operates and the value of the collateral.
Consumer Loans. At December 31, 2015, nearly all of our consumer loans were home equity loans or lines of credit. The small remainder of our consumer loan portfolio consisted of loans secured by passbook or certificate accounts, secured and unsecured personal loans and home improvement loans.
The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. In 2009 we introduced a rate floor of 4½% on new and renewed lines of credit. Home equity loans are fixed-rate loans. We offer home equity loans with a maximum combined loan-to-value ratio at underwriting of 80% and lines of credit with a maximum loan-to-value ratio of 80%. A home equity line of credit may be drawn down by the borrower for an initial period of ten years from the date of the loan agreement. During this period, the borrower has the option of paying, on a monthly basis, either principal and interest or only interest. After the initial draw period, the line of credit is frozen and the amount outstanding must be repaid over the remaining ten years of the loan term.
Loan Underwriting Risks.
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
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Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on the successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial real estate loans.
Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value that is insufficient to assure full repayment. If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Commercial Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Consumer Loans. Home equity and home improvement loans are generally subject to the same risks as residential mortgage loans. Other consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Loan Originations, Purchases and Sales. Loan originations come from a number of sources. We have a good working relationship with many realtors in our market area and employ three account executives solely for the purpose of soliciting loans. Our Web site accepts on-line applications and branch personnel are trained to take applications. We also employ five commercial loan officers.
We generally originate loans for our portfolio but from time to time will sell residential mortgage loans in the secondary market. Our decision to sell loans is based on prevailing market interest rate conditions and interest rate risk management. We sold no loans in the years ended December 31, 2015, 2014 and 2013. At December 31, 2015, we had no loans held for sale.
During 2015, we did not purchase any loans. At December 31, 2015, purchased loans totaled $5.2 million.
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management. The board of directors has granted loan approval authority to certain officers up to prescribed limits, depending on the officer’s experience and tenure. The Chief Executive Officer or Chief Lending Officer may combine their lending authority with that of one or more other officers. All extensions of credit that exceed $1.0 million in the aggregate require the approval or ratification of the board of directors.
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Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by regulation, to 15% of our stated capital and reserves. At December 31, 2015, our regulatory limit on loans to one borrower was $15.3 million. At that date, our largest lending relationship was $4.1 million, which consisted of four commercial mortgage loans, which was performing according to its original repayment terms at December 31, 2015.
Loan Commitments. We issue commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Commitments, excluding lines and letters of credit, as of December 31, 2015 totaled $32.5 million.
Investment Activities
We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities and mutual funds. We also are required to maintain an investment in Federal Home Loan Bank of New York stock. While we have the authority under applicable law and our investment policies to invest in derivative securities, we had no such investments at December 31, 2015.
Our investment objectives are to provide and maintain liquidity, to provide collateral for pledging requirements, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of the investment policy and appointment of the Investment Committee. The Investment Committee consists of the Chief Executive Officer, Chief Financial Officer and Controller. The Investment Committee is responsible for implementation of the investment policy and monitoring our investment performance. Individual investment transactions are reviewed and approved by the board of directors on a monthly basis, while portfolio composition and performance are reviewed at least quarterly by the Investment Committee.
At December 31, 2015, 82.7% of our
investment portfolio consisted of mortgage-backed securities issued primarily by government sponsored enterprises (“GSE”)
Fannie Mae, Freddie Mac and Ginnie Mae. None of our mortgage-backed securities had underlying collateral that would be considered
subprime (i.e., mortgage loans advanced to borrowers who do not qualify for market interest rates because of problems with their
credit history). All mortgage-backed securities owned by us as of December 31, 2015 possessed the highest possible investment
credit rating at that date. The remainder of the portfolio consisted primarily of corporate securities, U.S. agency securities
and municipal securities.
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. Substantially all of our depositors are residents of New Jersey. Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including noninterest-bearing demand accounts (such as money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our current strategy is to offer competitive rates on certificates of deposit and stress our high level of service and technology. At December 31, 2015, we did not have any brokered deposits.
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In addition to accounts for individuals, we also offer a variety of deposit accounts designed for the businesses operating in our market area. Our business banking deposit products include commercial checking accounts, a sweep account, and special accounts for realtors, attorneys and non-profit organizations. The promotion of commercial deposit accounts is an important part of our effort to increase our core deposits and reduce our funding costs. At December 31, 2015, commercial deposits totaled $162.4 million, or 20.0% of total deposits.
Since 1996, we have offered deposit services to municipalities and local school boards in our market area. At December 31, 2015, we had $194.7 million in deposits from 9 municipalities and 17 school boards, all in the form of checking accounts. We emphasize high levels of service in order to attract and retain these accounts. Municipal deposit accounts differ from business accounts in that we pay interest on those deposits and we pledge collateral (typically investment securities), in accordance with the requirements of New Jersey’s Governmental Unit Deposit Protection Act, with the New Jersey Department of Banking to secure the portion of the deposits that are not covered by federal deposit insurance. Unlike time deposits by municipalities, which often move from bank to bank in search of the highest available rate, checking accounts tend to be stable relationships.
Borrowings. We utilize advances from the Federal Home Loan Bank of New York and securities sold under agreements to repurchase to supplement our supply of investable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 30% of a member’s assets using mortgage collateral and an additional 20% using pledged securities for a total maximum indebtedness of 50% of assets. The Federal Home Loan Bank determines specific lines of credit for each member institution.
Personnel
As of December 31, 2015 we had 155 full-time employees and 25 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.
Subsidiaries
Ocean Shore Holding’s subsidiaries are Ocean City Home Bank, OCHB Preferred Corp., a New Jersey corporation, which qualifies as a mortgage Real Estate Investment Trust, and OCHB Investment Co., a Delaware corporation.
Ocean City Home Bank’s only active subsidiary is Seashore Financial Services, LLC. Seashore Financial Services receives commissions from referrals for the sale of insurance and investment products.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors annually elects the executive officers of Ocean Shore Holding and Ocean City Home Bank, who serve at the Board’s discretion. Our executive officers are:
| Name | Position | |
| Steven E. Brady | President and Chief Executive Officer of Ocean Shore Holding and Ocean City Home Bank |
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| Anthony J. Rizzotte | Executive Vice President of Ocean Shore Holding and Executive Vice President and Chief Lending Officer of Ocean City Home Bank | |
| Kim Davidson | Executive Vice President of Ocean City Home Bank and Corporate Secretary of Ocean Shore Holding and Ocean City Home Bank | |
| Janet Bossi | Executive Vice President of Loan Administration of Ocean City Home Bank | |
| Paul Esposito | Senior Vice President of Operations of Ocean City Home Bank | |
| Donald F. Morgenweck | Senior Vice President and Chief Financial Officer of Ocean Shore Holding and Ocean City Home Bank |
Below is information regarding our executive officers who are not also directors. Each executive officer has held his or her current position for at least the last five years. Ages presented are as of December 31, 2015.
Anthony J. Rizzotte has been Executive Vice President and Chief Lending Officer of Ocean City Home Bank and Vice President of Ocean Shore Holding since 1991. Mr. Rizzotte was named Executive Vice President of Ocean Shore Holding in 2004. Age 60.
Kim Davidson has been the Executive Vice President of Ocean City Home Bank since 2005, prior to which she served as the Senior Vice President of Business Development of Ocean City Home Bank since 2001. She has also served as the Corporate Secretary of Ocean Shore Holding and Ocean City Home Bank since 2004. Prior to becoming a senior vice president, Ms. Davidson was a vice president of Ocean City Home Bank. Age 55.
Janet Bossi has been the Executive Vice President of Loan Administration of Ocean City Home Bank since December 2012. Prior to becoming an executive vice president, Ms. Bossi was a senior vice president of Ocean City Home Bank. Age 49.
Paul Esposito has been the Senior Vice President of Operations of Ocean City Home Bank since 1999. Prior to becoming a senior vice president, Mr. Esposito was a vice president of Ocean City Home Bank. Age 65.
Donald F. Morgenweck has been Senior Vice President and Chief Financial Officer of Ocean City Home Bank and Vice President of Ocean Shore Holding since March 2001. Mr. Morgenweck was named Senior Vice President and Chief Financial Officer of Ocean Shore Holding in 2004. Prior to joining Ocean City Home Bank, Mr. Morgenweck was a Vice President at Summit Bank. Age 61.
REGULATION AND SUPERVISION
General
Ocean City Home Bank, as a federal savings association, is currently subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, as its primary federal regulator, and by the Federal Deposit Insurance Corporation as the insurer of its deposits. Ocean City Home Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Ocean City Home Bank must file reports with the Office of the Comptroller of the Currency concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the Office of the Comptroller of the Currency to evaluate Ocean City Home Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for loan losses for regulatory purposes. Any change in such policies, whether by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation or Congress, could have a material adverse effect on Ocean Shore Holding and Ocean City Home Bank and their operations.
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Certain of the regulatory requirements that are applicable to Ocean City Home Bank and Ocean Shore Holding are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Ocean City Home Bank and Ocean Shore Holding.
Capital Requirements
In early July 2013, the Federal Reserve Board and the Office of the Comptroller of the Currency approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which became effective January 1, 2015, and revised the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. In addition, the rules assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. However, instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period.
The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.
The Office of the Comptroller of the Currency also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances.
Federal Banking Regulation
Business Activities. The activities of federal savings banks, such as Ocean City Home Bank, are governed by federal laws and regulations. Those laws and regulations delineate the nature and extent of the business activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.
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Prompt Corrective Regulatory Action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept broker deposits. The Office of the Comptroller of the Currency is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The Office of the Comptroller of the Currency could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.
Insurance of Deposit Accounts. Ocean City Home Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Deposit insurance per account owner is currently $250,000. Under the Federal Deposit Insurance Corporation’s existing risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. Assessment rates range from five to 45 basis points on the institution’s assessment base, which is calculated as total assets minus tangible equity.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Ocean City Home Bank. Management cannot predict what insurance assessment rates will be in the future.
Loans to One Borrower. Federal law provides that savings associations are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.
Qualified Thrift Lender Test. Federal law requires savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities but also including education, credit card and small business loans) in at least nine months out of each 12-month period.
A savings association that fails the qualified thrift lender test is subject to certain operating restrictions, including dividend limitations. The Dodd-Frank Act made noncompliance with the qualified thrift lender test a violation of law that could result in an enforcement action. As of December 31, 2015, Ocean City Home Bank maintained 91.4% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.
Limitation on Capital Distributions. Federal regulations impose limitations upon all capital distributions by a savings association, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of the Comptroller of the Currency is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of the Comptroller of the Currency regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of the Comptroller of the Currency. If an application is not required, the institution must still provide 30 days prior written notice to the Board of Governors of the Federal Reserve System of the capital distribution if, like Ocean City Home Bank, it is a subsidiary of a holding company, as well as an informational notice filing to the Office of the Comptroller of the Currency. If Ocean City Home Bank’s capital ever fell below its regulatory requirements or the Office of the Comptroller of the Currency notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the Office of the Comptroller of the Currency could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of the Comptroller of the Currency determines that such distribution would constitute an unsafe or unsound practice.
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Community Reinvestment Act. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to satisfactorily comply with the provisions of the Community Reinvestment Act could result in denials of regulatory applications. Ocean City Home Bank received a “satisfactory” Community Reinvestment Act rating in its most recently completed examination.
Transactions with Related Parties. Federal law limits Ocean City Home Bank’s authority to engage in transactions with “affiliates” (e.g., any entity that controls or is under common control with Ocean City Home Bank, including Ocean Shore Holding and their other subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association may purchase the securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by Ocean Shore Holding to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Ocean City Home Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such person’s control, is limited. The laws limit both the individual and aggregate amount of loans that Ocean City Home Bank may make to insiders based, in part, on Ocean City Home Bank’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.
Enforcement. The Office of the Comptroller of the Currency currently has primary enforcement responsibility over savings associations and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.
Federal Home Loan Bank System. Ocean City Home Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Ocean City Home Bank, as a member of the Federal Home Loan Bank of New York, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Ocean City Home Bank was in compliance with this requirement with an investment in Federal Home Loan Bank of New York stock at December 31, 2015 of $5.9 million.
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Federal Reserve Board System. The Federal Reserve Board regulations require savings associations to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows for 2015: a 3% reserve ratio was assessed on net transaction accounts up to and including $103.6 million; a 10% reserve ratio is applied above $103.6 million. The first $14.5 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually and, for 2016, will require a 3% ratio for up to $110.2 million and an exemption of $15.2 million. Ocean City Home Bank complies with the foregoing requirements.
Other Regulations
Ocean City Home Bank’s operations are also subject to federal laws applicable to credit transactions, including the:
| · | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
| · | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
| · | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
| · | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; |
| · | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The operations of Ocean City Home Bank also are subject to laws such as the:
| · | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
| · | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and |
| · | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check. |
Holding Company Regulation
General. As a savings and loan holding company, Ocean Shore Holding is subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations regarding its activities. In addition, the Federal Reserve Board has enforcement authority over Ocean Shore Holding and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to Ocean City Home Bank.
Ocean Shore Holding is a unitary savings and loan holding company within the meaning of federal law. As a unitary savings and loan holding company that was in existence prior to May 4, 1999, Ocean Shore Holding is generally not restricted as to the types of business activities in which it may engage, provided that Ocean City Home Bank continues to be a qualified thrift lender.
Federal law prohibits a savings and loan holding company from, directly or indirectly or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings association, or savings and loan holding company thereof, without prior written approval of the Federal Reserve Board or from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings association. A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than those authorized by federal law or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings associations, the Federal Reserve Board must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.
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The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings association in another state if the laws of the state of the target savings association specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Source of Strength. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Dividends. The Federal Reserve Board has the power to prohibit dividends by savings and loan holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which also applies to savings and loan holding companies and which expresses Federal Reserve Board’s view that a holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”
Acquisition of Ocean Shore Holding. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Federal Reserve Board has found that the acquisition will not result in a change of control of Ocean Shore Holding. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.
The current economic conditions pose significant challenges that could adversely affect our financial condition and results of operations.
Our success depends to a large degree on the general economic conditions in Atlantic and Cape May Counties, New Jersey. Our market has experienced a significant downturn in which we have seen falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies. If economic conditions do not improve or continue to decline, we could experience any of the following consequences, each of which could further adversely affect our business:
| · | demand for our products and services could decline; |
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| · | problem assets and foreclosures may increase; and |
| · | loan losses may increase. |
We could experience further adverse consequences in the event of a prolonged economic downturn in our market due to our exposure to commercial loans across various lines of business. A prolonged economic downturn could adversely affect collateral values or cash flows of the borrowing businesses, and as a result our primary source of repayment could be insufficient to service the debt. Another adverse consequence in the event of a prolonged economic downturn in our market could be the loss of collateral value on commercial and real estate loans that are secured by real estate located in our market area. A further significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished.
Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies and inflation.
A downturn in the local gaming industry could cause increases in nonperforming loans, which would hurt our profits.
Substantially all of our loans are secured by real estate or made to individuals or businesses located in Southern New Jersey. As a result of this concentration, a downturn in the local economy could cause significant increases in nonperforming loans, which would hurt our profits. 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. Tourism is a significant contributor to the economy of Southern New Jersey, and other tourism destinations on the Jersey Shore rely on visitors to Atlantic City, who also visit nearby Shore communities for shopping, sightseeing or dining. While we are not engaged in lending to the gaming industry, some of our borrowers are employed in the gaming industry or have businesses that benefit from the industry. Further declines in the New Jersey gaming industry could result in increased levels of classified assets, nonperforming loans and charge-offs, as well as reduced loan demand.
Our emphasis on residential mortgage loans exposes us to a risk of loss due to a decline in property values.
At December 31, 2015, $607.8 million, or 77.6%, of our loan portfolio consisted of one- to four-family residential mortgage loans, and $51.0 million, or 6.5%, of our loan portfolio consisted of home equity loans. Declines in real estate values could cause some of our mortgage and home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss in the event that we seek to recover on defaulted loans by selling the real estate collateral. Because of our location on the South Jersey shore, many of the properties securing our residential mortgages are second homes or rental properties. At December 31, 2015, 41.2% of our one- to four-family mortgage loans were secured by second homes and 15.7% were secured by rental properties. These loans generally are considered to be more risky than loans secured by the borrower’s permanent residence, since the borrower is typically dependent upon rental income to meet debt service requirements, in the case of a rental property, and when in financial difficulty is more likely to make payments on the loan secured by the borrower’s primary residence before a vacation home.
Commercial lending may expose us to increased lending risks.
At December 31, 2015, $109.1 million, or 13.9%, of our loan portfolio consisted of commercial and multi-family real estate loans, commercial construction loans and commercial business loans. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.
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Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings.
When we loan money we incur the risk that our borrowers do not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. In addition, our determination as to the amount of our allowance for loan losses is subject to review by Ocean City Home’s primary regulator, the Office of the Comptroller of the Currency, as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the Office of the Comptroller of the Currency after a review of the information available at the time of its examination. Our allowance for loan losses amounted to 0.41% of total loans outstanding and 56.3% of nonperforming loans at December 31, 2015. Our allowance for loan losses at December 31, 2015, may not be sufficient to cover future loan losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.
If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.
We evaluate our securities portfolio for other-than-temporary impairment throughout the year. Each investment that has a fair value less than book value is reviewed on a quarterly basis. An impairment charge is recorded against individual securities if management’s review concludes that the decline in value is other than temporary. As of December 31, 2015, our investment portfolio included 5 corporate debt securities with a book value of $9.7 million and an estimated fair value of $8.8 million. Changes in the expected cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down the value of these securities. At December 31, 2015, we had an investment of $5.9 million in capital stock of the Federal Home Loan Bank of New York. If the Federal Home Loan Bank of New York is unable to meet minimum regulatory capital requirements or is required to aid the remaining Federal Home Loan Banks, our holding of Federal Home Loan Bank stock may be determined to be other than temporarily impaired and may require a charge to our earnings, which could have a material impact on our financial condition, results of operations and cash flows. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.
Ineffective liquidity management could adversely affect our financial results and condition.
Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities during 2015 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial majority of our assets were loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations or financial condition.
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Changes in interest rates could reduce our net interest income and earnings.
Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest spread and, as a result, our net interest income and net interest margin. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. This contraction could be more severe following a prolonged period of lower interest rates, as a larger proportion of our fixed rate residential loan portfolio will have been originated at those lower rates and borrowers may be more reluctant or unable to sell their homes in a higher interest rate environment. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.
Strong competition within our market area could reduce our profits and slow growth.
We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. As of June 30, 2015, which is the most recent date for which information is available, we held 10.36% of the deposits in Atlantic County, New Jersey, which represented the 4th largest share of deposits, respectively, out of 16 financial institutions with offices in the county. As of June 30, 2015, we held 9.33% of the deposits in Cape May County, New Jersey, which was the 6th largest share of deposits out of 12 financial institutions with offices in the county. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.
Our profitability may suffer because of changes in the highly regulated environment in which we operate.
The banking industry is subject to extensive regulation by state and federal banking authorities. Many of the banking regulations that govern us are intended to protect depositors, the public or the insurance fund maintained by the FDIC rather than our shareholders. Banking regulations affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business. These requirements may constrain our rate of growth, and changes in regulations could adversely affect our ability to grow. The burden imposed by these federal and state regulations may place banks at a competitive disadvantage compared to less regulated competitors. In addition, the cost of compliance with regulatory requirements could adversely affect our ability to operate profitably.
We operate in a highly regulated industry and may be adversely affected by supervisory actions of our regulators.
Since the financial crisis that began in 2008, the federal regulatory agencies have taken stronger supervisory actions against financial institutions that have experienced increased loan losses and other weaknesses. Actions include entering into written agreements and cease and desist orders that place certain limitations on such institutions’ operations. Federal bank regulators recently have also been using with more frequency their ability to impose individual minimal capital requirements on banks, which requirements may be higher than those which would otherwise qualify the bank as being “well capitalized” under prompt corrective action regulations. If we were to become subject to a supervisory agreement or higher individual capital requirements, such action may have a negative impact on our ability to execute our business plans, as well as our ability to grow, pay dividends or engage in mergers and acquisitions and may result in restrictions in our operations.
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New capital rules generally require insured depository institutions and their holding companies to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.
New capital rules adopted by the Federal Reserve and the OCC substantially amend the regulatory risk-based capital rules applicable to us. The rules phase in over time beginning in 2015 and will become fully effective in 2019. The rules apply to the Company as well as to the Bank. Our minimum capital requirements are (i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.
Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted in 2010 has created a significant shift in the way financial institutions operate. The Dodd-Frank Act restructured the regulation of depository institutions by merging the Office of Thrift Supervision, which previously regulated Ocean City Home Bank, into the Office of the Comptroller of the Currency, and assigning the regulation of savings and loan holding companies, including Ocean City Home, to the Board of Governors of the Federal Reserve System.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau which has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10.0 billion in assets. Banks and savings institutions with $10.0 billion or less in assets are examined by their applicable bank regulators.
As required by the Dodd-Frank Act, the federal banking regulators have adopted new consolidated capital requirements that limit our ability to borrow at the holding company level and invest the proceeds from such borrowings as capital in Ocean City Home Bank that could be leveraged to support additional growth. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.
Any future legislative changes could have a material impact on our profitability, the value of assets held for investment or collateral for loans. Future legislative changes could require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.
We are dependent on our information technology and telecommunications systems and third-party servicers; systems failures, interruptions or breaches of security could have a material adverse effect on us.
Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.
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Our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to expend significant additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners; and personally identifiable information of our customers and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We, our customers, and other financial institutions with which we interact, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties; disrupt our operations and the services we provide to customers; damage our reputation; and cause a loss of confidence in our products and services, all of which could adversely affect our business, revenues and competitive position. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses.
To remain competitive, we must keep pace with technological change.
Financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse impact on our business and therefore on our financial condition and results of operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
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We are subject to a variety of operational, environmental, legal and compliance risks, which may adversely affect our business and results of operations.
We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Actual or alleged conduct by the Bank can also result in negative public opinion about our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
We currently conduct business through our eleven full-service banking offices in Ocean City, Marmora, Linwood, Ventnor, Egg Harbor Township, Northfield, Margate City, Mays Landing, Galloway, Hammonton and Egg Harbor City, New Jersey. We own all of our offices, except for those in Absecon, Northfield and Hammonton. The lease for our Northfield office expires in 2021 and has an option for an additional one year. The lease for our Hammonton office expires in 2021 and has an option for an additional one year. The net book value of the land, buildings, furniture, fixtures and equipment owned by us was $12.4 million at December 31, 2015.
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.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is listed on the Nasdaq Global Market (“NASDAQ”) under the trading symbol “OSHC.” The following table sets forth the high and low sales prices of the common stock and dividends paid per share for the years ended December 31, 2015 and 2014. See Item 1, “Business—Regulation and Supervision—Limitation on Capital Distributions” and note 2 in the notes to the consolidated financial statements for more information relating to restrictions on dividends.
| High | Low | Dividends Paid Per Share | ||||||||||
| Year Ended December 31, 2015: | ||||||||||||
| Fourth Quarter | $ | 17.60 | $ | 15.74 | $ | 0.06 | ||||||
| Third Quarter | 16.17 | 14.54 | 0.06 | |||||||||
| Second Quarter | 15.72 | 14.59 | 0.06 | |||||||||
| First Quarter | 14.85 | 13.80 | 0.06 | |||||||||
| Year Ended December 31, 2014: | ||||||||||||
| Fourth Quarter | $ | 14.44 | $ | 13.64 | $ | 0.06 | ||||||
| Third Quarter | 14.79 | 14.12 | 0.06 | |||||||||
| Second Quarter | 14.88 | 13.94 | 0.06 | |||||||||
| First Quarter | 14.32 | 13.28 | 0.06 | |||||||||
As of March 2, 2016, there were approximately 562 holders of record of the Company’s common stock.
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| Period Ending | ||||||||||||||||||||||||
| Index | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | ||||||||||||||||||
| Ocean Shore Holding Co. | 100.00 | 91.45 | 134.55 | 126.23 | 134.55 | 163.68 | ||||||||||||||||||
| NASDAQ Composite | 100.00 | 99.21 | 116.82 | 163.75 | 188.03 | 201.40 | ||||||||||||||||||
| SNL Thrift Index | 100.00 | 84.12 | 102.32 | 131.30 | 141.22 | 158.80 | ||||||||||||||||||
Purchases of Equity Securities by the Issuer and Affiliated Purchases During the 4th Quarter of 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 | (d) Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| Month #1 October 1, 2015 through October 31, 2015 | — | — | — | — | ||||||||||||
| Month #2 November 1, 2015 through November 30, 2015 | 3,093 | (1) | $ | 16.65 | — | — | ||||||||||
| Month #3 December 1, 2015 through December 31, 2015 | — | — | — | — | ||||||||||||
| Total | 3,093 | $ | 16.65 | — | — | |||||||||||
| (1) | Shares withheld upon vesting of restricted stock to satisfy tax obligations. |
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ITEM 6. SELECTED FINANCIAL DATA
| At or For the Year Ended December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| (Dollars in thousands, except per share amounts) | ||||||||||||||||||||
| Financial Condition Data: | ||||||||||||||||||||
| Total assets | $ | 1,043,379 | $ | 1,024,754 | $ | 1,020,048 | $ | 1,045,488 | $ | 994,730 | ||||||||||
| Investment securities | 112,992 | 111,317 | 128,701 | 116,774 | 52,732 | |||||||||||||||
| Loans receivable, net | 783,948 | 774,017 | 744,802 | 703,898 | 727,626 | |||||||||||||||
| Deposits | 812,033 | 787,078 | 780,647 | 801,765 | 752,455 | |||||||||||||||
| Borrowings | 105,000 | 117,217 | 120,309 | 125,464 | 125,464 | |||||||||||||||
| Total equity | 111,789 | 105,811 | 106,223 | 104,728 | 104,680 | |||||||||||||||
| Operating Data: | ||||||||||||||||||||
| Interest and dividend income | $ | 35,150 | $ | 35,367 | $ | 34,972 | $ | 36,851 | $ | 38,087 | ||||||||||
| Interest expense | 6,696 | 7,566 | 8,512 | 10,217 | 12,186 | |||||||||||||||
| Net interest income | 28,454 | 27,801 | 26,460 | 26,634 | 25,901 | |||||||||||||||
| Provision for loan losses | 689 | 462 | 757 | 893 | 473 | |||||||||||||||
| Net interest income after provision for loan losses | 27,765 | 27,339 | 25,703 | 25,741 | 25,428 | |||||||||||||||
| Other income | 4,390 | 4,246 | 4,463 | 4,003 | 3,538 | |||||||||||||||
| Other expenses | 21,888 | 21,765 | 21,972 | 21,563 | 20,376 | |||||||||||||||
| Income before taxes | 10,267 | 9,820 | 8,194 | 8,181 | 8,590 | |||||||||||||||
| Provision for income taxes | 3,399 | 3,522 | 2,845 | 3,180 | 3,532 | |||||||||||||||
| Net income | $ | 6,868 | $ | 6,298 | $ | 5,349 | $ | 5,001 | $ | 5,058 | ||||||||||
| Per Share Data: | ||||||||||||||||||||
| Earnings per share, basic | $ | 1.14 | $ | 1.00 | $ | 0.82 | $ | 0.75 | $ | 0.75 | ||||||||||
| Earnings per share, diluted | $ | 1.12 | $ | 0.98 | $ | 0.81 | $ | 0.74 | $ | 0.74 | ||||||||||
| Dividends per share | $ | 0.24 | $ | 0.24 | $ | 0.24 | $ | 0.24 | $ | 0.24 | ||||||||||
| Dividend payout ratio | 22.0 | % | 25.7 | % | 31.2 | % | 34.5 | % | 34.6 | % | ||||||||||
| Weighted average shares – basic | 6,015,157 | 6,266,344 | 6,520,951 | 6,652,537 | 6,748,334 | |||||||||||||||
| Weighted average shares – diluted | 6,124,158 | 6,400,804 | 6,607,109 | 6,715,404 | 6,831,989 | |||||||||||||||
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| At or For the Year Ended December 31, | ||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||
| Performance Ratios: | ||||||||||||||||||||
| Return on average assets | 0.65 | % | 0.61 | % | 0.51 | % | 0.48 | % | 0.54 | % | ||||||||||
| Return on average equity | 6.31 | 5.89 | 5.02 | 4.73 | 4.90 | |||||||||||||||
| Interest rate spread (1) | 3.04 | 3.08 | 3.10 | 3.43 | 3.54 | |||||||||||||||
| Net interest margin (2) | 3.19 | 3.15 | 3.12 | 3.37 | 3.51 | |||||||||||||||
| Noninterest expense to average assets | 2.08 | 2.10 | 2.09 | 2.08 | 2.18 | |||||||||||||||
| Efficiency ratio (3) | 66.64 | 67.91 | 71.05 | 70.38 | 69.21 | |||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 120.67 | 107.76 | 102.41 | 95.18 | 98.17 | |||||||||||||||
| Average equity to average assets | 10.34 | 10.32 | 10.16 | 10.20 | 11.03 | |||||||||||||||
| Capital Ratios (4): | ||||||||||||||||||||
| Tier 1 leverage capital | 9.30 | 9.78 | 9.96 | 9.62 | 9.72 | |||||||||||||||
| Common equity Tier 1 risk-based capital | 17.94 | — | — | — | — | |||||||||||||||
| Tier 1 risk-based capital | 17.94 | 18.73 | 19.05 | 19.92 | 19.40 | |||||||||||||||
| Total risk-based capital | 18.52 | 19.24 | 19.77 | 20.63 | 18.75 | |||||||||||||||
| Asset Quality Ratios: | ||||||||||||||||||||
| Allowance for loan losses as a percent of total loans | 0.41 | 0.49 | 0.56 | 0.57 | 0.52 | |||||||||||||||
| Allowance for loan losses as a percent of nonperforming loans | 56.3 | 60.0 | 82.8 | 69.5 | 58.0 | |||||||||||||||
| Non-performing loans as a percent of total loans | 0.72 | 0.81 | 0.68 | 0.82 | 0.89 | |||||||||||||||
| Non-performing assets as a percent of total assets | 0.72 | 0.68 | 0.55 | 0.64 | 0.66 | |||||||||||||||
| (1) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
| (2) | Represents net interest income as a percent of average interest-earning assets. |
| (3) | Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities. |
| (4) | Ratios are for Ocean City Home Bank. Common equity Tier 1 risk-based capital was introduced in 2015. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about: future results of the Company; expectations for loan losses and the sufficiency of our loan loss allowance to cover future loan losses; the expected outcome and impact of legal, regulatory and legislative developments; and the Company’s plans, objectives and strategies.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
| · | the effect of political and economic conditions and geopolitical events; |
| · | economic conditions that affect the general economy, housing prices, the job market, consumer confidence and spending habits; |
| · | the level and volatility of the capital markets and interest rates; |
| · | investor sentiment and confidence in the financial markets; |
| · | the impact of current, pending and future legislation, regulation and legal actions; |
| · | changes in accounting standards, rules and interpretations; |
| · | various monetary and fiscal policies and regulations of the U.S. government; and |
| · | the other factors described in “Risk Factors” in this report. |
Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
General Overview
We conduct community banking activities by accepting deposits and making loans in our market area. Our lending products include residential mortgage loans, commercial loans and mortgages, and home equity and other consumer loans. We also maintain an investment portfolio consisting primarily of mortgage-backed securities to manage our liquidity and interest rate risk. Our loan and investment portfolios are funded with deposits as well as collateralized borrowings from the Federal Home Loan Bank of New York.
Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Our net interest income is affected by a variety of factors, including the mix of interest-earning assets in our portfolio and changes in levels of interest rates. Growth in net interest income is dependent upon our ability to prudently manage the balance sheet for growth, combined with how successfully we maintain or increase net interest margin, which is net interest income as a percentage of average interest-earning assets.
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A secondary source of income is non-interest income, or other income, which is revenue that we receive from providing products and services. The majority of our non-interest income generally comes from service charges (mostly from service charges on deposit accounts). We also earn income on bank-owned life insurance and receive commissions for various services. In some years, we recognize income from the sale of securities and real estate owned.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio as of the balance sheet date. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Expenses. The noninterest expenses we incur in operating our business consist primarily of expenses for salaries and employee benefits and for occupancy and equipment. We also incur expenses for items such as professional services, advertising, office supplies, insurance, telephone, and postage. Our largest noninterest expense is for salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, ATM and data processing expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Federal Deposit Insurance Corporation assessments are a specified percentage of assessable deposits.
Critical Accounting Policies, Judgments and Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are the following: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. A provision for loan losses is charged to operations based on management’s evaluation of the estimated losses that have been incurred in the Company’s loan portfolio. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans.
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Management monitors its allowance for loan losses monthly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:
| · | Levels of past due, classified and non-accrual loans, troubled debt restructurings and modifications; |
| · | Nature and volume of loans; |
| · | Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries, and for commercial loans, the level of loans being approved with exceptions to policy; |
| · | Experience, ability and depth of management and staff; |
| · | National and local economic and business conditions, including various market segments; |
| · | Quality of our loan review system and degree of Board oversight; |
| · | Concentrations of credit by industry, geography and collateral type, with a specific emphasis on real estate, and changes in levels of such concentrations; and |
| · | Effect of external factors, including the deterioration of collateral values, on the level of estimated credit losses in the current portfolio. |
In determining the allowance for loan losses, management has established both specific and general pooled allowances. 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 those criticized and classified loans without reserves (specific allowance). The amount of the specific allowance is determined through a loan-by-loan analysis of non-performing loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on qualitative and quantitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, and external factors. If a loan is identified as impaired and is collateral dependant, an appraisal is obtained to provide a base line in determining whether the carrying amount of the loan exceeds the net realizable value. We recognize impairment through a provision estimate or a charge-off is recorded when management determines we will not collect 100% of a loan based on foreclosure of the collateral, less cost to sell the property, or the present value of expected cash flows.
As changes in our operating environment occur and as recent loss experience fluctuates, the factors for each category of loan based on type and risk rating will change to reflect current circumstances and the quality of the loan portfolio. Given that the components of the allowance are based partially on historical losses and on risk rating changes in response to recent events, required reserves may trail the emergence of any unforeseen deterioration in credit quality.
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Other Than Temporary Impairment. We assess whether a decline is other than temporary with respect to a debt security which has a fair value less than the book value by considering whether (1) we have the intent to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery, or (3) we do not expect to recover the entire amortized cost basis of the security. We bifurcate the impact on securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors, when the security is not otherwise intended to be sold or is required to be sold. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI, with the amortized cost basis of the debt security. We use the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, then apply a discount rate equal to the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. The fair market value of the security is determined using the same expected cash flows, where market-based observable inputs are not available; the discount rate is a rate we determine from open market and other sources as appropriate for the security. The fair value is based on market prices or market-based observable inputs when available. The difference between the fair market value and the credit loss is recognized in other comprehensive income. Additional information regarding our accounting for investment securities is included in notes 2 and 3 to the notes to consolidated financial statements.
Deferred Income Taxes. We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC 740, Income Taxes. FASB ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income as well as judgments about availability of capital gains. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. Further, an inability to employ a qualifying tax strategy to utilize our deferred tax asset arising from capital losses may give rise to an additional valuation allowance. An increase in the valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. FASB ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. When applicable, we recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. Assessment of uncertain tax positions under FASB ASC 740 requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the requirements of FASB ASC 740.
Our adherence to FASB ASC 740 may result in increased volatility in quarterly and annual effective income tax rates, as FASB ASC 740 requires that any change in judgment or change in measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.
Fair Value Measurement. We account for fair value measurement in accordance with FASB ASC 820, Fair Value Measurements and Disclosures. FASB ASC 820 establishes a framework for measuring fair value. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, emphasizing that fair value is a market-based measurement and not an entity-specific measurement. FASB ASC 820 clarifies the application of fair value measurement in a market that is not active. FASB ASC 820 also includes additional factors for determining whether there has been a significant decrease in market activity, affirms the objective of fair value when a market is not active, eliminates the presumption that all transactions are not orderly unless proven otherwise, and requires an entity to disclose inputs and valuation techniques, and changes therein, used to measure fair value. FASB ASC 820 addresses the valuation techniques used to measure fair value. These valuation techniques include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves converting future amounts to a single present amount. The measurement is valued based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.
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FASB ASC 820 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:
| · | Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| · | Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| · | 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. |
We measure financial assets and liabilities at fair value in accordance with FASB ASC 820. These measurements involve various valuation techniques and models, which involve inputs that are observable, when available, and include the following significant financial instruments: investment securities available for sale and derivative financial instruments. The following is a summary of valuation techniques utilized by us for our significant financial assets and liabilities which are valued on a recurring basis.
Investment securities available for sale. Where quoted prices for identical securities are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows based on observable market inputs and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Level 3 market value measurements include an internally developed discounted cash flow model combined with using market data points of similar securities with comparable credit ratings in addition to market yield curves with similar maturities in determining the discount rate. In addition, significant estimates and unobservable inputs are required in the determination of Level 3 market value measurements. If actual results differ significantly from the estimates and inputs applied, it could have a material effect on our consolidated financial statements.
In addition, 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). We measure impaired loans, FHLB stock and loans transferred into other real estate owned at fair value on a non-recurring basis.
We review and validate the valuation techniques and models utilized for measuring financial assets and liabilities at least quarterly.
Goodwill and Core Deposit Intangibles. Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the purchase method. Core deposit intangibles are a measure of the value of checking, savings and other-low cost deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized over the estimated useful lives of the existing deposit relationships acquired, but not exceeding 15 years. The Company evaluates the identifiable intangibles at its Ocean City Home Bank subsidiary for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.
| 29 |
Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. Management performs an annual goodwill impairment test and whenever events occur or circumstances change that indicates the fair value of a reporting unit may be below its carrying value.
Balance Sheet Analysis
General. Total assets increased $18.6 million, or 1.8%, to $1,043.4 million at December 31, 2015 from $1,024.8 million at December 31, 2014. Total loans, net, increased $9.9 million, or 1.3%, to $783.9 million at December 31, 2015 from $744.0 million at December 31, 2014 as a result of loan originations and other advances totaling $156.8 million offset by payoffs and payments received of $147.8 million. Investment and mortgage-backed securities increased $1.7 million, or 1.5%, to $113.0 million at December 31, 2015 from $111.3 million at December 31, 2014. Cash and cash equivalents increased $7.4 million, or 9.2%, to $87.7 million at December 31, 2015 from $80.3 million at December 31, 2014. The increase in investments and mortgage-backed securities resulted from purchases of investments offset by normal repayments, calls and payoffs. Cash and cash equivalents increased as deposit growth exceeded increases in loans and investments and payoffs in borrowings.
Deposits increased $24.9 million, or 3.2%, to $812.0 million at December 31, 2015 from $787.1 million at December 31, 2014. The Company continued its focus on core deposits, which increased $23.8 million, or 3.9%, to $632.1 million. Certificates of deposit increased $1.1 million, or 0.6%, to $179.9 million at December 31, 2015 compared to December 31, 2014. Total borrowings decreased $12.2 million, or 10.4%, to $105.0 million at December 31, 2015 from $117.2 million at December 31, 2014. The decrease resulted from the redemption of trust preferred securities of $7.2 million and decreases in FHLB advances of $5.0 million to $105.0 million.
Loans. Our primary lending activity is the origination of loans secured by real estate. Total loans, net, represented 75.1% of total assets at December 31, 2015, compared to 75.5% of total assets at December 31, 2014.
Loans receivable, net, increased $9.9 million, or 1.3%, in 2015 to $783.9 million at December 31, 2015. One- to four-family residential loans increased $20.4 million, or 3.5%, to $607.8 million representing 77.6% of total loans. Commercial real estate mortgages decreased $5.7 million, or 6.4%, to $84.1 million representing 10.7% of total loans. Construction loans decreased $1.6 million, or 8.0%, to $18.6 million representing 2.4% of total loans. Commercial loans decreased $894 thousand, or 4.0%, to $21.4 million representing 2.7% of total loans. Consumer loans, almost all of which are home equity loans, decreased $3.2 million, or 5.9%, to $51.4 million representing 6.6% of total loans. Loan originations in 2015 totaled $156.8 million, which was an increase of $2.2 million, or 1.5%, over 2014. Loan originations resulted from originations from normal property purchase activity and refinance activity. The origination activity was offset by payoffs and payments received of $144.4 million, which was an increase of $20.2 million over 2014. The increase in payoff and payment activity in 2015 resulted from higher refinance activity due to lower interest rates on loans in 2015 compared to 2014. One- to four-family residential loan originations accounted for $91.5 million, or 58.4%, of total loan originations. Commercial real estate loan originations totaled $5.0 million, or 3.2%, of total loan originations. Construction loan originations totaled $26.4 million, or 16.8%, of total loan originations. Commercial loan originations totaled $17.2 million, or 11.0%, of total originations. Consumer loan originations totaled $16.6 million, or 10.6%, of total loan originations.
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The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated:
Table 1: Loan Portfolio Analysis
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| Real estate - mortgage: | ||||||||||||||||||||||||||||||||||||||||
| One- to four-family residential | $ | 607,807 | 77.6 | % | $ | 587,399 | 75.9 | % | $ | 545,812 | 73.2 | % | $ | 522,206 | 74.1 | % | $ | 547,906 | 75.2 | % | ||||||||||||||||||||
| Commercial and multi-family | 84,075 | 10.7 | 89,778 | 11.5 | 90,855 | 12.2 | 80,013 | 11.3 | 77,073 | 10.6 | ||||||||||||||||||||||||||||||
| Total real estate - mortgage loans | 691,882 | 88.3 | 677,177 | 87.4 | 636,667 | 85.4 | 602,219 | 85.4 | 624,979 | 85.8 | ||||||||||||||||||||||||||||||
| Real estate - construction: | ||||||||||||||||||||||||||||||||||||||||
| Residential | 14,960 | 1.9 | 16,030 | 2.1 | 25,113 | 3.4 | 12,709 | 1.8 | 8,057 | 1.1 | ||||||||||||||||||||||||||||||
| Commercial | 3,595 | 0.5 | 4,141 | 0.5 | 2,510 | 0.3 | 4,821 | 0.7 | 3,791 | 0.5 | ||||||||||||||||||||||||||||||
| Total real estate - construction loans | 18,555 | 2.4 | 20,171 | 2.6 | 27,623 | 3.7 | 17,530 | 2.5 | 11,848 | 1.6 | ||||||||||||||||||||||||||||||
| Commercial | 21,383 | 2.7 | 22,277 | 2.9 | 23,445 | 3.1 | 22,932 | 3.3 | 23,937 | 3.3 | ||||||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||
| Home equity | 51,001 | 6.5 | 54,279 | 7.0 | 57,367 | 7.7 | 61,328 | 8.7 | 66,788 | 9.2 | ||||||||||||||||||||||||||||||
| Other | 431 | 0.1 | 377 | 0.1 | 628 | 0.1 | 879 | 0.1 | 810 | 0.1 | ||||||||||||||||||||||||||||||
| Total consumer loans | 51,432 | 6.6 | 54,656 | 7.1 | 57,995 | 7.8 | 62,207 | 8.8 | 67,598 | 9.3 | ||||||||||||||||||||||||||||||
| Total loans | 783,252 | 100.0 | % | 774,281 | 100.0 | % | 745,730 | 100.0 | % | 704,888 | 100.0 | % | 728,362 | 100.0 | % | |||||||||||||||||||||||||
| Net deferred loan costs (fees) | 3,886 | 3,496 | 3,271 | 3,007 | 3,026 | |||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (3,190 | ) | (3,760 | ) | (4,199 | ) | (3,997 | ) | (3,762 | ) | ||||||||||||||||||||||||||||||
| Loans, net | $ | 783,948 | $ | 774,017 | $ | 744,802 | $ | 703,898 | $ | 727,626 | ||||||||||||||||||||||||||||||
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The following table sets forth certain information at December 31, 2015 regarding the dollar amount of loan principal repayments coming due during the periods indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
Table 2: Contractual Maturities and Interest Rate Sensitivity
| (In thousands) | Real Estate- Mortgage Loans | Real Estate- Construction Loans | Commercial Loans | Consumer Loans | Total Loans | |||||||||||||||
| Amounts due in: | ||||||||||||||||||||
| One year or less | $ | 1,507 | $ | 17,820 | $ | 7,837 | $ | 470 | $ | 27,634 | ||||||||||
| More than one to five years | 10,088 | 735 | 6,879 | 4,172 | 21,874 | |||||||||||||||
| More than five years | 680,287 | — | 6,668 | 46,789 | 733,744 | |||||||||||||||
| Total | $ | 691,882 | $ | 18,555 | $ | 21,384 | $ | 51,431 | $ | 783,252 | ||||||||||
| Interest rate terms on amounts due after one year: | ||||||||||||||||||||
| Fixed-rate loans | $ | 535,663 | $ | 14,496 | $ | 8,771 | $ | 20,797 | $ | 579,727 | ||||||||||
| Adjustable-rate loans | 156,219 | 4,060 | 12,612 | 30,634 | 203,525 | |||||||||||||||
| Total | $ | 691,882 | $ | 18,555 | $ | 21,383 | $ | 51,431 | $ | 783,252 | ||||||||||
Table 3: Loan Origination, Purchase and Sale Activity
| (In thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Total loans, net, at beginning of period | $ | 774,017 | $ | 744,802 | $ | 703,898 | $ | 727,626 | $ | 660,340 | ||||||||||
| Loans originated: | ||||||||||||||||||||
| Real estate-mortgage | 96,535 | 90,656 | 116,947 | 117,816 | 88,369 | |||||||||||||||
| Real estate-construction | 26,411 | 32,530 | 35,604 | 21,737 | 17,873 | |||||||||||||||
| Commercial | 17,228 | 15,060 | 17,045 | 14,474 | 15,517 | |||||||||||||||
| Consumer | 16,599 | 16,285 | 17,150 | 14,911 | 12,847 | |||||||||||||||
| Total loans originated | 156,773 | 154,531 | 186,746 | 168,938 | 134,606 | |||||||||||||||
| Loans purchased | — | — | — | 342 | 554 | |||||||||||||||
| Loans acquired through acquisition of Select Bank | — | — | — | — | 81,608 | |||||||||||||||
| Deduct: | ||||||||||||||||||||
| Real estate loan principal repayments | 107,157 | 89,049 | 106,621 | 155,087 | 109,380 | |||||||||||||||
| Loan sales | — | — | — | — | — | |||||||||||||||
| Other repayments | 37,263 | 35,145 | 37,637 | 36,351 | 39,593 | |||||||||||||||
| Total loan repayments | 144,420 | 124,194 | 144,258 | 191,438 | 148,973 | |||||||||||||||
| Transfer to real estate owned | 2,126 | 872 | 1,165 | 1,049 | 191 | |||||||||||||||
| Loans charged -off | 1,258 | 977 | 568 | 378 | 700 | |||||||||||||||
| Increase (decrease) due to deferred loan fees and allowance for loan losses | 962 | 727 | 149 | (143 | ) | 382 | ||||||||||||||
| Net (decrease) increase in loan portfolio | 9,931 | 29,215 | 40,904 | (23,728 | ) | 67,286 | ||||||||||||||
| Total loans, net, at end of period | $ | 783,948 | $ | 774,017 | $ | 744,802 | $ | 703,898 | $ | 727,626 | ||||||||||
| 32 |
Securities. At December 31, 2015 our securities portfolio represented 10.8% of total assets, compared to 10.9% at December 31, 2014. Investment securities increased $1.7 million to $113.0 million at December 31, 2015 from $111.3 million at December 31, 2014 primarily as the result of increases of $12.5 million in GNMA and FNMA mortgage backed securities offset by decreases of $11.0 million in U.S. agency securities.
The following table sets forth amortized cost and fair value information relating to our investment and mortgage-backed securities portfolios at the dates indicated:
Table 4: Investment Securities
| At December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| U.S. Government and agencies | $ | 10,033 | $ | 10,040 | $ | 21,223 | $ | 20,991 | $ | 35,035 | $ | 32,903 | ||||||||||||
| Agency mortgage-backed | 94,248 | 92,982 | 81,383 | 80,258 | 83,187 | 81,659 | ||||||||||||||||||
| Corporate debt | 9,660 | 8,844 | 9,596 | 8,839 | 11,551 | 10,797 | ||||||||||||||||||
| Total debt securities | 113,941 | 111,866 | 112,202 | 110,088 | 129,773 | 125,359 | ||||||||||||||||||
| Equity securities | 3 | 42 | 3 | 28 | 3 | 30 | ||||||||||||||||||
| Total securities available for sale | 113,944 | 111,908 | 112,205 | 110,116 | 129,776 | 125,389 | ||||||||||||||||||
| Securities held to maturity: | ||||||||||||||||||||||||
| Agency mortgage-backed | 507 | 560 | 707 | 784 | 984 | 1,075 | ||||||||||||||||||
| Municipal | 577 | 577 | 494 | 494 | 2,328 | 2,328 | ||||||||||||||||||
| Total securities held to maturity | 1,084 | 1,137 | 1,201 | 1,278 | 3,312 | 3,403 | ||||||||||||||||||
| Total | $ | 115,028 | $ | 113,045 | $ | 113,406 | $ | 111,394 | $ | 133,088 | $ | 128,791 | ||||||||||||
At December 31, 2015, we had no investments in a single company or entity (other than the U.S. Government or an agency of the U.S. Government) that had an aggregate book value in excess of 10% of our equity.
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The following table sets forth the stated maturities and weighted average yields of debt securities at December 31, 2015. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2015, mortgage-backed securities with adjustable rates totaled $1.2 million. Weighted average yields are on a tax-equivalent basis.
Table 5: Investment Maturities Schedule
| One Year or Less | More than One Year to Five Years | More than Five Years to Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||||||||
| At December 31, 2015 (Dollars in thousands) | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | Carrying Value | Weighted Average Yield | ||||||||||||||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||
| U. S. Government and agency | $ | — | — | $ | 33 | 1.15 | % | $ | 10,000 | 1.99 | % | $ | — | — | $ | 10,033 | 1.99 | % | ||||||||||||||||||||||
| Mortgage-backed | — | — | 14 | 6.10 | % | 6,455 | 1.28 | % | 87,779 | 1.71 | % | 94,248 | 1.68 | % | ||||||||||||||||||||||||||
| Corporate debt | 5,974 | 1.91 | % | — | — | — | — | 3,686 | 2.65 | % | 9,660 | 2.21 | % | |||||||||||||||||||||||||||
| Total securities available for sale | $ | 5,974 | 1.91 | % | $ | 47 | 2.61 | % | $ | 16,455 | 1.71 | % | $ | 91,465 | 1.74 | % | $ | 113,941 | 1.75 | % | ||||||||||||||||||||
| Securities held to maturity: | ||||||||||||||||||||||||||||||||||||||||
| Mortgage-backed | $ | — | — | $ | — | — | $ | 304 | 4.97 | % | $ | 203 | 5.88 | % | $ | 507 | 5.34 | % | ||||||||||||||||||||||
| Municipal | 577 | 0.96 | % | — | — | — | — | — | — | 577 | 1.93 | % | ||||||||||||||||||||||||||||
| Total held to maturity debt securities | $ | 577 | 0.96 | % | $ | — | — | $ | 304 | 4.97 | % | $ | 203 | 5.88 | % | $ | 1,084 | 3.52 | % | |||||||||||||||||||||
| Total | $ | 6,551 | 1.83 | % | $ | 47 | 2.61 | % | $ | 16,759 | 1.77 | % | $ | 91,668 | 1.74 | % | $ | 115,025 | 1.77 | % | ||||||||||||||||||||
| 34 |
Deposits. Our primary source of funds is retail deposit accounts held primarily by individuals and businesses within our market area. We also actively solicit deposits from municipalities in our market area. Municipal deposit accounts differ from business accounts in that we pay interest on those deposits and we pledge collateral (typically investment securities) with the New Jersey Department of Banking to secure the portion of the deposits that are not covered by federal deposit insurance. At December 31, 2015 and 2014, there were approximately $194.6 million and $181.0 million of such deposits, respectively.
Our deposit base is comprised of demand deposits, savings accounts and time deposits. Deposits increased $24.9 million, or 3.2%, to $812.0 million in 2015. The Company continued its focus on core deposits, which increased $23.8 million, or 3.9%, to $632.1 million. The change in deposits consisted of increases in demand deposits of $17.9 million, savings accounts of $6.0 million and in time deposits of $1.1 million. A repricing of a segment of interest bearing demand deposits to non-interest bearing demand deposits led to the change of category of those deposits.
We aggressively market checking and savings accounts, as these tend to provide longer-term customer relationships and a lower cost of funding compared to time deposits. Due to our marketing and sales efforts, we have been able to attract core deposits of 77.8% of total deposits at December 31, 2015, compared to 77.3% in 2014.
Table 6: Deposits
| At December 31, | ||||||||||||||||||||||||
| (Dollars in thousands) | 2015 | 2014 | 2013 | |||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| Noninterest-bearing demand deposits | $ | 190,614 | 23.5 | % | $ | 98,417 | 12.5 | % | $ | 96,750 | 12.4 | % | ||||||||||||
| Interest-bearing demand deposits | 266,874 | 32.9 | 341,206 | 43.4 | 322,857 | 41.3 | ||||||||||||||||||
| Savings accounts | 174,640 | 21.5 | 168,686 | 21.4 | 170,661 | 21.9 | ||||||||||||||||||
| Time deposits | 179,905 | 22.1 | 178,770 | 22.7 | 190,379 | 24.4 | ||||||||||||||||||
| Total | $ | 812,033 | 100.0 | % | $ | 787,079 | 100.0 | % | $ | 780,647 | 100.0 | % | ||||||||||||
Table 7: Time Deposit Maturities of $100,000 or More
| Maturity Period | Certificates of Deposit | |||
| At December 31, 2015 (In thousands) | ||||
| Three months or less | $ | 10,232 | ||
| Over three through six months | 9,383 | |||
| Over six through twelve months | 26,787 | |||
| Over twelve months | 24,158 | |||
| Total | $ | 70,560 | ||
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Borrowings. We utilize borrowings from a variety of sources to supplement our supply of funds for loans and investments and to meet deposit withdrawal requirements.
Table 8: Borrowings
| Year Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2015 | 2014 | 2013 | |||||||||
| Maximum amount outstanding at any month end during the period: | ||||||||||||
| FHLB advances | $ | 110,000 | $ | 110,000 | $ | 110,000 | ||||||
| Subordinated debt | 7,217 | 10,309 | 15,464 | |||||||||
| Average amounts outstanding during the period: | ||||||||||||
| FHLB advances | $ | 109,849 | $ | 110,000 | $ | 110,000 | ||||||
| Subordinated debt | 4,686 | 9,309 | 13,713 | |||||||||
| Weighted average interest rate during the period: | ||||||||||||
| FHLB advances | 3.41 | % | 3.83 | % | 3.88 | % | ||||||
| Subordinated debt | 8.75 | 8.64 | 8.69 | |||||||||
| Balance outstanding at end of period: | ||||||||||||
| FHLB advances | $ | 105,000 | $ | 110,000 | $ | 110,000 | ||||||
| Subordinated debt | — | 7,217 | 10,309 | |||||||||
| Weighted average interest rate at end of period: | ||||||||||||
| FHLB advances | 3.38 | % | 3.37 | % | 3.80 | % | ||||||
| Subordinated debt | — | 8.67 | 8.67 | |||||||||
At December 31, 2015, Federal Home Loan Bank advances decreased $5.0 million, or 4.5%, to $105.0 million from $110 million at December 31, 2014. These advances mature starting in 2016 through 2024.
Subordinated debt reflects the junior subordinated deferrable interest debentures issued by us in 1998 to a business trust formed by us that issued $15.0 million of preferred securities in a private placement. On August 30, 2013, the Company redeemed $5.2 million of this issue resulting in a remaining outstanding balance of $10.3 million. On September 5, 2014, the Company redeemed $3.1 million of this issue resulting in a remaining outstanding balance of $7.2 million. On August 26, 2015, the Company redeemed the remaining $7.2 million of this issue.
| 36 |
Results of Operations for the Years Ended December 31, 2015, 2014 and 2013
Table 9: Overview of 2015, 2014 and 2013
| (Dollars in thousands) | 2015 | 2014 | 2013 | % Change 2015/2014 | % Change 2014/2013 | |||||||||||||||
| Net income | $ | 6,868 | $ | 6,298 | $ | 5,349 | 9.1 | % | 17.7 | % | ||||||||||
| Return on average assets | 0.65 | % | 0.61 | % | 0.51 | % | 6.6 | 19.6 | ||||||||||||
| Return on average equity | 6.31 | % | 5.89 | % | 5.02 | % | 7.1 | 17.3 | ||||||||||||
| Average equity to average assets | 10.34 | % | 10.32 | % | 10.16 | % | 0.2 | 1.6 | ||||||||||||
2015 vs. 2014. Net income increased $570 thousand, or 9.1%, in 2015 to $6.9 million. The increase was due to an increase in net interest income of $653 thousand, an increase in other income of $144 thousand and a decrease in taxes of $123 thousand offset by an increase in the provision for loan losses of $227 thousand and an increase in other expenses of $123 thousand.
2014 vs. 2013. Net income increased $949 thousand, or 17.7%, in 2014 to $6.3 million. The increase was due to an increase in net interest income of $1.3 million, a decrease in the provision for loan losses of $295 thousand and a decrease in other expenses of $207 thousand offset by a decrease in other income of $217 thousand and an increase in taxes of $677 thousand.
Net Interest Income.
2015 vs. 2014. Net interest income increased $653 thousand, or 2.3%, to $28.5 million for 2015 from $27.8 million in 2014. Net interest margin increased four basis points to 3.19% for 2015 from 3.15% in 2014. The increase in net interest income for 2015 resulted from an increase in average interest-earning assets of $10.2 million, a decrease in average interest-bearing liabilities of $79.1 million and a decrease in the average cost of interest-bearing liabilities of 2 basis points to 0.90% offset by a decrease of 7 basis points in the average yield on interest-earning assets to 3.94%. Changes in average balances of earning assets and interest bearing liabilities and a decrease in the average cost of interest bearing liabilities resulted from the Company’s strategy to grow earning assets, and decrease interest bearing liabilities. The declining yields on earning assets reflect the continued impact of repricing of the earning assets in the low interest rate environment, such that maturing assets were replaced with lower yield investments.
Total interest and dividend income decreased $217 thousand, or 0.6%, to $35.1 million for 2015, as an increase in the average balance of loans was partially offset by a decrease in the average balance of investments. Interest income on loans decreased $69 thousand as an increase in the average balance of the portfolio of $16.0 million, or 2.1%, was partially offset by the decrease in the average yield of nine basis points to 4.20%. The decrease in the average yield was the primarily the result of lower rates on new loans originated and payoffs or refinances of higher yielding loans. Decreased balances and a lower yield in the investment portfolio accounted for the $148 thousand decrease in interest income on investment securities in 2015. The average balance of the investment portfolio decreased $5.8 million, or 4.8%, in 2015, while the average yield decreased two basis points to 2.14%.
Total interest expense decreased $870 thousand, or 11.5%, to $6.7 million for 2015 as compared to 2014 as the result of decreases in the cost and balance of interest-bearing liabilities. Interest paid on deposits decreased $9 thousand, or 0.3%, in 2015 as the average balance of interest-bearing deposits decreased $74.4 million, or 10.6%, in 2015 due to decreases of $70.2 million in the average balances of interest-bearing checking and of $4.9 million in the average balance of certificates of deposit offset by increases in the average balance of savings accounts of $672 thousand and in the average interest rate paid on deposits of five basis points. The decrease in interest-bearing checking deposits resulted from the Company’s restructuring of checking products to non-interest bearing from interest-bearing. Interest paid on borrowings decreased $861 thousand, or 17.1%, in 2015. The average rate paid on borrowings decreased 42 basis points to 3.41% due to lower rates paid on refinanced borrowings. The average balance of subordinated debt decreased $4.6 million due to a redemption of the remaining outstanding balance of subordinated debt.
| 37 |
2014 vs. 2013. Net interest income increased $1.3 million, or 5.1%, to $27.8 million for 2014 from $26.5 million in 2013. Net interest margin increased 3 basis points to 3.15% for 2014 from 3.12% in 2013. The increase in net interest income for 2014 resulted from an increase in the average interest-earning assets of $35.1 million, a decrease in average interest-bearing liabilities of $8.5 million and a decrease in the average cost of interest-bearing liabilities of 11 basis points to 0.92% offset by a decrease of 11 basis points in the average yield on interest-earning assets to 4.01%. The lower yield on interest-earning assets was primarily attributable to lower yields on new loans and investments offset by an increase in the balance of interest-earning assets and decreases in the cost and balance of interest-bearing liabilities.
Total interest and dividend income increased $395 thousand, or 1.1%, to $35.4 million for 2014, as an increase in the average balance of loans was partially offset by a decrease in the average balance of investments. Interest income on loans increased $691 thousand as an increase in the average balance of the portfolio of $44.7 million, or 6.2% was partially offset by the decrease in the average yield of 18 basis points to 4.29%. The decrease in the average yield was the primarily the result of lower rates on new loans originated and payoffs or refinances of higher yielding loans. Decreased balances and a lower yield in the investment portfolio accounted for the $296 thousand decrease in interest income on investment securities in 2014. The average balance of the investment portfolio decreased $9.6 million, or 7.4%, in 2014, while the average yield decreased 7 basis points to 2.16%.
Total interest expense decreased $946 thousand, or 11.1%, to $7.6 million for 2014 as compared to 2013 was the result of decreases in the cost and balance of interest-bearing liabilities. Interest paid on deposits decreased $507 thousand, or 16.6%, in 2014. The average interest rate paid on deposits decreased 7 basis points to 0.36% as a result of the prevailing lower interest rate environment during 2014. The average balance of interest-bearing deposits decreased $4.1 million, or 0.6%, in 2014 due to decreases of $19.2 million in the average balance of certificates of deposit and savings accounts of $2.2 million offset by an increase in the average balances of interest-bearing checking of $17.3 million, as customers shifted deposits from CD’s and savings accounts to interest bearing checking. Interest paid on borrowings decreased $439 thousand, or 8.0%, in 2014. The average rate paid on borrowings decreased 20 basis points to 4.21%. The average balance of subordinated debt decreased $4.4 million due to a reduction in the outstanding balance of subordinated debt.
Table 10: Net Interest Income – Changes Due to Rate and Volume
| 2015 Compared to 2014 | 2014 Compared to 2013 | |||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
| (In thousands) | Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||
| Interest and dividend income: | ||||||||||||||||||||||||
| Loans receivable | $ | 652 | $ | (721 | ) | $ | (69 | ) | $ | 1,959 | $ | (1,268 | ) | $ | 691 | |||||||||
| Investment securities | (123 | ) | (25 | ) | (148 | ) | (208 | ) | (88 | ) | (296 | ) | ||||||||||||
| Total interest-earning assets | 529 | (746 | ) | (217 | ) | 1,751 | (1,356 | ) | 395 | |||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Deposits | 29 | (38 | ) | (9 | ) | (18 | ) | (489 | ) | (507 | ) | |||||||||||||
| FHLB advances | (44 | ) | (423 | ) | (467 | ) | — | (51 | ) | (51 | ) | |||||||||||||
| Subordinated debt | (394 | ) | — | (394 | ) | (388 | ) | — | (388 | ) | ||||||||||||||
| Total interest-bearing liabilities | (409 | ) | (461 | ) | (870 | ) | (406 | ) | (540 | ) | (946 | ) | ||||||||||||
| Net change in interest income | $ | 938 | $ | (285 | ) | $ | 653 | $ | 2,157 | $ | (816 | ) | $ | 1,341 | ||||||||||
Provision for Loan Losses.
2015 vs. 2014. Provision for loan losses increased $227 thousand to $689 thousand in 2015 as compared to $462 thousand in 2014. The increase resulted from higher provision needed for loans moving to real estate owned offset by lower general reserves in 2015 compared to 2014 due to improved portfolio performance and macroeconomic trends resulting in lower loss rates applied in calculation of general reserves on loans. Loan loss provisions in 2015 were primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of classified and non-performing loans, the level of charge-offs and the current economic conditions.
2014 vs. 2013. Provision for loan losses decreased $295 thousand to $462 thousand in 2014 as compared to $757 thousand in 2013. The decrease resulted from lower general reserves in 2014 compared to 2013 due to improved portfolio performance and macroeconomic trends resulting in lower loss rates applied in calculation of general reserves on loans. Loan loss provisions in 2014 were primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of classified and non-performing loans, the level of charge-offs and the current economic conditions.
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Other Income. The following table shows the components of other income and the percentage changes from year to year.
Table 11: Other Income Summary
| (Dollars in thousands) | 2015 | 2014 | 2013 | % Change 2015/2014 | % Change 2014/2013 | |||||||||||||||
| Service charges | $ | 1,986 | $ | 1,753 | $ | 2,098 | 13.3 | % | (16.4 | )% | ||||||||||
| Cash surrender value of life insurance | 629 | 633 | 665 | (0.6 | ) | (4.8 | ) | |||||||||||||
| Gain (loss) on sale of AFS securities | 3 | 95 | 3 | (96.8 | ) | 3066.7 | ||||||||||||||
| Other | 1,772 | 1,765 | 1,697 | 0.4 | 4.0 | |||||||||||||||
| Total | $ | 4,390 | $ | 4,246 | $ | 4,463 | 3.4 | % | (4.9 | )% | ||||||||||
2015 vs. 2014. Total other income increased $144 thousand, or 3.4%, to $4.4 million in 2015 compared to the same period in 2014 due primarily to increases of $233 thousand in fees collected on deposit and loan accounts and of $7 thousand in Visa debit card commissions offset by decreases of $4 thousand in cash surrender value of life insurance increases and of $92 thousand on gains on sale or calls of AFS securities.
2014 vs. 2013. Total other income decreased $217 thousand, or 4.9%, to $4.2 million in 2014 compared to the same period in 2013 due primarily to decreases of $345 thousand in fees collected on deposit and loan accounts, $32 thousand in cash surrender value of life insurance offset by increases of $68 thousand in Visa debit card commissions and other income and of $92 thousand on gains on sale or calls of AFS securities.
Other Expense. The following table shows the components of other expense and the percentage changes from year to year.
Table 12: Other Expense Summary
| (Dollars in thousands) | 2015 | 2014 | 2013 | % Change 2015/2014 | % Change 2014/2013 | |||||||||||||||
| Salaries and employee benefits | $ | 12,864 | $ | 12,684 | $ | 12,436 | 1.4 | % | 2.0 | % | ||||||||||
| Occupancy and equipment | 5,001 | 5,095 | 5,100 | (1.8 | ) | (0.1 | ) | |||||||||||||
| FDIC deposit insurance | 551 | 535 | 541 | 3.0 | (1.1 | ) | ||||||||||||||
| Advertising | 419 | 429 | 412 | (2.3 | ) | 4.1 | ||||||||||||||
| Professional services | 1,054 | 1,035 | 1,318 | 1.8 | (21.5 | ) | ||||||||||||||
| Supplies | 216 | 229 | 267 | (5.7 | ) | (14.2 | ) | |||||||||||||
| Telephone | 119 | 125 | 130 | (4.8 | ) | (3.8 | ) | |||||||||||||
| Postage | 163 | 191 | 183 | (14.7 | ) | 4.4 | ||||||||||||||
| Charitable contributions | 178 | 141 | 147 | 26.2 | (4.1 | ) | ||||||||||||||
| Insurance | 208 | 199 | 184 | 4.5 | 8.2 | |||||||||||||||
| Real estate owned expenses | 144 | 61 | 270 | 136.1 | (77.4 | ) | ||||||||||||||
| All other | 971 | 1,041 | 984 | (6.7 | ) | 5.8 | ||||||||||||||
| Total | $ | 21,888 | $ | 21,765 | $ | 21,972 | 0.6 | % | (0.9 | )% | ||||||||||
2015 vs. 2014. Total other expenses increased $123 thousand, or 0.6%, to $21.9 million for 2015 compared to $21.8 million for 2014. The increase in other expenses for 2015 resulted from increases in salary and benefits of $180 thousand, REO expenses of $83 thousand, FDIC insurance of $16 thousand, professional services of $19 thousand, insurance of $9 thousand and charitable contributions of $37 thousand offset by decreases in occupancy and equipment of $94 thousand, advertising expenses of $10 thousand, supplies of $13 thousand, telephone of $6 thousand, postage of $28 thousand and all other expenses of $70 thousand. The increase in REO expenses resulted from properties sold or reevaluated at lower prices than the original recorded investment and the costs associated with maintaining the properties. The increase in salaries and employee benefits resulted from normal increases in 2015 over 2014 costs. The remaining expense changes were the result of normal increases and decreases in year over year operations.
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2014 vs. 2013. Total other expenses decreased $207 thousand, or 0.9%, to $21.8 million for 2014 compared to $22.0 million for 2013. The decrease in other expenses for 2014 resulted from decreases in REO expenses of $209 thousand, occupancy and equipment of $5 thousand, FDIC insurance of $6 thousand, professional services of $283 thousand, supplies of $38 thousand, telephone of $5 thousand and charitable contributions of $6 thousand offset by increases in salary and benefits of $248 thousand, advertising expenses of $17 thousand, postage of $8 thousand, insurance of $15 thousand, and all other expenses of $57 thousand. The higher than normal decrease in REO expenses resulted from 2013 properties sold or reevaluated at lower prices than the original recorded investment and the costs associated with maintaining the properties not incurred in 2014. The decrease in professional services resulted from 2013 costs not in 2014 to start up a subsidiary. The remaining expense changes including an increase in salaries and employee benefits were the result of normal increases and decreases in year over year operations.
Income Taxes.
2015 vs. 2014. Income tax expense decreased $123 thousand, or 3.5%, to $3.4 million for the year ended December 31, 2015 as compared to $3.5 million for the year ended December 31, 2014. The effective tax rate decreased to 33.1% from 35.9% in 2015 compared to 2014. The decrease in the effective rate was primarily based upon a change in the mix of assets with a tax preference offset by taxes paid on higher taxable income.
2014 vs. 2013. Income tax expense increased $677 thousand, or 23.8%, to $3.5 million for the year ended December 31, 2014 as compared to $2.8 million for the year ended December 31, 2013. The effective tax rate increased to 35.9% from 34.7% in 2014 compared to 2013. The increase in the effective rate was primarily based upon higher taxes on higher taxable income and a change in the mix of assets with a tax preference.
Average Balances and Yields. 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. For purposes of this table, average balances have been calculated using the average daily balances and nonaccrual loans are included in average balances only. 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.
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Table 13: Average Balance Tables
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Loans | $ | 779,368 | $ | 32,716 | 4.20 | % | $ | 763,374 | $ | 32,785 | 4.29 | % | $ | 718,669 | $ | 32,094 | 4.47 | % | ||||||||||||||||||
| Investment securities | 113,817 | 2,434 | 2.14 | 119,575 | 2,582 | 2.16 | 129,174 | 2,878 | 2.23 | |||||||||||||||||||||||||||
| Total interest-earning assets | 893,185 | 35,150 | 3.94 | 882,949 | 35,367 | 4.01 | 847,843 | 34,972 | 4.12 | |||||||||||||||||||||||||||
| Noninterest-earning assets | 159,007 | 153,941 | 201,938 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,052,192 | $ | 1,036,890 | $ | 1,049,781 | ||||||||||||||||||||||||||||||
| Liabilities and equity: | ||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 276,149 | 482 | 0.17 | % | $ | 346,314 | 537 | 0.16 | % | $ | 328,973 | 513 | 0.16 | % | |||||||||||||||||||||
| Savings accounts | 170,547 | 343 | 0.20 | 169,875 | 341 | 0.20 | 172,112 | 344 | 0.20 | |||||||||||||||||||||||||||
| Certificates of deposit | 178,957 | 1,712 | 0.96 | 183,838 | 1,668 | 0.91 | 203,055 | 2,196 | 1.08 | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 625,653 | 2,537 | 0.41 | 700,027 | 2,546 | 0.36 | 704,140 | 3,053 | 0.43 | |||||||||||||||||||||||||||
| FHLB advances | 109,849 | 3,749 | 3.41 | 110,000 | 4,216 | 3.83 | 110,000 | 4,267 | 3.88 | |||||||||||||||||||||||||||
| Subordinated debt | 4,686 | 410 | 8.75 | 9,309 | 804 | 8.64 | 13,713 | 1,192 | 8.69 | |||||||||||||||||||||||||||
| Total borrowings | 114,535 | 4,159 | 3.63 | 119,309 | 5,020 | 4.21 | 123,713 | 5,459 | 4.41 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 740,188 | 6,696 | 0.90 | 819,336 | 7,566 | 0.92 | 827,853 | 8,512 | 1.03 | |||||||||||||||||||||||||||
| Noninterest-bearing demand accounts | 190,442 | 98,985 | 103,442 | |||||||||||||||||||||||||||||||||
| Other | 12,748 | 11,585 | 11,837 | |||||||||||||||||||||||||||||||||
| Total liabilities | 943,378 | 929,906 | 943,132 | |||||||||||||||||||||||||||||||||
| Retained earnings | 108,814 | 106,984 | 106,649 | |||||||||||||||||||||||||||||||||
| Total liabilities and retained earnings | $ | 1,052,192 | $ | 1,036,890 | $ | 1,049,781 | ||||||||||||||||||||||||||||||
| Net interest income | $ | 28,454 | $ | 27,801 | $ | 26,460 | ||||||||||||||||||||||||||||||
| Interest rate spread | 3.04 | % | 3.08 | % | 3.10 | % | ||||||||||||||||||||||||||||||
| Net interest margin | 3.19 | % | 3.15 | % | 3.12 | % | ||||||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 107.76 | % | 102.41 | % | ||||||||||||||||||||||||||||||||
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Risk Management
Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Our strategy also emphasizes the origination of one- to four-family mortgage loans, which typically have lower default rates than other types of loans and are secured by collateral that generally holds its value better than other types of collateral.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We make initial contact with the borrower when the loan becomes 15 days past due. If payment is not then received by the 30th day of delinquency, additional letters and phone calls generally are made. Generally, when the loan becomes 60 days past due, we send a letter notifying the borrower that we will commence foreclosure proceedings if the loan is not brought current within 30 days. Generally, when the loan becomes 90 days past due, we commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. We may consider loan workout arrangements with certain borrowers under certain circumstances.
Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and all foreclosed and repossessed property that we own.
Analysis of Nonperforming and Classified Assets. We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. When a loan becomes 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan, plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.
Non-performing assets totaled $7.5 million, or 0.72% of total assets, at December 31, 2015, compared to $6.9 million, or 0.68% of total assets, at December 31, 2014. Non-performing assets consisted of seventeen residential mortgages totaling $2.6 million, five commercial mortgages totaling $1.6 million, one construction mortgage totaling $143 thousand, one commercial loan totaling $41 thousand, eight consumer equity loans totaling $601 thousand, five TDR non-accrual loans totaling $708 thousand and six real estate owned properties totaling $1.8 million. Specific reserves recorded for these loans at December 31, 2015 were $804 thousand.
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Table 14: Nonperforming Assets
| At December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Nonaccrual loans: | ||||||||||||||||||||
| Real estate-mortgage loans | $ | 2,597 | $ | 3,626 | $ | 3,618 | $ | 3,850 | $ | 4,768 | ||||||||||
| Real estate-commercial and multifamily | 1,580 | 803 | 463 | 1,275 | 392 | |||||||||||||||
| Real estate-construction | 143 | 143 | — | 84 | — | |||||||||||||||
| Commercial | 41 | 501 | — | 200 | 318 | |||||||||||||||
| Consumer | 601 | 502 | 674 | 342 | 198 | |||||||||||||||
| Total | 4,962 | 5,575 | 4,755 | 5,751 | 5,676 | |||||||||||||||
| Troubled debt restructurings –nonaccrual | 708 | 694 | 316 | — | 805 | |||||||||||||||
| Total nonaccrual loans | 5,670 | 6,269 | 5,071 | 5,751 | 6,481 | |||||||||||||||
| Real estate owned | 1,814 | 650 | 498 | 906 | 98 | |||||||||||||||
| Total nonperforming assets | $ | 7,484 | $ | 6,919 | $ | 5,569 | $ | 6,657 | $ | 6,579 | ||||||||||
| Total nonperforming loans to total loans | 0.72 | % | 0.81 | % | 0.68 | % | 0.82 | % | 0.89 | % | ||||||||||
| Total nonperforming loans to total assets | 0.54 | % | 0.61 | % | 0.50 | % | 0.55 | % | 0.65 | % | ||||||||||
| Total nonperforming assets to total assets | 0.72 | % | 0.68 | % | 0.55 | % | 0.64 | % | 0.66 | % | ||||||||||
Interest income that would have been recorded for the year ended December 31, 2015 had nonaccruing loans been current according to their original terms amounted to $268 thousand.
Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of the Comptroller of the Currency has 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.
Classified assets decreased $3.1 million to $18.2 million at December 31, 2015 from $21.3 million at December 31, 2014. The decrease in classified assets reflects a decrease in classified residential mortgage loans of $2.2 million, $39 thousand in consumer loans, $272 thousand in commercial mortgage loans and $546 thousand in commercial loans.
Table 15: Classified Assets
| At December 31, | ||||||||||||
| (In thousands) | 2015 | 2014 | 2013 | |||||||||
| Special mention assets | $ | 4,310 | $ | 5,879 | $ | 5,451 | ||||||
| Substandard assets | 13,877 | 15,371 | 12,822 | |||||||||
| Doubtful and loss assets | — | 14 | — | |||||||||
| Total classified assets | $ | 18,187 | $ | 21,264 | $ | 18,273 | ||||||
| 43 |
Table 16: Loan Delinquencies (1)
| At December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||
| (In thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 30-59 Days Past Due | 60-89 Days Past Due | 30-59 Days Past Due | 60-89 Days Past Due | ||||||||||||||||||
| Real estate-mortgage loans | $ | 1,483 | $ | — | $ | 3,154 | $ | — | $ | 1,271 | $ | — | ||||||||||||
| Commercial loans | — | — | — | — | — | — | ||||||||||||||||||
| Consumer loans | 93 | 21 | 485 | 5 | 266 | 50 | ||||||||||||||||||
| Total | $ | 1,576 | $ | 21 | $ | 3,639 | $ | 5 | $ | 1,537 | $ | 50 | ||||||||||||
(1) Excludes loans that are on nonaccrual status.
At each of the dates in the above table, delinquent mortgage loans consisted primarily of loans secured by residential real estate.
Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio as of the balance sheet date. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for impaired or collateral-dependent loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. See “Critical Accounting Policies, Judgments and Estimates” and note 2 of the notes to the consolidated financial statements for additional information on the determination of the allowance for loan losses.
At December 31, 2015, our allowance for loan losses represented 0.41% of total net loans. The allowance for loan losses decreased to $3.2 million at December 31, 2015 from $3.8 million at December 31, 2014 due to provisions for loan losses of $689 thousand offset by net charge-offs of $1.3 million. The decrease in the provision for loan losses for 2015 was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the increase of loans in the portfolio, level of classified loans, non-performing loans, the level of charge-offs and the current economic conditions. At December 31, 2015, the specific allowance on impaired or collateral-dependent loans was $804 thousand and the general valuation allowance on the remainder of the loan portfolio was $2.4 million.
At December 31, 2014, our allowance for loan losses represented 0.49% of total net loans. The allowance for loan losses decreased to $3.8 million at December 31, 2014 from $4.2 million at December 31, 2013 due to provisions for loan losses of $462 thousand offset by net charge-offs of $901 thousand. The decrease in the provision for loan losses for 2014 was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the increase of loans in the portfolio, level of classified loans, non-performing loans, the level of charge-offs and the current economic conditions. At December 31, 2014, the specific allowance on impaired or collateral-dependent loans was $1.0 million and the general valuation allowance on the remainder of the loan portfolio was $2.8 million.
| 44 |
Table 17: Allocation of Allowance for Loan Losses
| At December 31, | ||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | |||||||||||||||||||||||||||
| Real estate-mortgage loans | $ | 2,291 | 71.8 | % | 87.8 | % | $ | 2,943 | 78.3 | % | 87.4 | % | $ | 3,532 | 84.1 | % | 85.2 | % | ||||||||||||||||||
| Real estate-construction loans | 25 | 0.8 | 3.0 | 33 | 0.9 | 2.6 | 85 | 2.0 | 1.6 | |||||||||||||||||||||||||||
| Commercial | 236 | 7.4 | 2.6 | 380 | 10.1 | 2.9 | 230 | 5.5 | 3.8 | |||||||||||||||||||||||||||
| Consumer | 638 | 20.0 | 6.6 | 404 | 10.7 | 7.1 | 352 | 8.4 | 9.4 | |||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 3,190 | 100.0 | % | 100.0 | % | $ | 3,760 | 100.0 | % | 100.0 | % | $ | 4,199 | 100.0 | % | 100.0 | % | ||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||
| 2012 | 2011 | |||||||||||||||||||||||
| (Dollars in Thousands) | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | ||||||||||||||||||
| Real estate-mortgage loans | $ | 3,094 | 77.4 | % | 85.4 | % | $ | 2,973 | 79.0 | % | 85.8 | % | ||||||||||||
| Real estate-construction loans | 187 | 4.7 | 2.5 | 98 | 2.6 | 1.6 | ||||||||||||||||||
| Commercial | 286 | 7.2 | 3.3 | 229 | 6.1 | 3.3 | ||||||||||||||||||
| Consumer | 430 | 10.7 | 8.8 | 462 | 12.3 | 9.3 | ||||||||||||||||||
| Total allowance for loan losses | $ | 3,997 | 100.0 | % | 100.0 | % | $ | 3,762 | 100.0 | % | 100.0 | % | ||||||||||||
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
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Table 18: Analysis of Loan Loss Experience
| Year Ended December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Allowance at beginning of period | $ | 3,760 | $ | 4,199 | $ | 3,997 | $ | 3,762 | $ | 3,988 | ||||||||||
| Provision for loan losses | 689 | 462 | 757 | 893 | 473 | |||||||||||||||
| Charge-offs: | ||||||||||||||||||||
| Real estate-mortgage loans | 684 | 538 | 393 | 557 | 559 | |||||||||||||||
| Real estate-construction loans | — | — | — | — | — | |||||||||||||||
| Commercial loans | 331 | — | 154 | 29 | 90 | |||||||||||||||
| Consumer loans | 244 | 439 | 21 | 105 | 51 | |||||||||||||||
| Total charge-offs | 1,259 | 977 | 568 | 691 | 700 | |||||||||||||||
| Recoveries: | ||||||||||||||||||||
| Real estate-mortgage loans | — | 1 | — | 13 | — | |||||||||||||||
| Real estate-construction loans | — | — | — | — | — | |||||||||||||||
| Commercial loans | — | 75 | — | 20 | — | |||||||||||||||
| Consumer loans | — | — | 13 | — | 1 | |||||||||||||||
| Total recoveries | — | 76 | 13 | 33 | 1 | |||||||||||||||
| Net charge-offs (recoveries) | 1,259 | 901 | 555 | 658 | 699 | |||||||||||||||
| Allowance at end of period | $ | 3,190 | $ | 3,760 | $ | 4,199 | $ | 3,997 | $ | 3,762 | ||||||||||
| Allowance to nonperforming loans | 56.3 | % | 60.0 | % | 82.8 | % | 69.5 | % | 58.0 | % | ||||||||||
| Allowance to total loans outstanding at the end of the period | 0.41 | % | 0.49 | % | 0.56 | % | 0.57 | % | 0.52 | % | ||||||||||
| Net charge-offs to average loans outstanding during the period | 0.16 | % | 0.12 | % | 0.08 | % | 0.09 | % | 0.10 | % | ||||||||||
N/M—not measurable as nonperforming loans and charge-offs are not material enough to allow for meaningful calculations.
In 2015, we experienced charge-offs of $1.3 million on 20 loans based on current appraisals of properties securing non-performing loans.
Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. We have adopted an interest rate risk action plan pursuant to which we manage our interest rate risk. Under this plan, we have: periodically sold fixed-rate mortgage loans; extended the maturities of our borrowings; increased commercial lending, which emphasizes the origination of shorter term, prime-based loans; emphasized the generation of core deposits, which provides a more stable, lower cost funding source; and structured our investment portfolio to include more liquid securities. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.
We have an Asset/Liability Committee, which includes members of both the board of directors and management, to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
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.
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Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.
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.
The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12- and 24-month periods using interest income simulation. The simulation uses projected repricing of assets and liabilities at December 31, 2015 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.
Table 19: Net Interest Income Simulation
At December 31, 2015 Percentage Change in Estimated Net Interest Income Over | ||||||||
| 12 Months | 24 Months | |||||||
| 200 basis point increase in rates | $ | 2,586 | $ | 7,713 | ||||
| 100 basis point decrease in rates | $ | (571 | ) | $ | (2,717 | ) | ||
Management believes that under the current rate environment, a change of interest rates downward of 200 basis points is not possible as the treasury yield curve is below 200 basis points for maturities of 2 years or less. Therefore, management has deemed a change in interest rates downward of 200 basis points not measurable. This limit will be re-evaluated periodically and may be modified as appropriate.
The 200 and 100 basis point changes in rates in the above table is assumed to occur evenly over the following 12- and 24- months. Based on the scenario above, net interest income would be positively affected (within our internal guidelines) in the 12- and 24-month periods if rates rose by 200 basis points. Additionally, if rates declined by 100 basis points net interest income would be negatively affected (within our internal guidelines) in the 12- and 24-month periods.
Economic Value of Equity Analysis. In addition to a net interest income simulation analysis, we use an interest rate sensitivity analysis prepared by the Office of the Comptroller of the Currency 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 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 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, which is based on information that we provide to the Office of the Comptroller of the Currency, presents the change in our net portfolio value at December 31, 2015 that would occur in the event of an immediate change in interest rates based on Office of the Comptroller of the Currency assumptions, with no effect given to any steps that we might take to counteract that change.
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Table 20: EVE Analysis
| Basis Point (“bp”) | Economic Value of Equity (Dollars in Thousands) | Economic Value of Equity as % of Portfolio Value of Assets | ||||||||||||||||||
| Change in Rates | $ Amount | $ Change | % Change | EVE Ratio | Change | |||||||||||||||
| 300 bp | $ | 106,153 | $ | (32,186 | ) | (23.27 | )% | 10.92 | % | (214) | bp | |||||||||
| 200 | 119,229 | (19,110 | ) | (13.81 | ) | 11.89 | (117 | ) | ||||||||||||
| 100 | 130,649 | (7,690 | ) | (5.56 | ) | 12.66 | (40 | ) | ||||||||||||
| 50 | 135,038 | (3,301 | ) | (2.39 | ) | 12.91 | (15 | ) | ||||||||||||
| 0 | 138,339 | — | — | 13.06 | — | |||||||||||||||
| (50) | 139,978 | 1,638 | 1.18 | 13.07 | 1 | |||||||||||||||
| (100) | 139,371 | 1,031 | 0.75 | 12.90 | (16 | ) | ||||||||||||||
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.
Liquidity Management. The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, the purchase of investment securities, deposit withdrawals, repayment of borrowings and operating expenses. Our ability to meet our current financial obligations is a function of balance sheet structure, the ability to liquidate assets and the availability of alternative sources of funds. To meet the needs of clients and manage risk, we engage in liquidity planning and management.
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, calls of investment securities and borrowed funds, and prepayments on loans and mortgage-backed securities 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 December 31, 2015, cash and cash equivalents totaled $87.7 million. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $36.5 million at December 31, 2015. In addition, at December 31, 2015, we had the ability to borrow an additional $271.8 million from the Federal Home Loan Bank of New York, which included available overnight lines of credit of $271.8 million. On that date, we had no overnight advances outstanding.
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At December 31, 2015, we had $78.0 million in commitments outstanding, which included $19.2 million in residential loans, $2.5 million in commercial loans, $10.8 million in undisbursed construction loans, $28.2 million in unused home equity lines of credit and $17.2 million in commercial lines and letters of credit. Certificates of deposit due within one year of December 31, 2015 totaled $123.4 million, or 68.6% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2016. 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.
Table 21: Outstanding Loan Commitments
| Amount of Commitment Expiration - Per Period | ||||||||||||||||||||
| At December 31, 2015 (In thousands) | Total | Less than One Year | One to Three Years | Three to Five Years | More Than 5 Years | |||||||||||||||
| Commitments to originate loans | $ | 21,745 | $ | — | $ | — | $ | — | $ | 21,745 | ||||||||||
| Unused portion of unsecured consumer lines of credit | 8 | — | — | — | 8 | |||||||||||||||
| Unused portion of home equity lines of credit | 28,244 | 576 | 1,614 | 658 | 25,396 | |||||||||||||||
| Unused portion of commercial lines of credit | 15,140 | 13,843 | 1,297 | — | — | |||||||||||||||
| Unused portion of commercial letters of credit | 2,063 | 1,862 | 101 | — | 100 | |||||||||||||||
| Undisbursed portion of construction loans in process | 10,781 | 9,953 | 828 | — | — | |||||||||||||||
| Total | $ | 77,981 | $ | 26,234 | $ | 3,840 | $ | 658 | $ | 47,249 | ||||||||||
Table 22: Contractual Obligations
| Payments due by period | ||||||||||||||||||||
| At December 31, 2015 (In thousands) | Total | Less than One Year | One to Three Years | Three to Five Years | More Than 5 Years | |||||||||||||||
| Short-term debt obligations | $ | 25,301 | $ | 25,301 | $ | — | $ | — | $ | — | ||||||||||
| Long-term debt obligations | 96,031 | 2,953 | 25,005 | 4,324 | 63,749 | |||||||||||||||
| Time deposits | 179,904 | 123,394 | 45,397 | 8,971 | 2,142 | |||||||||||||||
| Operating lease obligations(1) | 1,135 | 160 | 338 | 363 | 274 | |||||||||||||||
| Total | $ | 302,371 | $ | 151,808 | $ | 70,740 | $ | 13,658 | $ | 66,165 | ||||||||||
| (1) | Payments are for lease of real property. |
Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts, Federal Home Loan Bank advances and reverse repurchase agreements. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit and commercial banking relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits.
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Table 23: Summary of Investing and Financing Activities
| Year Ended December 31, | ||||||||||||
| (In thousands) | 2015 | 2014 | 2013 | |||||||||
| Investing activities: | ||||||||||||
| Loan originations, net of repayments | $ | 12,471 | $ | 30,527 | $ | 42,800 | ||||||
| Securities purchased | 25,754 | 32,652 | 52,849 | |||||||||
| Loans purchased | — | — | — | |||||||||
| Financing activities: | ||||||||||||
| Increase (decrease) in deposits | $ | 24,955 | $ | 6,398 | $ | (21,112 | ) | |||||
| Increase (decrease) in FHLB advances | (5,000 | ) | — | — | ||||||||
| Increase (decrease) in subordinated debt | (7,311 | ) | (3,146 | ) | (5,263 | ) | ||||||
The Company is a separate legal entity from Ocean City Home Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, and interest and principal on outstanding debt, if any. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from Ocean City Home Bank. The amount of dividends that Ocean City Home Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Federal Reserve Board and the Office of the Comptroller of the Currency, but with prior notice to the Federal Reserve Board and the Office of the Comptroller of the Currency, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. The Company received dividends from Ocean City Home Bank for the years ended December 31, 2015, 2014 and 2013 of $9.0 million, $9.0 million and $6.0 million, respectively. At December 31, 2015, the Company had liquid assets of $4.0 million.
Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Under these requirements the federal bank regulatory agencies have established quantitative measures to ensure that minimum thresholds for Tier 1 Capital, Common Equity Tier 1 Capital, Total Capital and Leverage (Tier 1 Capital divided by average assets) ratios are maintained. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary, actions by regulators that could have a direct material effect on our operations and financial position. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Ocean City Home Bank must meet specific capital guidelines that involve quantitative measures of assets and certain off-balance sheet items as calculated under regulatory accounting practices. It is our intention to maintain “well-capitalized” risk-based capital levels. Company capital amounts and classifications are also subject to qualitative judgments by the federal bank regulators about components, risk weightings, and other factors. At December 31, 2015, the Company and Ocean City Home Bank exceeded all of their regulatory capital requirements and are considered “well capitalized” under regulatory guidelines.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America, 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 information about our loan commitments and unused lines of credit, see note 10 of the notes to the consolidated financial statements.
For the years ended December 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.
Impact of Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see note 2 of the notes to the consolidated financial statements included in this Form 10-K.
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Effect of Inflation and Changing Prices
The financial statements and related financial data presented in this Form 10-K have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Part II, Item 7, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, utilizing the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2015 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ocean Shore Holding Co. and subsidiaries:
We have audited the internal control over financial reporting of Ocean Shore Holding Co. and subsidiaries (the “Company”) as of December 31, 2015 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management's Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated March 11, 2016 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Philadelphia, PA
March 11, 2016
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ocean Shore Holding Co. and subsidiaries:
We have audited the accompanying consolidated statements of financial condition of Ocean Shore Holding Co. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, statement of changes in equity, and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ocean Shore Holding Co. and subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on criteria established in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Philadelphia, PA
March 11, 2016
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| OCEAN SHORE HOLDING CO. AND SUBSIDIARIES | |||
| CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | |||
| (Dollars in thousands, except par value amounts) |
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Cash and amounts due from depository institutions | $ | 7,496 | $ | 9,023 | ||||
| Interest-earning bank balances | 80,214 | 71,284 | ||||||
| Cash and cash equivalents | 87,710 | 80,307 | ||||||
| Investment securities held to maturity (estimated fair value— $1,137 at December 31, 2015 and $1,278 at December 31, 2014) | 1,084 | 1,201 | ||||||
| Investment securities available for sale (amortized cost— $113,944 at December 31, 2015 and $112,205 at December 31, 2014) | 111,908 | 110,116 | ||||||
| Loans—net of allowance for loan losses of $3,190 and $3,760 at December 31, 2015 and 2014 | 783,948 | 774,017 | ||||||
| Accrued interest receivable: | ||||||||
| Loans | 2,330 | 2,304 | ||||||
| Investment securities | 21 | 33 | ||||||
| Federal Home Loan Bank stock—at cost | 5,864 | 6,039 | ||||||
| Office properties and equipment—net | 12,359 | 12,870 | ||||||
| Prepaid expenses and other assets | 2,242 | 3,161 | ||||||
| Real estate owned | 1,814 | 650 | ||||||
| Cash surrender value of life insurance | 24,457 | 23,828 | ||||||
| Deferred tax asset | 4,572 | 5,062 | ||||||
| Goodwill | 4,630 | 4,630 | ||||||
| Other intangible assets | 440 | 536 | ||||||
| TOTAL ASSETS | $ | 1,043,379 | $ | 1,024,754 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Non-interest bearing deposits | $ | 190,614 | $ | 98,417 | ||||
| Interest bearing deposits | 621,419 | 688,661 | ||||||
| Advances from Federal Home Loan Bank | 105,000 | 110,000 | ||||||
| Junior subordinated debentures | - | 7,217 | ||||||
| Advances from borrowers for taxes and insurance | 4,591 | 4,026 | ||||||
| Accrued interest payable | 589 | 879 | ||||||
| Other liabilities | 9,377 | 9,743 | ||||||
| Total liabilities | 931,590 | 918,943 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||
| 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 issued, 6,403,058 and 6,393,344 outstanding shares at December 31, 2015 and 2014 | 73 | 73 | ||||||
| Additional paid in capital | 66,397 | 66,059 | ||||||
| Retained earnings - partially restricted | 62,480 | 57,055 | ||||||
| Treasury stock - at cost: 904,532 and 914,246 at December 31, 2015 and 2014 | (12,694 | ) | (12,678 | ) | ||||
| Common stock acquired by employee benefit plans | (2,297 | ) | (2,639 | ) | ||||
| Deferred compensation plans trust | (783 | ) | (608 | ) | ||||
| Accumulated other comprehensive loss | (1,387 | ) | (1,451 | ) | ||||
| Total stockholders' equity | 111,789 | 105,811 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,043,379 | $ | 1,024,754 | ||||
See notes to consolidated financial statements.
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| OCEAN SHORE HOLDING CO. AND SUBSIDIARIES | ||||
| CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME | ||||
| (Dollars in thousands, except per share amounts) | Years Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| INTEREST AND DIVIDEND INCOME: | ||||||||||||
| Taxable interest and fees on loans | $ | 32,715 | $ | 32,785 | $ | 32,094 | ||||||
| Taxable interest on mortgage-backed securities | 1,408 | 1,368 | 1,393 | |||||||||
| Non-taxable interest on municipal securities | 4 | 7 | 69 | |||||||||
| Taxable interest and dividends on investments securities | 1,023 | 1,207 | 1,416 | |||||||||
| Total interest and dividend income | 35,150 | 35,367 | 34,972 | |||||||||
| INTEREST EXPENSE: | ||||||||||||
| Deposits | 2,537 | 2,546 | 3,053 | |||||||||
| Borrowings | 4,159 | 5,020 | 5,459 | |||||||||
| Total interest expense | 6,696 | 7,566 | 8,512 | |||||||||
| NET INTEREST INCOME | 28,454 | 27,801 | 26,460 | |||||||||
| PROVISION FOR LOAN LOSSES | 689 | 462 | 757 | |||||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 27,765 | 27,339 | 25,703 | |||||||||
| OTHER INCOME: | ||||||||||||
| Service charges | 1,986 | 1,753 | 2,098 | |||||||||
| Increase in cash surrender value of life insurance | 629 | 633 | 665 | |||||||||
| Gain on sale or call of securities | 3 | 95 | 3 | |||||||||
| Other | 1,772 | 1,765 | 1,697 | |||||||||
| Total other income | 4,390 | 4,246 | 4,463 | |||||||||
| OTHER EXPENSES: | ||||||||||||
| Salaries and employee benefits | 12,864 | 12,684 | 12,436 | |||||||||
| Occupancy and equipment | 5,001 | 5,095 | 5,100 | |||||||||
| Federal insurance premiums | 551 | 535 | 541 | |||||||||
| Advertising | 419 | 429 | 412 | |||||||||
| Professional services | 1,054 | 1,035 | 1,318 | |||||||||
| Real estate owned activity | 144 | 61 | 270 | |||||||||
| Charitable contributions | 178 | 141 | 147 | |||||||||
| Other operating expenses | 1,677 | 1,785 | 1,748 | |||||||||
| Total other expenses | 21,888 | 21,765 | 21,972 | |||||||||
| INCOME BEFORE INCOME TAXES | 10,267 | 9,820 | 8,194 | |||||||||
| INCOME TAXES: | ||||||||||||
| Current | 2,936 | 4,587 | 1,238 | |||||||||
| Deferred | 463 | (1,065 | ) | 1,607 | ||||||||
| Total income taxes | 3,399 | 3,522 | 2,845 | |||||||||
| NET INCOME | $ | 6,868 | $ | 6,298 | $ | 5,349 | ||||||
| OTHER COMPREHENSIVE INCOME, NET OF TAX | ||||||||||||
| Unrealized gain (loss) on available for sale securities | 27 | 1,375 | (2,761 | ) | ||||||||
| Unrealized gain (loss) on post retirement life benefit | 37 | (159 | ) | 138 | ||||||||
| Total other comprehensive income, net of tax | 64 | 1,216 | (2,623 | ) | ||||||||
| TOTAL COMPREHENSIVE INCOME | $ | 6,932 | $ | 7,514 | $ | 2,726 | ||||||
| Earnings per share basic | $ | 1.14 | $ | 1.00 | $ | 0.82 | ||||||
| Earnings per share diluted | $ | 1.12 | $ | 0.98 | $ | 0.81 | ||||||
See notes to consolidated financial statements.
| 56 |
| OCEAN SHORE HOLDING CO. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY |
| FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 |
| (Dollars in thousands) | Common Stock | Deferred | Accumulated | |||||||||||||||||||||||||||||
| Additional | Acquired for | Compensation | Other | Total | ||||||||||||||||||||||||||||
| Common | Paid-In | Retained | Treasury | Employee | Plans | Comprehensive | Stockholders' | |||||||||||||||||||||||||
| Stock | Capital | Earnings | Stock | Benefit Plans | Trust | (Loss) | Equity | |||||||||||||||||||||||||
| BALANCE— January 1, 2013 | $ | 73 | $ | 64,842 | $ | 48,518 | $ | (4,777 | ) | $ | (3,323 | ) | $ | (561 | ) | $ | (44 | ) | $ | 104,776 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | - | - | 5,349 | - | - | - | - | 5,349 | ||||||||||||||||||||||||
| Other comprehensive income— | ||||||||||||||||||||||||||||||||
| Unrealized holding loss arising from adjustment to Post Retirment Life Benefit | - | - | - | - | - | - | 138 | 138 | ||||||||||||||||||||||||
| Unrealized holding gain arising during the period (net of tax of ($1,854)) | - | - | - | - | - | - | (2,761 | ) | (2,761 | ) | ||||||||||||||||||||||
| Total comprehensive income | 2,726 | |||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | (965 | ) | - | - | - | (965 | ) | ||||||||||||||||||||||
| Unallocated ESOP shares commited to employees | - | - | - | - | 342 | - | - | 342 | ||||||||||||||||||||||||
| Excess of fair value above cost of ESOP shares committed to be released | - | 178 | - | - | - | - | - | 178 | ||||||||||||||||||||||||
| Non-vested shares | - | 218 | - | - | - | - | - | 218 | ||||||||||||||||||||||||
| Stock options | - | 163 | - | - | - | - | - | 163 | ||||||||||||||||||||||||
| Stock options Exercised | - | - | - | 438 | - | - | - | 438 | ||||||||||||||||||||||||
| Purchase of shares by deferred compensation plans trust | - | - | - | - | - | (25 | ) | - | (25 | ) | ||||||||||||||||||||||
| Current year dividends declared | - | - | (1,667 | ) | - | - | - | - | (1,667 | ) | ||||||||||||||||||||||
| Unallocated ESOP dividends applied to ESOP loan payment | - | - | 87 | - | - | - | - | 87 | ||||||||||||||||||||||||
| BALANCE— December 31, 2013 | $ | 73 | $ | 65,401 | $ | 52,287 | $ | (5,304 | ) | $ | (2,981 | ) | $ | (586 | ) | $ | (2,667 | ) | $ | 106,223 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | - | - | 6,298 | - | - | - | - | 6,298 | ||||||||||||||||||||||||
| Other comprehensive income— | ||||||||||||||||||||||||||||||||
| Unrealized holding loss arising from adjustment to Post Retirment Life Benefit | - | - | - | - | - | - | (159 | ) | (159 | ) | ||||||||||||||||||||||
| Unrealized holding gain arising during the period (net of tax of $923) | - | - | - | - | - | - | 1,375 | 1,375 | ||||||||||||||||||||||||
| Total comprehensive income | 7,514 | |||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | (7,473 | ) | - | - | - | (7,473 | ) | ||||||||||||||||||||||
| Unallocated ESOP shares commited to employees | - | - | - | - | 342 | - | - | 342 | ||||||||||||||||||||||||
| Excess of fair value above cost of ESOP shares committed to be released | - | 145 | - | - | - | - | - | 145 | ||||||||||||||||||||||||
| Non-vested shares | - | 361 | - | - | - | - | - | 361 | ||||||||||||||||||||||||
| Stock options | - | 184 | - | - | - | - | - | 184 | ||||||||||||||||||||||||
| Stock options Exercised | - | (32 | ) | - | 99 | - | - | - | 67 | |||||||||||||||||||||||
| Purchase of shares by deferred compensation plans trust | - | - | - | - | - | (22 | ) | - | (22 | ) | ||||||||||||||||||||||
| Current year dividends declared | - | - | (1,616 | ) | - | - | - | - | (1,616 | ) | ||||||||||||||||||||||
| Unallocated ESOP dividends applied to ESOP loan payment | - | - | 86 | - | - | - | - | 86 | ||||||||||||||||||||||||
| BALANCE— December 31, 2014 | $ | 73 | $ | 66,059 | $ | 57,055 | $ | (12,678 | ) | $ | (2,639 | ) | $ | (608 | ) | $ | (1,451 | ) | $ | 105,811 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | - | - | 6,868 | - | - | - | - | 6,868 | ||||||||||||||||||||||||
| Other comprehensive income— | ||||||||||||||||||||||||||||||||
| Unrealized holding loss arising from adjustment to Post Retirment Life Benefit | - | - | - | - | - | - | 37 | 37 | ||||||||||||||||||||||||
| Unrealized holding gain arising during the period (net of tax of -$26) | - | - | - | - | - | - | 27 | 27 | ||||||||||||||||||||||||
| Total comprehensive income | 6,932 | |||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | (3,608 | ) | - | - | - | (3,608 | ) | ||||||||||||||||||||||
| Unallocated ESOP shares commited to employees | - | - | - | - | 342 | - | - | 342 | ||||||||||||||||||||||||
| Excess of fair value above cost of ESOP shares committed to be released | - | 181 | - | - | - | - | - | 181 | ||||||||||||||||||||||||
| Non-vested shares | - | 299 | - | - | - | - | - | 299 | ||||||||||||||||||||||||
| Stock options | - | 175 | - | - | - | - | - | 175 | ||||||||||||||||||||||||
| Stock options Exercised | - | (317 | ) | - | 3,592 | - | - | - | 3,275 | |||||||||||||||||||||||
| Purchase of shares by deferred compensation plans trust | - | - | - | - | - | (175 | ) | - | (175 | ) | ||||||||||||||||||||||
| Current year dividends declared | - | - | (1,514 | ) | - | - | - | - | (1,514 | ) | ||||||||||||||||||||||
| Unallocated ESOP dividends applied to ESOP loan payment | - | - | 71 | - | - | - | - | 71 | ||||||||||||||||||||||||
| BALANCE— December 31, 2015 | $ | 73 | $ | 66,397 | $ | 62,480 | $ | (12,694 | ) | $ | (2,297 | ) | $ | (783 | ) | $ | (1,387 | ) | $ | 111,789 | ||||||||||||
See notes to consolidated financial statements.
| 57 |
| OCEAN SHORE HOLDING CO. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Dollars in thousands) | ||||||||||||
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 6,868 | $ | 6,298 | $ | 5,349 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 878 | 1,280 | 600 | |||||||||
| Provision for loan losses | 689 | 462 | 757 | |||||||||
| Deferred income taxes | 463 | (1,065 | ) | 1,607 | ||||||||
| Stock based compensation expense | 997 | 1,032 | 903 | |||||||||
| Gain on sale/call of AFS securities | (3 | ) | (95 | ) | (3 | ) | ||||||
| Premium paid on redemption of junior subordinated debt | 94 | 54 | 112 | |||||||||
| Cash surrender value of life insurance | (629 | ) | (633 | ) | (665 | ) | ||||||
| Loss on sale of office properties and equipment | 1 | - | - | |||||||||
| Valuation adjustment on real estate owned | 59 | - | - | |||||||||
| Changes in assets and liabilities which provided (used) cash: | ||||||||||||
| Accrued interest receivable | (14 | ) | 196 | 48 | ||||||||
| Prepaid expenses and other assets | 919 | (99 | ) | 2,512 | ||||||||
| Accrued interest payable | (290 | ) | (145 | ) | (233 | ) | ||||||
| Other liabilities | (329 | ) | 1,439 | (287 | ) | |||||||
| Net cash provided by operating activities | 9,703 | 8,724 | 10,700 | |||||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Principal collected on: | ||||||||||||
| Mortgage-backed securities available for sale | 12,060 | 10,290 | 6,541 | |||||||||
| Mortgage-backed securities held to maturity | 198 | 277 | 437 | |||||||||
| Collateralized mortgage obligations | - | - | - | |||||||||
| Agency securities available for sale | - | - | - | |||||||||
| Loans originated, net of repayments | (12,471 | ) | (30,527 | ) | (42,800 | ) | ||||||
| Purchases of: | ||||||||||||
| Loans receivable | - | - | - | |||||||||
| Investment securities held to maturity | (577 | ) | (494 | ) | (2,328 | ) | ||||||
| Investment securities available for sale | (25,177 | ) | (32,158 | ) | (50,013 | ) | ||||||
| Office properties and equipment | (362 | ) | (661 | ) | (643 | ) | ||||||
| Federal Home Loan Bank stock | (50 | ) | (82 | ) | - | |||||||
| Life insurance contracts | - | - | - | |||||||||
| Proceeds from sales of: | ||||||||||||
| Federal Home Loan Bank stock | 225 | 363 | 70 | |||||||||
| Investment securities available for sale | - | 1,290 | - | |||||||||
| Premise owned | - | - | - | |||||||||
| Real estate owned | 902 | 720 | 1,573 | |||||||||
| Proceeds from maturities and calls of: | ||||||||||||
| Investment securities held to maturity | 494 | 2,328 | 9,143 | |||||||||
| Investment securities available for sale | 11,200 | 38,000 | 20,032 | |||||||||
| Mortgage-backed securities available for sale | - | - | - | |||||||||
| Cash used for acquistion, net of cash acquired | - | - | - | |||||||||
| Net cash used in investing activities | (13,558 | ) | (10,654 | ) | (57,988 | ) | ||||||
| (Continued) |
| 58 |
OCEAN SHORE HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| FINANCING ACTIVITIES: | ||||||||||||
| Increase (decrease) in deposits | $ | 24,955 | $ | 6,398 | $ | (21,112 | ) | |||||
| Advances from Federal Home Loan Bank, net | (5,000 | ) | - | - | ||||||||
| Dividends paid | (1,514 | ) | (1,616 | ) | (1,667 | ) | ||||||
| Purchase of shares by deferred compensation plans trust | (175 | ) | (22 | ) | (24 | ) | ||||||
| Purchase of treasury stock | (3,608 | ) | (7,473 | ) | (966 | ) | ||||||
| Stock options exercised | 3,275 | 67 | 436 | |||||||||
| Unallocated ESOP dividends applied to ESOP loan | 71 | 86 | 87 | |||||||||
| Decrease in advances from borrowers for taxes and insurance | 565 | 324 | (6 | ) | ||||||||
| Redemption of junior subordinated debt | (7,311 | ) | (3,146 | ) | (5,263 | ) | ||||||
| Net cash provided by (used in) financing activities | 11,258 | (5,382 | ) | (28,515 | ) | |||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 7,403 | (7,312 | ) | (75,803 | ) | |||||||
| CASH AND CASH EQUIVALENTS—Beginning of period | 80,307 | 87,619 | 163,422 | |||||||||
| CASH AND CASH EQUIVALENTS—End of period | $ | 87,710 | $ | 80,307 | $ | 87,619 | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW | ||||||||||||
| INFORMATION—Cash paid during the period for: | ||||||||||||
| Interest | $ | 6,892 | $ | 7,653 | $ | 8,690 | ||||||
| Income taxes | $ | 4,530 | $ | 2,684 | $ | 2,572 | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS | ||||||||||||
| Transfers of loans to real estate owned | $ | 2,126 | $ | 872 | $ | 1,165 | ||||||
See notes to consolidated financial statements.
| 59 |
OCEAN SHORE HOLDING CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables, except share and per share amounts, are in thousands)
| 1. | NATURE OF OPERATIONS |
Ocean Shore Holding Co. (“Company”) is the holding company for Ocean City Home Bank (“Bank”), a federally chartered savings bank. The Company is a unitary savings and loan holding company and conducts its operations primarily through the Bank. The Bank has three active subsidiaries, Seashore Financial Services, LLC, which receives commissions from referrals of insurance products, OCHB Preferred Corp, a New Jersey real estate investment trust and OCHB Investment Corp, a Delaware investment company.
The Bank’s market area consists of Atlantic and Cape May counties, New Jersey. Through a eleven-branch network, the Bank operates as a retail banking concern in the communities of Ocean City and Marmora within Cape May County, and Linwood, Ventnor, Margate, Mays Landing, Egg Harbor Township and Galloway Township within Atlantic County. The Bank is engaged in the business of attracting time and demand deposits from the general public, small businesses and municipalities, and investing such deposits primarily in residential mortgage loans, consumer loans and small commercial loans.
The Company’s outstanding common stock is traded on NASDAQ Global Select Market under the symbol “OSHC”. The Bank is subject to regulatory supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), its primary regulator, and the Federal Deposit Insurance Corporation (the “FDIC”) which insures its deposits. The Bank is a member of and owns capital stock in the Federal Home Loan Bank (the “FHLB”) of New York, which is one of the twelve regional banks that comprise the FHLB System.
| 2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation—The consolidated financial statements of the Company include the accounts of the Bank and its subsidiaries Seashore Financial LLC, OCHB Preferred Corp and OCHB Investment Corp and are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Intercompany accounts and transactions have been eliminated in consolidation.
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 and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. The most significant estimates and assumptions in the Company’s consolidated financial statements 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.
Subsequent Events—All material events that occurred after the date of the consolidated financial statements and before the consolidated financial statements were issued have been either recognized in the consolidated financial statements or disclosed in the Notes to the Consolidated Financial Statements. The Company evaluated events from the date of the consolidated financial statements on December 31, 2015 through the issuance of those consolidated financial statements included in this Annual Report on Form 10-K.
Segment Information —In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) FASB ASC 280, Segment Reporting (FASB ASC 280), the Company has one reportable operating segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings, and manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.
| 60 |
Business Combinations —The Company records the net assets of companies that are acquired at their estimated fair value at the date of acquisition, and includes the results of operations of the acquired companies in the Consolidated Income Statement from the date of acquisition. The Company recognizes, as goodwill, the excess of the acquisition price over the estimated fair value of the net assets acquired.
Treasury Stock— From time to time the Company may choose to reacquire some of its outstanding stock from its shareholders for retirement or resale. Common stock reacquired by the Company is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity equal to the cost of purchase.
The Company held 904,532 shares in treasury stock at a cost of $12.7 million at December 31, 2015 and 914,246 shares at a cost of $12.7 million at December 31, 2014.
During 2015, the Company repurchased 246,958 shares of the Company’s outstanding common stock for $3.6 million at a weighted average cost of $14.61 per share. Additionally, 256,672 shares were issued from treasury stock for exercised stock options totaling $3.3 million.
Concentration of Credit Risk—The majority of the Company’s loans are secured by 1 to 4 family real estate or made to businesses in Atlantic or Cape May Counties, New Jersey.
Investment Securities— The Company’s debt and equity securities include both those that are held to maturity and those that are available for sale. The purchase and sale of the Company’s debt securities are recorded as of the trade date. At December 31, 2015 and 2014, the Company had no unsettled purchases or sales of investment securities. The following provides further information on the Company’s accounting for debt securities:
| a. | Held to Maturity—Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security. |
| b. | Available for Sale—Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments, are classified as available for sale. These securities are carried at estimated fair value. Fair values are based on quoted prices for identical assets in active markets, quoted prices for similar assets in markets that are either actively or not actively traded, or, in some cases where there is limited activity or less transparency around inputs, internally developed discounted cash flow models. Unrealized gains and losses that are not concluded to be other than temporary, are excluded from earnings and are reported net of tax in other comprehensive income. Upon the sale of securities, any unamortized premium or unaccreted discount is considered in the determination of gain or loss from the sale. Realized gains and losses on the sale or call of investment securities are recorded as of the trade date, reported in the Consolidated Statements of Income and Comprehensive Income and determined using the adjusted cost of the specific security sold or called. The Company had no sales of securities for the year ended December 31, 2015 and sold $1.3 million of available for sale securities realizing a gain on sale of $84 thousand for the year ended 2014. |
| 61 |
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 325-40, Beneficial Interests in Securitized Financial Assets, and FASB ASC 320-10, Investments – Debt and Equity Securities, the Company evaluates its debt securities portfolio for other-than-temporary impairment (“OTTI”) throughout the year. Each investment that has a fair value less than the book value is reviewed on a quarterly basis by management. Management considers at a minimum the following factors that, both individually or in combination, could indicate that the decline is other-than-temporary: (a) the Company has the intent to sell the security; (b) it is more likely than not that it will be required to sell the security before recovery; and (c) the Company does not expect to recover the entire amortized cost basis of the security. An impairment charge is recorded if, based on the review described above, management concludes that the decline in value is other-than-temporary. Among the factors that are considered in determining intent is a review of capital adequacy, interest rate risk profile and liquidity at the Company. The guidance allows the Company to bifurcate the impact on securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors, when the security is not otherwise intended to be sold or is not required to be sold. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The portion of the fair value decline not attributable to credit loss is recognized through other comprehensive income. For securities accounted for under FASB ASC 320-10, the credit loss component is determined by comparing the present value of the cash flows expected to be collected, discounted at the effective interest rate implicit in the security at the date of acquisition, with the amortized cost basis of the debt security. For securities accounted for under FASB 325-40, if the present value of the original estimate at the initial transaction date (or the last date previously revised) of cash flows expected to be collected is greater than the present value of the current estimate of cash flows expected to be collected, the difference is considered to be the credit loss component. For all securities, the Company’s expected cash flow estimates include assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, The Company did not record any OTTI for the years ended December 31, 2015, 2014 and 2013.
Other investments include the Company's investment in the stock of the Federal Home Loan Bank ("FHLB") of New York. Although FHLB stock is an equity interest in an FHLB, it does not have a readily determinable fair value, because its ownership is restricted and it is not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to the FHLBs or to another member institution. Accordingly, FHLB stock is carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Deferred Loan Fees—The Bank defers all loan origination fees, net of certain direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using the level-yield method. Deferred loan fees are recorded as a component of “Loans – net” in the statement of financial condition.
Unearned Discounts and Premiums—Unearned discounts and premiums on loans, investments and mortgage-backed securities purchased are accreted and amortized, respectively, over the estimated life of the related asset using the interest method.
Office Properties and Equipment - Net—Office properties and equipment are recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the related assets as follows: buildings and improvements, ten to thirty nine years or at the lesser of the life of improvement or the lease; furniture and equipment, three to seven years. The costs of maintenance and repairs are expensed as incurred, and renewals and betterments are capitalized.
Real Estate Owned—Real estate owned is comprised of property acquired through foreclosure, in lieu of deed and bank property that is not in use. The property acquired through foreclosure is carried at the lower of the related loan balance or fair value of the property based on an appraisal less estimated cost to dispose. Losses arising from foreclosure transactions are charged against the allowance for loan losses. Bank property is carried at the lower of cost or fair value less estimated cost to dispose. Costs to maintain real estate owned and any subsequent gains or losses are included in the Company’s Consolidated Statements of Operations.
Bank Owned Life Insurance—The Company has purchased life insurance policies on certain key employees. The Bank is the primary beneficiary of insurance policies on the lives of officers and employees of the Bank. These policies are recorded at their cash surrender value and the Bank has recognized any increase in cash surrender value of life insurance, net of insurance costs, in the consolidated statements of income. The cash surrender value of the insurance policies is recorded as an asset in the statements of financial condition. The Company accounts for split dollar life insurance in accordance with FASB ASC 715-60, Defined Benefit Plans – Other Post-Retirement. The guidance provides for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement.
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Loans held for investment— Loans are reported net of loan origination fees, direct origination costs and discounts and premiums associated with purchased loans and unearned income. Interest on loans is credited to income as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest rate method. Premiums and discounts associated with loans purchased by the Bank are deferred and amortized as adjustments to interest income utilizing the effective interest rate method.
Certain loans acquired that result in recognition of a discount attributable, at least in part, to credit quality, and are not subsequently accounted for at fair value, are accounted for under the receivable topic of the FASB Accounting Standards Codification Section 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The excess of the estimated undiscounted principal, interest and other cash flows expected to be collected over the initial investment in the acquired loans is amortized to interest income over the expected life of the loans through the effective interest rate method. The amount amortized for the acquired loan pool is adjusted when there is an increase or decrease in the expected cash flows. Further, the Company assesses impairment on these acquired loan pools for which there has been a decrease in the expected cash flows. Impairment is measured based on the present value of the expected cash flows from the loan (including the estimated fair value of the underlying collateral), discounted using the loan's effective interest rate.
Loans are considered past due 16 days or more past the due date. Loans are considered delinquent if 30 days or more past due. Loans over 90 days past due are placed on non-accrual status. Payments received on non-accrual loans are applied to principal, interest and escrow on mortgage loans and to accrued interest followed by principal on all other loans. Loans are returned to accrual status when no payment is over 90 days past due. Unsecured loans are charged off when becoming more than 90 days past due. Secured loans are charged off to the extent the loan amount exceeds the appraised value of the collateral when over 90 days past due and management believes the uncollectability of the loan balance is confirmed.
A loan is determined to be impaired and non-accrual when, based upon current information and events, it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement. An insignificant delay (e.g., less than 90 days) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.
When a loan is placed on non-accrual status, all accrued yet uncollected interest is reversed from income. Payments received on non-accrual loans are generally applied to the outstanding principal balance. Interest income on impaired loans other than nonaccrual loans is recognized on an accrual basis. Interest income on nonaccrual loans is recognized only as collected.
Troubled debt restructurings (“TDRs”) are loans that have been modified whereby the Company has agreed to make certain concessions to customers to both meet the needs of the customers and maximize the ultimate recovery of the loan. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified involving a concession that would otherwise not be granted to the borrower. TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically defined as six months for a monthly amortizing loan). All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification will remain on the loan until it is paid in full or liquidated.
Impaired loans are defined as all TDRs plus non-accrual loans. In addition, the Company may perform a specific reserve analysis on loans where based on management’s judgment the nature of the collateral or business conditions warrant such an analysis.
Allowance for Loan Losses— The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to results of operations based on management’s evaluation of the estimated losses that have been incurred in the Company’s loan portfolio. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are the following: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio as of the balance sheet date.
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Management monitors its allowance for loan losses monthly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors such as historical loss experience, trends in delinquency and non-performing loans, changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions and trends are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio.
In determining the allowance for loan losses, management has established both general pooled and specific allowances. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for performing loans (general pooled allowance). The amount of the specific allowance is determined through a loan-by-loan analysis of non-performing loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on qualitative and quantitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, and external factors. If a loan is identified as impaired and is collateral dependent, an appraisal is obtained to provide a base line in determining whether the carrying amount of the loan exceeds the net realizable value. We recognize impairment through a provision estimate or a charge-off is recorded when management determines we will not collect 100% of a loan based on foreclosure of the collateral, less cost to sell the property, or the present value of expected cash flows.
As changes in our operating environment occur and as recent loss experience fluctuates, the factors for each category of loan based on type and risk rating will change to reflect current circumstances and the quality of the loan portfolio. Given that the components of the allowance are based partially on historical losses and on risk rating changes in response to recent events, required reserves may trail the emergence of any unforeseen deterioration in credit quality.
Goodwill and Core Deposit Intangibles—Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the purchase method. Core deposit intangibles are a measure of the value of checking, savings and other-low cost deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized over the estimated useful lives of the existing deposit relationships acquired, but not exceeding 15 years. The Company evaluates the identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.
Goodwill is not amortized on a recurring basis, but rather is subject to periodic impairment testing. Management performs an annual goodwill impairment test and whenever events occur or circumstances change that indicates the fair value of a reporting unit may be below its carrying value.
The Company performed goodwill impairment testing as of August 1, 2015 and 2014 and concluded that goodwill was not impaired. The Company did not have any indefinite-lived intangible assets as of December 31, 2015.
Loans Held for Sale and Loans Sold—The Bank originates mortgage loans held for investment and for sale. At origination, the mortgage loan is identified as either held for sale or for investment. Mortgage loans held for sale are carried at the lower of cost or forward committed contracts (which approximates market), determined on a net aggregate basis. The Bank had no loans classified as held for sale at December 31, 2015 and 2014. The Bank did not sell any loans in 2015 or 2014.
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Income Taxes—The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes. FASB ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income as well as judgments about availability of capital gains. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. Further, an inability to employ a qualifying tax strategy to utilize our deferred tax asset arising from capital losses may give rise to an additional valuation allowance. An increase in the valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. FASB ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. When applicable, we recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated statement of income. Assessment of uncertain tax positions under FASB ASC 740 requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Judgment may be involved in applying the requirements of FASB ASC 740.
Our adherence to FASB ASC 740 may result in increased volatility in quarterly and annual effective income tax rates, as FASB ASC 740 requires that any change in judgment or change in measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.
Interest Rate Risk—The Bank is engaged principally in providing first mortgage loans to borrowers. At December 31, 2015 and 2014, approximately two-thirds of the Bank’s assets consisted of assets that earned interest at fixed interest rates. Those assets were funded with long-term fixed rate liabilities and with short-term liabilities that have interest rates that vary with market rates over time. The shorter duration of the interest-sensitive liabilities indicates that the Bank is exposed to interest rate risk because, in a rising rate environment, liabilities will be repricing faster at higher interest rates, thereby reducing the market value of long-term assets and net interest income.
Earnings Per Share—Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock 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 of common shares sold during the period.
Other Comprehensive Income (Loss)—The Company classifies items of other comprehensive income (loss) by their nature and displays the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in capital in the equity section of the Consolidated Statements of Financial Condition. Amounts categorized as other comprehensive income (loss) represent net unrealized gains or losses on investment securities available for sale and post-retirement benefits, net of tax of $781 thousand. Reclassifications are made to avoid double counting in comprehensive income (loss) items which are displayed as part of net income for the period. There are no reclassifications during the period ending December 31, 2015. Reclassification adjustments recognized in Accumulated Other Comprehensive Income during the period ending December 31, 2014 are as follows:
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| Accumulated Other Comprehensive Income (Loss) | ||||||||||||
| Year Ended December 31, 2014 | ||||||||||||
| Pre-tax | Tax | After-tax | ||||||||||
| Unrealized holding loss on securities available for sale during the period | $ | (2,184 | ) | $ | 841 | $ | (1,343 | ) | ||||
| Reclassification adjustment for net gains included in net income | 95 | (34 | ) | 61 | ||||||||
| Net unrealized loss on securities available for sale | $ | (2,089 | ) | $ | 807 | $ | (1,282 | ) | ||||
The following table presents the changes in Accumulated Other Comprehensive Income (Loss) by component as of December 31, 2015 and 2014.
| Accumulated Other Comprehensive Income (Loss) | ||||||||||||
| Year Ended December 31, 2015 | ||||||||||||
| Unrealized | Accumulated | |||||||||||
| Unrealized | Loss on | Other | ||||||||||
| Gains(Loss) on | Post Retirement | Comprehensive | ||||||||||
| AFS Securities | Life | Income | ||||||||||
| Beginning balance | $ | (1,282 | ) | $ | (169 | ) | $ | (1,451 | ) | |||
| Current-period change | 53 | 36 | 89 | |||||||||
| Tax Benefit | (26 | ) | - | (26 | ) | |||||||
| Ending Balance | $ | (1,255 | ) | $ | (133 | ) | $ | (1,388 | ) | |||
| Year Ended December 31, 2014 | ||||||||||||
| Unrealized | Accumulated | |||||||||||
| Unrealized | Loss on | Other | ||||||||||
| Gains(Loss) on | Post Retirement | Comprehensive | ||||||||||
| Beginning balance | AFS Securities | Life | Income | |||||||||
| Current-period change | $ | (2,761 | ) | $ | (10 | ) | $ | (2,771 | ) | |||
| Tax Benefit | 2,402 | (159 | ) | 2,243 | ||||||||
| Ending Balance | (923 | ) | - | (923 | ) | |||||||
| $ | (1,282 | ) | $ | (169 | ) | $ | (1,451 | ) | ||||
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.
Determining the fair value of stock-based awards at measurement date requires judgment, including estimating the expected term of the stock options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on the Company’s consolidated financial statements.
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In accordance with FASB ASC 718, the fair value of the stock options granted is estimated on the date of the grant using the Black-Scholes option pricing model which uses the assumptions noted in the table below. Stock options have been historically granted a for a 10 year term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term of the option is the estimated time the option will be exercised. The expected volatility is based on the historical volatility of the Company’s stock price.
The Equity Plans authorize the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price equal to the fair market value of the common stock on the grant date. Options will generally become vested and exercisable at the rate of 20% per year over five years. A total of 380,407 shares of common stock have been approved for issuance pursuant to the grant of stock options under the Equity Plans. At December 31, 2015, 1,040 options issued in 2013, 1,200 options granted in 2011, 20,620 options issued in 2010, 3,524 options issued in 2007, 3,520 options issued in 2006 and 54,100 options issued in 2005 have been forfeited. At December 31, 2015, 313,087 shares have been issued upon the exercise of stock options. No options were granted in 2015 or 2014.
Common Stock Acquired for Employee Benefit Plans—Unearned ESOP shares are not considered outstanding for calculating net income per common share and are shown as a reduction of stockholders’ equity and presented as Common Stock Acquired for Employee Benefit Plans. During the period the ESOP shares are committed to be released, the Company recognizes compensation cost equal to the fair value of the ESOP shares. When the shares are released, Common Stock Acquired for Employee Benefit Plans is reduced by the cost of the ESOP shares released and the differential between the fair value and the cost is charged/credited to additional paid-in capital. The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability in the Company’s consolidated financial statements. At December 31, 2015 and 2014, unearned ESOP shares totaled 258,233 and 292,500 shares, respectively.
Statement of Cash Flows—For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
New Accounting Pronouncements — In January 2014, the FASB issued 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.
In May 2014, the FASB issued ASU 2014-09, which created 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 first reporting period ending after December 15, 2017. Early adoption would be permitted as of the original effective date in ASU 2014-09 which is the first reporting period ending after December 15, 2016. The adoption of the amended guidance is currently being evaluated by the Company.
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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.
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.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires that 1) equity investments, except those accounted for under the equity method of accounting or result in consolidation of the investee, be measured at fair value with changes in the fair value being recorded in net income, unless those equity investments do not have readily determinable fair values in which case they will be measured at cost less impairment, if any, plus the effect of changes resulting from observable price transactions in orderly transactions or for the identical or similar investment of the same issuer, 2) simplifies the impairment assessment of equity instruments that do not have readily determinable fair values, 3) eliminates the requirement to disclose methods and assumptions used to estimate fair value of instruments measured at amortized cost on the balance sheet, 4) requires public entities to use "exit price" when measuring the fair value of financial instruments, 5) requires entities to separately present in other comprehensive income the portion of the total change in fair value of a liability resulting from instrument-specific credit risk when the fair value option has been elected for that liability, 6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes, and 7) clarifies that an entity should evaluate the need for a valuation allowance on its deferred tax asset related to its available-for-sale securities in combination with its other deferred tax assets. This amendment will be effective for the Company for the first reporting period beginning after December 15, 2017, with earlier adoption permitted by public entities on a limited basis. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values which should be applied prospectively. Earlier application is permitted. The Company is in the process of evaluating the impacts of the adoption of this ASU.
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3. INVESTMENT SECURITIES
Investment securities are summarized as follows:
| December 31, 2015 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gain | Loss | Value | |||||||||||||
| Held to Maturity | ||||||||||||||||
| Debt Securities - Municipal | $ | 577 | $ | - | $ | - | $ | 577 | ||||||||
| US treasury and government sponsored entity mortgage-backed securities | 507 | 53 | - | 560 | ||||||||||||
| Totals | $ | 1,084 | $ | 53 | $ | - | $ | 1,137 | ||||||||
| Available for Sale | ||||||||||||||||
| Debt securities: | ||||||||||||||||
| Corporate | $ | 9,660 | $ | 26 | $ | (842 | ) | $ | 8,844 | |||||||
| US treasury and federal agencies | 10,033 | 7 | - | 10,040 | ||||||||||||
| Equity securities | 3 | 39 | - | 42 | ||||||||||||
| US treasury and government sponsored entity mortgage-backed securities | 94,248 | 223 | (1,489 | ) | 92,982 | |||||||||||
| Totals | $ | 113,944 | $ | 295 | $ | (2,331 | ) | $ | 111,908 | |||||||
| December 31, 2014 | ||||||||||||||||
| Gross | Gross | Estimated | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gain | Loss | Value | |||||||||||||
| Held to Maturity | ||||||||||||||||
| Debt Securities – Municipal | $ | 494 | $ | - | $ | - | $ | 494 | ||||||||
| US 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 | |||||||
| US treasury and federal agencies | 21,223 | 6 | (238 | ) | 20,991 | |||||||||||
| Equity securities | 3 | 25 | - | 28 | ||||||||||||
| US treasury and government sponsored entity mortgage-backed securities | 81,383 | 278 | (1,403 | ) | 80,258 | |||||||||||
| Totals | $ | 112,205 | $ | 408 | $ | (2,497 | ) | $ | 110,116 | |||||||
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As of December 31, 2015 and 2014, the Company had investment securities available for sale with an estimated fair value of $97.9 million and $105.1 million, respectively, pledged as collateral to secure public fund deposits. The decrease in held to maturity investment in 2015 from 2014 resulted from municipal maturities and principal repayments received on mortgage-backed securities.
The Company's municipal bond portfolio consists of unrated general obligation bonds of local municipalities maturing in less than one year.
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 December 31, 2015 and 2014:
| December 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 | |||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Corporate | $ | - | $ | - | $ | 2,843 | $ | (842 | ) | $ | 2,843 | $ | (842 | ) | ||||||||||
| US treasuries and federal agencies | - | - | - | - | - | - | ||||||||||||||||||
| US Treasury and government sponsored entity mortgage-backed securities | 20,704 | (217 | ) | 51,821 | (1,272 | ) | 72,525 | (1,489 | ) | |||||||||||||||
| Totals | $ | 20,704 | $ | (217 | ) | $ | 54,664 | $ | (2,114 | ) | $ | 75,368 | $ | (2,331 | ) | |||||||||
| 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 | |||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Corporate | $ | - | $ | - | $ | 2,826 | $ | (856 | ) | $ | 2,826 | $ | (856 | ) | ||||||||||
| US treasuries and federal agencies | 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 | ) | |||||||||||||||
| Totals | $ | 15,123 | $ | (22 | ) | $ | 78,613 | $ | (2,475 | ) | $ | 93,736 | $ | (2,497 | ) | |||||||||
Management has reviewed its investment securities as of December 31, 2015 and 2014 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.
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, OTTI is concluded to exists and the Company only recognizes currently in earnings the amount of decline in value attributable to credit deterioration, with the remaining component of OTTI is presented in other comprehensive income.
| 70 |
Corporate Debt Securities – The Company’s investments in corporate debt securities consist of corporate debt securities issued by large financial institutions and single issuer and CDOs backed by bank trust preferred capital securities.
At December 31, 2015 and 2014, 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 22.9% 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 December 31, 2015 and 2014, 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 contractual terms and the Company’s intent not to sell these investments for a period of time sufficient to allow for the anticipated recovery of amortized cost, which may be maturity. The Company expects recovery of amortized cost when market conditions have stabilized and that the Company will receive all contractual principal and interest payments related to those investments.
United States Treasury and Government Sponsored Enterprise Mortgage-backed Securities - The Company’s investments in United States government sponsored enterprise notes consist of debt obligations of the Federal Home Loan Bank (“FHLB”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”). At December 31, 2015, 13 agency and agency mortgage-backed securities had been in a continuous unrealized loss position for 12 months or longer. Those securities had aggregate depreciation of 2.4% from the Company’s amortized cost basis. These securities were performing in accordance with their contractual terms as of December 31, 2015, and had paid all contractual cash flows since the Company’s initial investment. Management concluded that the decline in value is attributable to rising interest rate environment and depressed pricing on lower yielding investments with prolonged maturities. Management concluded that these unrealized losses are not other-than-temporary. This is based upon the Company’s analysis that the securities will perform in accordance with their terms and the Company’s intent not to sell or lack of requirement to sell these investments for a period of time sufficient to allow for the anticipated recovery of amortized cost, which may be maturity. The Company expects recovery of amortized cost when market conditions have stabilized and that the Company will receive all contractual principal and interest payments related to those investments.
At December 31, 2014, 15 agency and agency mortgage-backed securities had been in a continuous unrealized loss position for 12 months or longer. Those securities had aggregate depreciation of 2.1% from the Company’s amortized cost basis. These securities were performing in accordance with their contractual terms as of December 31, 2014, and had paid all contractual cash flows since the Company’s initial investment. Management concluded that the decline in value is attributable to rising interest rate environment and depressed pricing on lower yielding investments with prolonged maturities. Management concluded that these unrealized losses are not other-than-temporary. This is based upon the Company’s analysis that the securities will perform in accordance with their terms and the Company’s intent not to sell or lack of requirement to sell these investments for a period of time sufficient to allow for the anticipated recovery of amortized cost, which may be maturity. The Company expects recovery of amortized cost when market conditions have stabilized and that the Company will receive all contractual principal and interest payments related to those investments.
The amortized cost and estimated fair value of debt securities available for sale at December 31, 2015 and 2014 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.
| 71 |
| December 31, 2015 | ||||||||||||||||
| Held to Maturity | Available for Sale Securities | |||||||||||||||
| Estimated | Estimated | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Due within 1 year | $ | 577 | $ | 577 | $ | 5,974 | $ | 6,001 | ||||||||
| Due after 1 year through 5 years | - | - | 33 | 33 | ||||||||||||
| Due after 5 years through 10 years | - | - | 10,000 | 10,007 | ||||||||||||
| Due after 10 years | - | - | 3,686 | 2,844 | ||||||||||||
| Total | $ | 577 | $ | 577 | $ | 19,693 | $ | 18,885 | ||||||||
| December 31, 2014 | ||||||||||||||||
| Held to Maturity | Available for Sale Securities | |||||||||||||||
| Estimated | Estimated | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Due within 1 year | $ | 494 | $ | 494 | $ | - | $ | - | ||||||||
| Due after 1 year through 5 years | - | - | 5,948 | 6,047 | ||||||||||||
| Due after 5 years through 10 years | - | - | 11,189 | 11,190 | ||||||||||||
| Due after 10 years | - | - | 13,683 | 12,593 | ||||||||||||
| Total | $ | 494 | $ | 494 | $ | 30,820 | $ | 29,830 | ||||||||
Equity securities had a cost of $3 thousand and a fair value of $42 thousand as of December 31, 2015 and a cost of $3 thousand and a fair value of $28 thousand as of December 31, 2014. Mortgage-backed securities had a cost of $94.8 million and a fair value of $93.5 million as of December 31, 2015 and a cost of $82.1 million and a fair value of $81.0 million as of December 31, 2014.
| 72 |
4. LOANS RECEIVABLE—NET
Loans receivable consist of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Real estate - mortgage: | ||||||||
| One-to-four family residential | $ | 607,807 | $ | 587,399 | ||||
| Commercial and multi-family | 84,075 | 89,778 | ||||||
| Total real - estate mortgage | 691,882 | 677,177 | ||||||
| Real estate - construction: | ||||||||
| Residential | 14,960 | 16,030 | ||||||
| Commercial | 3,595 | 4,141 | ||||||
| Total real estate - construction | 18,555 | 20,171 | ||||||
| Commercial | 21,383 | 22,277 | ||||||
| Consumer | ||||||||
| Home equity | 51,001 | 54,279 | ||||||
| Other consumer loans | 431 | 377 | ||||||
| Total consumer loans | 51,432 | 54,656 | ||||||
| Total loans | 783,252 | 774,281 | ||||||
| Net deferred loan cost | 3,886 | 3,496 | ||||||
| Allowance for loan losses | (3,190 | ) | (3,760 | ) | ||||
| Net total loans | $ | 783,948 | $ | 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.
The Bank originates and purchases both fixed and adjustable interest rate loans. At December 31, 2015 and 2014, the composition of these loans was approximately $579.7 million and $567.6 million, respectively, of fixed rate loans and $203.5 million and $206.7 million, respectively, of adjustable rate loans.
Interest income on loans is accrued based on the contractual interest rate and the principal amount outstanding, except for those loans classified as non-accrual. At December 31, 2015 and December 31, 2014, accrued interest receivable on the Company's loans was $2.3 million and $2.3 million, respectively.
Changes in the allowance for loan losses are as follows:
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Balance, beginning of year | $ | 3,760 | $ | 4,199 | $ | 3,997 | ||||||
| Provision for loan loss | 689 | 462 | 757 | |||||||||
| Charge-offs | (1,259 | ) | (977 | ) | (568 | ) | ||||||
| Recoveries | - | 76 | 13 | |||||||||
| Balance, end of year | $ | 3,190 | $ | 3,760 | $ | 4,199 | ||||||
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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 at December 31, 2015 and 2014 consisted of non-accrual loans that amounted to $5.0 million and $5.6 million, respectively, non-accrual troubled debt restructurings of $708 thousand and $694, respectively and real estate owned of $1.8 million and $650 thousand, respectively. The reserve for delinquent interest on loans totaled $337 thousand and $423 thousand at December 31, 2015 and 2014, respectively.
Year-end non-performing assets segregated by class of loans are as follows:
| 2015 | 2014 | |||||||
| Real estate - mortgage | ||||||||
| 1-4 family residential | $ | 2,597 | $ | 3,626 | ||||
| Commercial and multi-family | 1,580 | 803 | ||||||
| Real estate - construction | 143 | 143 | ||||||
| Commercial | 41 | 501 | ||||||
| Consumer | 601 | 502 | ||||||
| Non-accrual loans | 4,962 | 5,575 | ||||||
| Troubled debt restructuring, non-accrual | 708 | 694 | ||||||
| Total non-performing loans | 5,670 | 6,269 | ||||||
| Real estate owned | 1,814 | 650 | ||||||
| Total non-performing assets | $ | 7,484 | $ | 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 year-ended December 31, 2015:
| Contractual Receivable Amount | Nonaccretable (Yield) / Premium | Accretable (Yield)/ Premium | Carrying Amount | |||||||||||||
| Balance at January 1, 2015 | $ | 44,216 | $ | (2,540 | ) | $ | 542 | $ | 42,218 | |||||||
| Principal Reductions | (5,478 | ) | - | - | (5,478 | ) | ||||||||||
| Charge-offs, net | (117 | ) | 117 | - | - | |||||||||||
| Accretion of loan discount (premium) | - | - | (116 | ) | (116 | ) | ||||||||||
| Transfer between nonaccretable and accretable yield | - | - | - | - | ||||||||||||
| Settlement Adjustments | - | - | - | - | ||||||||||||
| Balance at December 31, 2015 | $ | 38,621 | $ | (2,423 | ) | $ | 426 | $ | 36,624 | |||||||
Portfolio segments and classes of financing receivables
U.S. GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and "classes of financing receivables" based on management’s systematic methodology for determining the allowance for credit losses. For this, compared to the financial statement categorization of loans, the Company utilizes an alternate categorization to model and calculate the allowance for credit losses and track the credit quality, delinquency and impairment status of the underlying commercial and consumer loan populations.
In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer portfolio segments. The commercial portfolio segment is then disaggregated by line of business distinctions. “Real estate” includes 1-4 family residential portfolio, Commercial and Multi-Family Real estate, as well as construction loans. “Commercial” represents the portfolio of small business and commercial and industrial portfolio, and “Consumer” represents principally secured consumer lending.
| 74 |
An age analysis of past due loans, disaggregated
by class of financing receivables, as of December 31, 2015 and 2014 is as follows:
| 30-59 Days | 60-89 Days | Greater Than | Total Past | Total Loan | ||||||||||||||||||||
| Past Due | Past Due | 90 Days | Due | Current | Receivables | |||||||||||||||||||
| 2015 | ||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||
| 1-4 family residential | $ | 1,483 | $ | - | $ | 2,968 | $ | 4,451 | $ | 603,356 | $ | 607,807 | ||||||||||||
| Commercial and multi-family | - | - | 1,580 | 1,580 | 82,495 | 84,075 | ||||||||||||||||||
| Construction | - | - | 143 | 143 | 18,412 | 18,555 | ||||||||||||||||||
| Commercial | - | - | 41 | 41 | 21,342 | 21,383 | ||||||||||||||||||
| Consumer | 93 | 21 | 601 | 715 | 50,717 | 51,432 | ||||||||||||||||||
| Total | $ | 1,576 | $ | 21 | $ | 5,333 | $ | 6,930 | $ | 776,322 | $ | 783,252 | ||||||||||||
| 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 | ||||||||||||
Impaired Loans
Impaired loans are generally defined as all TDRs and loans on non-accrual status.
Impaired loans disaggregated by class of financing receivables, excluding purchased impaired loans, are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.
| 75 |
| Unpaid | Average | |||||||||||||||
| Recorded | Principal | Related | Recorded | |||||||||||||
| Investment | Balance | Allowance | Investment (1) | |||||||||||||
| 2015 | ||||||||||||||||
| With no related allowance recorded | ||||||||||||||||
| Real estate | ||||||||||||||||
| 1-4 family residential | $ | 6,103 | $ | 6,320 | $ | - | $ | 153 | ||||||||
| Commercial and multi-family | 1,545 | 1,545 | - | 257 | ||||||||||||
| Construction | 143 | 143 | - | 143 | ||||||||||||
| Commercial | 41 | 41 | - | 41 | ||||||||||||
| Consumer | 1,187 | 1,187 | - | 66 | ||||||||||||
| With an allowance recorded | ||||||||||||||||
| Real estate | ||||||||||||||||
| 1-4 family residential | 3,758 | 3,868 | 599 | 268 | ||||||||||||
| Commercial and multi-family | 285 | 310 | 23 | 285 | ||||||||||||
| Construction | - | - | - | - | ||||||||||||
| Commercial | 179 | 179 | 4 | 179 | ||||||||||||
| Consumer | 434 | 479 | 179 | 72 | ||||||||||||
| Total | ||||||||||||||||
| Real estate | ||||||||||||||||
| 1-4 family residential | $ | 9,861 | $ | 10,188 | $ | 599 | $ | 183 | ||||||||
| Commercial and multi-family | 1,830 | 1,855 | 23 | 261 | ||||||||||||
| Construction | 143 | 143 | - | 143 | ||||||||||||
| Commercial | 220 | 220 | 4 | 110 | ||||||||||||
| Consumer | 1,621 | 1,666 | 179 | 68 | ||||||||||||
| 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 | - | - | - | - | ||||||||||||
| Construction | - | - | - | - | ||||||||||||
| Commercial | 702 | 702 | 254 | 351 | ||||||||||||
| Consumer | 181 | 181 | 55 | 90 | ||||||||||||
| Total | ||||||||||||||||
| 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 | ||||||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
| 76 |
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 that 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. The company had two modified commercial mortgage loans during the period ending December
31, 2015 as compared to one commercial loan at December 31, 2014.
The primary modification program
for the Company’s home mortgage and self-originated home equity portfolios is a proprietary program designed to keep customers
in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing
a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s
entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income
ratio (“DTI”) range. The main modification benefits of the program allow for term extensions, interest rate reductions,
or deferment of principal. The Company reviews each customer on a case-by-case basis to determine which benefit or combination
of benefits will be offered to achieve the target DTI range.
For the Company’s other consumer portfolios, the terms of the modifications include one or a combination of the following:
a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with
similar risk or an extension of the maturity date.
Consumer TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably
assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan).
However, any loan that has remained current for the six months immediately prior to modification will remain on accrual status
after the modification is enacted. The TDR classification will remain on the loan until it is paid in full or liquidated.
In addition to those identified as TDRs above, the guidance also requires loans discharged under Chapter 7 bankruptcy to be considered
TDRs and collateral-dependent, regardless of delinquency status. Collateral-dependent loans must be written down to fair market
value and classified as non-accrual/non-performing for the remaining life of the loan.
TDR Impact to Allowance for Loan Losses
The allowance for loan losses is established to recognize losses inherent in funded loans intended to be held for investment that
are probable and can be reasonably estimated. Prior to a TDR, the Company generally measures its allowance under a loss contingency
methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for
credit risk and deterioration with statistical tools considering factors such as delinquency, LTVs, and credit scores.
Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology
considering all available evidence using the effective interest rate or fair value of collateral. The amount of the required valuation
allowance is equal to the difference between the loan’s impaired value and the recorded investment.
When a consumer TDR subsequently defaults, the Company generally measures impairment based on the fair value of the collateral,
if applicable, less its estimated cost to sell.
| 77 |
As of December 31, 2015, the Company entered into 20 TDR agreements with a total carrying value of $4.4 million as compared to thirteen TDR agreements with a total carrying value of $3.8 million at December 31, 2014.
Included in impaired loans at December
31, 2015 were 20 TDRs which had a specific reserve of $534 thousand as compared to thirteen TDRs which had a specific reserve of
$495 thousand at December 31, 2014. The following table presents an analysis of the Company’s TDR agreement entered into
during the years ending December 31, 2015 and 2014.
| Outstanding Recorded Investment | ||||||||||||
| As of December 31, 2015 | Number of Contracts | Pre-Modification | Post-Modification | |||||||||
| 1-4 family residential real estate | 10 | $ | 3,378 | $ | 3,378 | |||||||
| Commercial mortgage | 2 | $ | 250 | $ | 250 | |||||||
| Consumer loan | 7 | 621 | 621 | |||||||||
| Commercial loan | 1 | 179 | 179 | |||||||||
| Total | 20 | $ | 4,428 | $ | 4,428 | |||||||
| Outstanding Recorded Investment | ||||||||||||
| As of December 31, 2014 | Number of Contracts | Pre-Modification | Post-Modification | |||||||||
| 1-4 family residential real estate | 8 | $ | 3,335 | $ | 3,335 | |||||||
| Consumer loan | 4 | 287 | 287 | |||||||||
| Commercial loan | 1 | 201 | 201 | |||||||||
| Total | 13 | $ | 3,823 | $ | 3,823 | |||||||
Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of Comptroller of the Currency has 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.
The following table presents classified
loans by class of loans as of December 31, 2015 and 2014.
| Real Estate | ||||||||||||||||||||||||||||||||||||||||
| 1-4 Family | Commercial | |||||||||||||||||||||||||||||||||||||||
| Residential | and Multi-Family | Construction | Commercial | Consumer | ||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||
| Grade: | ||||||||||||||||||||||||||||||||||||||||
| Special mention | $ | 3,182 | $ | 3,948 | $ | 321 | $ | 572 | $ | - | $ | - | $ | - | $ | 444 | $ | 807 | $ | 915 | ||||||||||||||||||||
| Substandard | 7,916 | 9,370 | 3,989 | 4,010 | 143 | 143 | 557 | 659 | 1,272 | 1,189 | ||||||||||||||||||||||||||||||
| Doubtful and loss | - | - | - | - | - | - | - | - | - | 14 | ||||||||||||||||||||||||||||||
| Total | $ | 11,098 | $ | 13,318 | $ | 4,310 | $ | 4,582 | $ | 143 | $ | 143 | $ | 557 | $ | 1,103 | $ | 2,079 | $ | 2,118 | ||||||||||||||||||||
| 78 |
The following table presents the credit risk profile of loans based on payment activity as of December 31, 2015 and 2014.
| Real Estate | ||||||||||||||||||||||||||||||||||||||||
| 1-4 Family | Commercial | |||||||||||||||||||||||||||||||||||||||
| Residential | and Multi-Family | Construction | Commercial | Consumer | ||||||||||||||||||||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||||
| Performing | $ | 605,210 | $ | 583,773 | $ | 82,495 | $ | 88,975 | $ | 18,412 | $ | 20,028 | $ | 21,342 | $ | 21,776 | $ | 50,831 | $ | 54,154 | ||||||||||||||||||||
| Non-performing | 2,597 | 3,626 | 1,580 | 803 | 143 | 143 | 41 | 501 | 601 | 502 | ||||||||||||||||||||||||||||||
| Total | $ | 607,807 | $ | 587,399 | $ | 84,075 | $ | 89,778 | $ | 18,555 | $ | 20,171 | $ | 21,383 | $ | 22,277 | $ | 51,432 | $ | 54,656 | ||||||||||||||||||||
The following table details activity in the allowance for possible loan losses by portfolio segment for the years ended December 31, 2015 and 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 | Commercial | |||||||||||||||||||||||
| Residential | and Multi-Family | Construction | Commercial | Consumer | Total | |||||||||||||||||||
| 2015 | ||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||
| Beginning Balance | $ | 2,318 | $ | 625 | $ | 33 | $ | 380 | $ | 404 | $ | 3,760 | ||||||||||||
| Charge-offs | (683 | ) | (25 | ) | - | (306 | ) | (245 | ) | (1,259 | ) | |||||||||||||
| Recoveries | - | - | - | - | - | - | ||||||||||||||||||
| Provision for loan losses | 416 | (360 | ) | (8 | ) | 162 | 479 | 689 | ||||||||||||||||
| Ending balance | $ | 2,051 | $ | 240 | $ | 25 | $ | 236 | $ | 638 | $ | 3,190 | ||||||||||||
| Ending balance: individually evaluated for impairment | $ | 599 | $ | 23 | $ | - | $ | 4 | $ | 178 | $ | 804 | ||||||||||||
| Ending balance: collectively evaluated for impariment | $ | 1,452 | $ | 217 | $ | 25 | $ | 232 | $ | 460 | $ | 2,386 | ||||||||||||
| Loan Receivables: | ||||||||||||||||||||||||
| Ending balance | $ | 607,807 | $ | 84,075 | $ | 18,555 | $ | 21,383 | $ | 51,432 | $ | 783,252 | ||||||||||||
| Ending balance: individually evaluated for impairment | $ | 9,861 | $ | 1,830 | $ | 143 | $ | 220 | $ | 1,621 | $ | 13,675 | ||||||||||||
| Ending balance: collectively evaluated for impariment | $ | 597,946 | $ | 82,245 | $ | 18,412 | $ | 21,163 | $ | 49,811 | $ | 769,577 | ||||||||||||
| 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 impariment | $ | 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 impariment | $ | 577,027 | $ | 88,454 | $ | 20,028 | $ | 21,575 | $ | 53,505 | $ | 760,589 | ||||||||||||
| 79 |
Certain directors and officers of the Company have loans with the Bank. Repayments and other includes loans for which there was a change in employee status which resulted in a change in loan classification.
Total loan activity for directors and officers was as follows:
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Balance, beginning of year | $ | 4,072 | $ | 4,749 | $ | 4,626 | ||||||
| Additions | 1,355 | 295 | 672 | |||||||||
| Repayments and other | (1,008 | ) | (972 | ) | (549 | ) | ||||||
| Balance, end of year | $ | 4,419 | $ | 4,072 | $ | 4,749 | ||||||
5. OFFICE PROPERTIES AND EQUIPMENT—NET
Office properties and equipment are summarized by major classification as follows:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Land | $ | 3,465 | $ | 3,465 | ||||
| Buildings and improvements | 14,096 | 13,986 | ||||||
| Furniture and equipment | 6,999 | 7,211 | ||||||
| Total | 24,560 | 24,662 | ||||||
| Accumulated depreciation | (12,201 | ) | (11,792 | ) | ||||
| Net | $ | 12,359 | $ | 12,870 | ||||
For the years ended December 31, 2015, 2014 and 2013,
depreciation expense amounted to $872 thousand, $934 thousand and $935 thousand, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
| December 31, | ||||||||||||||||
| 2015 | 2014 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
| NOW and other demand deposit accounts | $ | 457,488 | 0.13 | % | $ | 439,623 | 0.13 | % | ||||||||
| Passbook savings and club accounts | 174,640 | 0.20 | % | 168,686 | 0.20 | % | ||||||||||
| Subtotal | 632,128 | 608,309 | ||||||||||||||
| Certificates with original maturities: | ||||||||||||||||
| Within one year | 29,341 | 0.30 | % | 42,821 | 0.29 | % | ||||||||||
| One to three years | 127,813 | 1.03 | % | 113,927 | 0.92 | % | ||||||||||
| Three years and beyond | 22,751 | 1.56 | % | 22,021 | 1.73 | % | ||||||||||
| Total certificates | 179,905 | 178,769 | ||||||||||||||
| Total | $ | 812,033 | $ | 787,078 | ||||||||||||
The aggregate amount of certificate
accounts in denominations of $100 thousand or more at December 31, 2015 and 2014 amounted to $70.6 million and $62.8 million,
respectively. Currently, deposit amounts in excess of $250 thousand are generally not federally insured.
| 80 |
Municipal demand deposit accounts
in denominations of $100 thousand or more at December 31, 2015 and 2014 amounted to $194.6 million and $181.0 million, respectively.
7. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
Advances from the FHLB of New York
are as follows:
| Interest | December 31, | |||||||||||
| Due | Rate | 2015 | 2014 | |||||||||
| December 17, 2015 | 0.610 | % | $ | - | $ | 15,000 | ||||||
| December 21, 2015 | 4.540 | % | - | 5,000 | ||||||||
| April 11, 2016 | 4.795 | % | 10,000 | 10,000 | ||||||||
| December 19, 2016 | 1.130 | % | 15,000 | - | ||||||||
| November 16, 2017 | 3.875 | % | 20,000 | 20,000 | ||||||||
| January 14, 2022 | 3.690 | % | 10,000 | 10,000 | ||||||||
| August 22, 2022 | 3.497 | % | 10,000 | 10,000 | ||||||||
| October 24, 2022 | 3.770 | % | 20,000 | 20,000 | ||||||||
| February 27, 2023 | 3.408 | % | 10,000 | 10,000 | ||||||||
| April 3, 2023 | 3.160 | % | 10,000 | 10,000 | ||||||||
| $ | 105,000 | $ | 110,000 | |||||||||
The advances are collateralized by FHLB stock and substantially all first mortgage loans. The carrying value of assets pledged to the FHLB of New York was $414.8 million and $415.7 million at December 31, 2015 and 2014, respectively.
The following table sets forth information concerning balances and interest rates on our FHLB advances at the dates and for the periods indicated.
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Weighted average balance during the period | $ | 109,849 | $ | 110,000 | ||||
| Maximum month-end balance during the period | 110,000 | 110,000 | ||||||
| Balance outstanding at the end of the period | 105,000 | 110,000 | ||||||
| Weighted average interest rate during the period | 3.41 | % | 3.83 | % | ||||
| Weighted average interest rate at the end of the period | 3.38 | % | 3.37 | % | ||||
Unused lines of credit and borrowing capacity available for short-term and long-term borrowings from the FHLB of New York at December 31, 2015 and 2014 were $271.8 million and $295.7 million, respectively.
| 81 |
8. INCOME TAXES
The income tax provision consists of the following:
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Income taxes: | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 2,932 | $ | 3,995 | $ | 1,221 | ||||||
| State | 4 | 592 | 17 | |||||||||
| Total current tax provision | 2,936 | 4,587 | 1,238 | |||||||||
| Deferred: | ||||||||||||
| Federal | 434 | (835 | ) | 1,324 | ||||||||
| State | 29 | (230 | ) | 283 | ||||||||
| Total deferred tax provision (benefit) | 463 | (1,065 | ) | 1,607 | ||||||||
| Total income tax provision | $ | 3,399 | $ | 3,522 | $ | 2,845 | ||||||
The Company’s provision for income taxes differs
from the amounts determined by applying the statutory federal income tax rate to income before income before taxes as follows:
| Years Ended December 31, | ||||||||||||||||||||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
| Income tax expense at statutory rate | $ | 3,491 | 34.0 | % | $ | 3,338 | 34.0 | % | $ | 2,783 | 34.0 | % | ||||||||||||
| State income taxes, net of federal benefit | 21 | 0.2 | 239 | 2.4 | 197 | 2.5 | ||||||||||||||||||
| Changes in taxes resulting from: | ||||||||||||||||||||||||
| Tax exempt income | (215 | ) | (2.1 | ) | (217 | ) | (2.2 | ) | (247 | ) | (3.1 | ) | ||||||||||||
| Non-deductible and other expenses | 102 | 1.0 | 162 | 1.7 | 112 | 1.3 | ||||||||||||||||||
| Total | $ | 3,399 | 33.1 | % | $ | 3,522 | 35.9 | % | $ | 2,845 | 34.7 | % | ||||||||||||
Items that gave rise to significant portions of the deferred tax accounts are as follows:
| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Deferred tax assets: | ||||||||||||
| Unrealized (gain) loss on available for sale securities | $ | 781 | $ | 807 | $ | 1,730 | ||||||
| Allowance for loan losses | 1,274 | 1,502 | 1,677 | |||||||||
| Nonperforming loans | - | - | - | |||||||||
| Deferred compensation | 365 | 387 | 371 | |||||||||
| Employee benefits | 2,351 | 2,257 | 2,023 | |||||||||
| Other than temporary impairment | 1,020 | 1,020 | 1,020 | |||||||||
| Property | 54 | 4 | (122 | ) | ||||||||
| Purchase accounting | 772 | 893 | 1,000 | |||||||||
| Other | 41 | 47 | 81 | |||||||||
| Total deferred tax assets | 6,658 | 6,917 | 7,780 | |||||||||
| Deferred tax liabilities: | ||||||||||||
| Deferred loan fees | (1,487 | ) | (1,203 | ) | (1,257 | ) | ||||||
| Servicing | - | (1 | ) | (2 | ) | |||||||
| IRC Section 475 mark-to-market | (598 | ) | (651 | ) | (1,602 | ) | ||||||
| Total deferred tax liabilities | (2,085 | ) | (1,855 | ) | (2,861 | ) | ||||||
| Net deferred tax asset | $ | 4,573 | $ | 5,062 | $ | 4,919 | ||||||
| 82 |
Pursuant to ASC-740, the Company is not required to provide deferred taxes on its tax loan loss reserve as of December 31, 1987. The amount of this reserve on which no deferred income taxes have been provided is approximately $2.4 million and is included in retained earnings at December 31, 2015 and 2014. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if one of the following occur: (1) the Company’s retained earnings represented by this reserve are used for distributions in liquidation or for any other purpose other than to absorb losses from bad debts; (2) the Company fails to qualify as a Bank, as provided by the Internal Revenue Code; or (3) there is a change in federal tax law.
The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated statement of income and comprehensive income. As of December 31, 2015, 2014 and 2013, there were no uncertain tax positions and the Company does not anticipate any in the next twelve months. The Company files income tax returns in the United States federal jurisdiction and in the State of New Jersey. As of December 31, 2015, the tax years ended December 31, 2012 through 2015 were subject to examination by the Internal Revenue Service, while the tax years ended December 31, 2011 through 2015 were subject to New Jersey examination.
9. JUNIOR SUBORDINATED DEBENTURES
In 1998, Ocean Shore Capital Trust I (the “Trust”), a trust created under Delaware law that is wholly owned by the Company, issued $15 million of 8.67% Capital Securities (the “Capital Securities”) with a liquidation amount of $1,000 per Capital Security unit and a scheduled maturity of July 15, 2028. The proceeds from the sale of the Capital Securities, together with a capital contribution from the Company, were utilized by the Trust to invest in $15.5 million of 8.67% Junior Subordinated Deferrable Interest Debentures (the “Debentures”) of the Company. The Debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Interest on the Capital Securities is cumulative and payable semi-annually in arrears. The Company has the option, subject to required regulatory approval, to prepay the Debentures in whole or in part, at various prepayment prices, plus accrued and unpaid interest thereon to the date of the prepayment. On September 5, 2014, the Company redeemed $3.1 million of this issue, paying a redemption premium of $54 thousand, reducing the outstanding balance to $7.2 million. On August 26, 2015, the Company redeemed the remaining $7.2 million of this issue, paying a redemption premium of $94 thousand.
10. COMMITMENTS AND CONTINGENCIES
Loan Commitments— As of December 31, 2015, the Company had approximately $32.5 million in outstanding commitments to originate fixed and variable rate loans with market interest rates ranging from 3.00% to 5.50% and approximately $45.5 million in unused lines and letters of credit with interest rates ranging from 3.00% to 6.50% on outstanding balances. Commitments are issued in accordance with the same policies and underwriting procedures as settled loans.
Lease Commitment—The Company leases certain property and equipment under non-cancellable operating leases. Scheduled minimum lease payments are as follows as of December 31, 2015:
| Year Ending December 31 | ||||
| 2016 | $ | 160 | ||
| 2017 | 165 | |||
| 2018 | 172 | |||
| 2019 | 178 | |||
| 2020 | 185 | |||
| Thereafter | 275 | |||
| Total | $ | 1,135 |
Rent expense for all operating leases was approximately $163 thousand, $217 thousand and $261 thousand for the years ended December 31, 2015, 2014 and 2013, respectively.
| 83 |
Cash Reserve Requirement—The
Bank is required to maintain average reserve balances under the Federal Reserve Act and Regulation D issued thereunder. Such
reserves totaled approximately $100,000 at December 31, 2015 and 2014.
Restrictions on Funds Transferred—There
are various restrictions which limit the ability of a bank subsidiary to transfer funds in the form of cash dividends, loans or
advances to the parent company. Under federal law, the approval of the primary regulator is required if dividends declared
by the Bank in any year exceed the net profits of that year, as defined, combined with the retained profits for the two preceding
years.
Employment Contracts—The Bank has entered into employment contracts with several officers of the Bank whereby
such officers would be entitled to a cash payment equal to 2 or 3 years annual compensation, depending on the officer, in the event
of a change of control or other specified reasons.
| 11. | 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 shares of common stock 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 ESOP shares.
The calculated basic and diluted earnings per share (“EPS”) are as follows:
| December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Numerator – Net Income | $ | 6,868 | $ | 6,298 | $ | 5,349 | ||||||
| Denominators: | ||||||||||||
| Basic average shares outstanding | 6,015,157 | 6,266,344 | 6,520,951 | |||||||||
| Net effect of dilutive common stock equivalents | 109,001 | 134,460 | 86,158 | |||||||||
| Diluted average shares outstanding | 6,124,158 | 6,400,804 | 6,607,109 | |||||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 1.14 | $ | 1.00 | $ | 0.82 | ||||||
| Diluted | $ | 1.12 | $ | 0.98 | $ | 0.81 | ||||||
At December 31, 2015, 2014 and 2013 there were 317,549, 612,406 and 605,803 outstanding options that were anti-dilutive, respectively.
12. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 and common equity Tier 1 capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Basel III capital regulations, which became effective for the Company and the Bank on January 1, 2015, revised the capital requirements applicable to the Bank and made the same requirements applicable to the Company. Management believes that, as of December 31, 2015 and 2014, the Company and the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 2015 and 2014,
the most recent notification from the OCC categorized the Bank as “well capitalized” under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum Tier 1 leverage and common
equity, Tier 1 and total risk-based ratios as set forth in the table below. There are no conditions or events since that notification
that management believes have changed the Bank’s category.
| 84 |
| Required | Considered Well | |||||||||||||||||||||||
| For Capital | Capitalized Under Prompt | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Corrective Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2015: | ||||||||||||||||||||||||
| Tier 1 leverage capital | $ | 98,711 | 9.30 | % | $ | 42,456 | 4.00 | % | $ | 53,070 | 5.00 | % | ||||||||||||
| Common equity risk-based capital | 98,711 | 17.94 | 24,764 | 4.50 | 35,770 | 6.50 | ||||||||||||||||||
| Tier 1 risk-based capital | 98,711 | 17.94 | 33,018 | 6.00 | 44,024 | 8.00 | ||||||||||||||||||
| Total risk-based capital | 101,918 | 18.52 | 44,024 | 8.00 | 55,030 | 10.00 | ||||||||||||||||||
| As of December 31, 2014: | ||||||||||||||||||||||||
| Tangible capital | $ | 99,286 | 9.78 | % | $ | 15,226 | 1.50 | % | N/A | N/A | ||||||||||||||
| Tier 1 leverage capital | 99,286 | 9.78 | 40,603 | 4.00 | $ | 60,905 | 6.00 | % | ||||||||||||||||
| Tier 1 risk-based capital | 99,286 | 18.73 | 21,207 | 4.00 | 31,810 | 6.00 | ||||||||||||||||||
| Total risk-based capital | 102,026 | 19.24 | 42,414 | 8.00 | 53,017 | 10.00 | ||||||||||||||||||
As of December 31, 2015, the most recent notification from the OCC categorized the Company as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum Tier 1 leverage and common equity, Tier 1 and total risk-based ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Company’s category.
| Required | Considered Well | |||||||||||||||||||||||
| For Capital | Capitalized Under Prompt | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Corrective Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of December 31, 2015: | ||||||||||||||||||||||||
| Tier 1 leverage capital | $ | 108,014 | 10.15 | % | $ | 42,563 | 4.00 | % | $ | 53,203 | 5.00 | % | ||||||||||||
| Common equity risk-based capital | 108,014 | 19.58 | 24,826 | 4.50 | 35,860 | 6.50 | ||||||||||||||||||
| Tier 1 risk-based capital | 108,014 | 19.58 | 33,101 | 6.00 | 44,135 | 8.00 | ||||||||||||||||||
| Total risk-based capital | 111,204 | 20.16 | 44,135 | 8.00 | 55,169 | 10.00 | ||||||||||||||||||
Federal banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total dividends that may be paid at any date is generally limited to the earnings of the Bank for the year to date plus retained earnings for the prior two years, net of any prior capital distributions. In addition, dividends paid by the Bank to the Company would be prohibited if the distribution would cause the Bank’s capital to be reduced below the applicable minimum capital requirements. For the periods ending December 31, 2015 and December 31, 2014, the Bank paid $9.0 million in dividends to the Company.
| 13. | BENEFIT PLANS |
401(k) Plan
The Company maintains an approved 401(k) Plan. All employees age 18 and over are eligible to participate in the plan at the beginning of the quarter after hire date. The employees may contribute up to 100% of their compensation, subject to IRS limitations, to the plan with the Company matching one-half of the first six percent contributed. Full vesting in the plan is prorated equally over a five-year period from the date of employment. The Company’s contributions to the 401(k) Plan for the years ended December 31, 2015, 2014 and 2013 were $219 thousand, $202 thousand, and $196 thousand, respectively, and were included as a component of “Salaries and employee benefits” expense.
| 85 |
Deferred Compensation Plans
The Bank maintains a deferred compensation plan whereby certain officers will be provided supplemental retirement benefits for a period of fifteen or twenty years following normal retirement. The benefits under the plan are fully vested for all officers. The Company makes annual contributions, based upon an accrued liability schedule, to a trust for each respective officer organized by the Company to administer the plan so that the amounts required will be provided at the normal retirement dates and thereafter. Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 2016 and 2032. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of employment, or death. The contributions to the plan for the years ended December 31, 2015, 2014 and 2013 were $357 thousand, $523 thousand and $550 thousand, respectively, and were included as a component of “Salaries and employee benefits” expense in the statement of income. The accrued liability included as a component of “Other liabilities” in the statement of financial condition was $4.8 million, $4.4 million and $3.9 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Bank maintains a directors’ deferred compensation plan whereby directors may defer into a retirement account a portion of their monthly director fees for a specified period to provide a specified amount of income for a period of five to ten years following normal retirement. The Company also accrues the interest cost on the deferred fee obligation so that the amounts required will be provided at the normal retirement dates and thereafter. Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 2016 and 2032. Payments of $85 thousand were made from the plan in 2015. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of service, or death. At December 31, 2015 and 2014, the accrued deferred compensation liability amounted to approximately $914 thousand and $970 thousand, respectively, and is included as a component of “Other Liabilities” in the statement of financial condition. The contributions to the plan for the years ended December 31, 2015, 2014 and 2013 were $162 thousand, $104 thousand and $57 thousand, respectively, and were included as a component of “Salaries and employee benefits” expense.
The Bank is the owner and primary beneficiary of insurance policies on the lives of participating officers and directors. Such policies were purchased to informally fund the benefit obligations and to allow the Company to honor its contractual obligations in the event of pre-retirement death of a covered officer or director. Certain of the insurance policies owned by the Bank are policies under which the employee’s designated beneficiary is entitled to part of the policy benefits upon the death of the employee. The aggregate cash surrender value of all policies owned by the Company amounted to $24.5 million and $23.8 million at December 31, 2015 and 2014.
During 2004, a Deferred Compensation Stock Plan was established creating a rabbi trust to fund benefit plans for certain officers and directors to acquire shares through deferred compensation plans. During the years ended December 31, 2015 and 2014, 11,055 and 1,082 shares of the Company’s stock were purchased for $171 thousand and $16 thousand, respectively, at various market prices.
Employee Stock Ownership Plan
In December 2004, the Company established an Employee Stock Ownership Plan ("ESOP") covering all eligible employees as defined by the ESOP. The ESOP is a tax-qualified plan designed to invest primarily in the Company’s common stock that provides employees with the opportunity to receive a funded retirement benefit based primarily on the value of the Company’s common stock.
To purchase the Company’s common stock in December 2004, the ESOP borrowed $3.4 million from the Company to purchase 343,499 shares of the Company’s common stock in the initial public offering. The ESOP loan is being repaid principally from the Bank's contributions to the ESOP over a period of up to 15 years. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. The number of shares released annually is based upon the ratio that the current principal and interest payment bears to the current and all remaining scheduled future principal and interest payments.
In December 2009, the ESOP borrowed an additional $2.3 million from the Company to purchase 282,611 shares of the Company’s common stock in its second step offering. The ESOP loan is being repaid principally from the Bank's contributions to the ESOP over a period of up to 20 years. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. The number of shares released annually is based upon the ratio that the current principal and interest payment bears to the current and all remaining scheduled future principal and interest payments.
During the years ended December 31, 2015, 2014 and 2013, the Company annually released 34,267 shares and recorded an expense related to this plan of approximately $523 thousand, $487 thousand and $498 thousand, respectively.
| 86 |
All shares that have not been released for allocation to participants are held in a suspense account by the ESOP for future allocation as the loans are repaid. Unallocated common stock purchased by the ESOP is recorded as a reduction of stockholders' equity at cost. At December 31, 2015, the ESOP had 258,233 unallocated shares remaining.
Stocks Options
A summary of the status of the Company’s stock options under the Equity Plans as of December 31, 2015, 2014 and 2013 and changes during the periods ended December 31, 2015, 2014 and 2013 are presented below.
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||||||||||||||
| Number of shares | Weighted average exercise price | 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 | 649,313 | $ | 11.50 | |||||||||||||||
| Granted | - | - | - | - | 66,300 | 14.14 | ||||||||||||||||||
| Exercised | (290,090 | ) | 13.06 | (5,809 | ) | 11.49 | (35,413 | ) | 12.30 | |||||||||||||||
| Forfeited | (3,894 | ) | 11.69 | - | - | - | - | |||||||||||||||||
| Outstanding at the end of the period | 380,407 | $ | 11.46 | 674,391 | $ | 12.15 | 680,200 | $ | 12.14 | |||||||||||||||
| Exercisable at the end of the period | 322,993 | $ | 11.09 | 541,222 | $ | 12.12 | 471,686 | $ | 12.24 | |||||||||||||||
| Stock options vested or expected to vest (1) | 290,693 | $ | 11.09 | |||||||||||||||||||||
(1) Includes vested shares and nonvested shares after a forfeiture rate, which is based upon historical data, is applied.
There were no options granted in 2015 and 2014. The weighted average grant date fair value of options granted for the year ended December 31, 2013 $2.56 per share. Options exercised in 2015 totaled 290,090 shares at an average price of $13.09 as compared to 5,809 shares in 2014 at an average price of $11.49 as compared to 35,413 shares in 2013 at an average exercise price of $12.30. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2015, 2014 and 2013 was $2.0 million, $1.2 million, and $670 thousand, respectively.
The following table summarizes all stock options outstanding under the Equity Plan as of December 31, 2015:
| Options Outstanding | ||||||||||||
| Date Issued | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | |||||||||
| (in years) | ||||||||||||
| November 21, 2006 | 14,506 | $ | 14.78 | 0.9 | ||||||||
| November 20, 2007 | 17,274 | 11.32 | 1.9 | |||||||||
| August 18, 2010 | 208,239 | 10.21 | 4.6 | |||||||||
| March 15, 2011 | 13,600 | 12.06 | 5.2 | |||||||||
| August 17, 2011 | 44,898 | 11.53 | 5.6 | |||||||||
| November 19, 2012 | 17,100 | 13.10 | 6.9 | |||||||||
| November 19, 2013 | 64,790 | 14.14 | 7.9 | |||||||||
| Total | 380,407 | $ | 11.46 | 5.2 | ||||||||
| 87 |
At December 31, 2015, there was $253 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 1.6 years.
The compensation expense recognized for the period ended December 31, 2014, 2013 and 2012 was $175 thousand, $184 thousand and $155 thousand, respectively.
Summary of Non-vested Stock Award activity:
| Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||||||||||||||
| Number of shares | Weighted average exercise price | Number of shares | Weighted average exercise price | Number of shares | Weighted average exercise price | |||||||||||||||||||
| Outstanding at the beginning of the period | 54,950 | $ | 10.74 | 83,290 | $ | 10.99 | 60,390 | $ | 10.33 | |||||||||||||||
| Issued | - | - | - | - | 42,700 | 14.14 | ||||||||||||||||||
| Vested | 28,340 | 11.46 | 28,340 | 11.46 | 19,800 | 10.30 | ||||||||||||||||||
| Forfeited | - | - | - | - | - | - | ||||||||||||||||||
| Outstanding at the end of the period | 26,610 | $ | 14.06 | 54,950 | $ | 10.74 | 83,290 | $ | 10.99 | |||||||||||||||
As of December 31, 2015, there was $350 thousand of total unrecognized compensation costs related to non-vested stock awards. That cost is expected to be recognized over a weighted average period of 2.9 years.
The compensation expense recognized for the period ended December 31, 2015, 2014 and 2013 was $241 thousand, $325 thousand and $218 thousand, respectively.
| 14. | FAIR VALUE MEASUREMENT |
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.
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.
| 88 |
Those assets as of December 31, 2015 which will continue to be measured at fair value on a recurring basis are as follows:
| Category Used for Fair Value Measurement | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets: | ||||||||||||
| Securities available for sale: | ||||||||||||
| U.S. Government sponsored entity mortgage-backed securities | $ | - | $ | 92,982 | $ | - | ||||||
| U.S. Treasury and federal agencies | - | 10,040 | - | |||||||||
| Corporate securities | - | 8,844 | - | |||||||||
| Equity securities | 42 | - | - | |||||||||
| Totals | $ | 42 | $ | 111,866 | $ | - | ||||||
Those assets as of December 31, 2014 which will continue to be measured at fair value on a recurring basis are as follows:
| Category Used for Fair Value Measurement | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets: | ||||||||||||
| Securities available for sale: | ||||||||||||
| U.S. Government sponsored entity mortgage-backed securities | $ | - | $ | 80,258 | $ | - | ||||||
| U.S. Treasury and federal agencies | - | 20,991 | - | |||||||||
| 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.
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.
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Summary of Non-Recurring Fair Value Measurements
| Category Used for Fair Value Measurement | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | (Losses) | ||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Impaired loans | $ | 3,852 | $ | - | $ | 1,282 | $ | 2,570 | $ | (166 | ) | |||||||||
| Real estate owned | 1,714 | - | 1,714 | - | (451 | ) | ||||||||||||||
| December 31, 2014 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Impaired loans | $ | 5,640 | $ | - | $ | 3,294 | $ | 2,346 | $ | (735 | ) | |||||||||
| Real estate owned | 510 | - | 510 | - | (122 | ) | ||||||||||||||
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. Total loans remeasured at fair value for the twelve months ended December 31, 2015 were $3.9 million. Such loans were carried at the value of $4.0 million immediately prior to remeasurement, resulting in the recognition of impairment through earnings in the amount of $166 thousand. Total loans remeasured at fair value for the twelve months ended December 31, 2014 were $5.6 million. Such loans were carried at the value of $6.4 million immediately prior to remeasurement, resulting in the recognition of impairment through earnings in the amount of $735 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 would be categorized as a Level 3 measurement. Total real estate owned remeasured at fair value for the twelve months ended December 31, 2015 was $2.2 million, of which $447 thousand was sold. These properties were carried at the value of $2.2 million immediately prior to remeasurement, resulting in the recognition of impairment through earnings in the amount of $451 thousand. Total real estate owned remeasured at fair value for the twelve months ended December 31, 2014 was $872 thousand, of which $362 thousand was sold. These properties were carried at the value of $632 thousand immediately prior to remeasurement, resulting in the recognition of impairment through earnings in the amount of $122 thousand.
| 90 |
Fair Value of Financial Instruments
| December 31, 2015 | ||||||||||||||||
| Carrying | Category Used for Fair Value | |||||||||||||||
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 87,710 | $ | 87,710 | $ | - | $ | - | ||||||||
| Investment securities: | ||||||||||||||||
| Held to maturity | 1,084 | - | 1,137 | - | ||||||||||||
| Available for sale | 111,908 | 42 | 111,866 | - | ||||||||||||
| Loans receivable, net | 783,948 | - | 793,597 | - | ||||||||||||
| Federal Home Loan Bank stock | 5,864 | - | 5,864 | - | ||||||||||||
| Liabilities: | ||||||||||||||||
| NOW and other demand deposit accounts | 457,488 | - | 476,186 | - | ||||||||||||
| Passbook savings and club accounts | 174,640 | - | 183,352 | - | ||||||||||||
| Certificates | 179,905 | - | 180,624 | - | ||||||||||||
| Advances from Federal Home Loan Bank | 105,000 | - | 111,315 | - | ||||||||||||
| December 31, 2014 | ||||||||||||||||
| Carrying | Category Used for Fair Value | |||||||||||||||
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| 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 Equivalents— For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Investment and Mortgage-Backed Securities— For 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 - Net— The 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.
| 91 |
Federal Home Loan Bank (FHLB) Stock— Although 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 December 31, 2015 and 2014. The estimated fair value approximates the carrying amount.
NOW and Other Demand Deposit, Passbook Savings and Club, and Certificates Accounts—The 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 FHLB—The fair value was estimated by determining the cost or benefit for early termination of each individual borrowing.
Junior Subordinated Debenture—The 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 December 31, 2015 and 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 December 31, 2015 and 2014, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
| 15. | GOODWILL AND INTANGIBLE ASSETS |
Goodwill totaled $4.6 million at December 31, 2015 as compared to $4.6 million at December 31, 2014. The Company completed its annual goodwill impairment test as of August 1, 2015 and concluded that goodwill was not impaired. At December 31, 2015, no triggering events have occurred from the date of impairment test that would have impaired goodwill.
The core deposit intangible totaled $440 thousand at December 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.
| 16. | REAL ESTATE OWNED |
Summary of Real Estate Owned Activity:
| 2015 | 2014 | |||||||||||||||||||||||
| Residential Property | Commercial Property | Total | Residential Property | Commercial Property | Total | |||||||||||||||||||
| Balance, January 1, | $ | 609 | $ | 41 | $ | 650 | $ | 296 | $ | 202 | $ | 498 | ||||||||||||
| Transfers into Real Estate Owned | 1,931 | 195 | 2,126 | 872 | - | 872 | ||||||||||||||||||
| Valuation adjustment on Real Estate Owned | (59 | ) | - | (59 | ) | - | - | - | ||||||||||||||||
| Sales of Real Estate Owned | (708 | ) | (195 | ) | (903 | ) | (559 | ) | (161 | ) | (720 | ) | ||||||||||||
| Balance, December 31, | $ | 1,773 | $ | 41 | $ | 1,814 | $ | 609 | $ | 41 | $ | 650 | ||||||||||||
| 92 |
| 17. | RELATED PARTY TRANSACTION |
The Company obtains legal services from McCrosson and Stanton, PC, a law firm located in Ocean City, NJ. Dorothy F. McCrosson, a Director of the Company since January 2011, is Managing Partner at McCrosson and Stanton, PC. Legal fees paid to McCrosson and Stanton, PC were $160 thousand, $156 thousand and $172 thousand during the years ended December 31, 2015, 2014 and 2013, respectively.
| 18. | PARENT ONLY FINANCIAL INFORMATION |
The following are the condensed financial statements for Ocean Shore Holding Co. (Parent company):
CONDENSED STATEMENTS OF FINANCIAL CONDITION - PARENT ONLY
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 3,991 | $ | 2,380 | ||||
| Investment securities | 1,269 | 1,451 | ||||||
| Investment in subsidiary | 102,486 | 103,518 | ||||||
| Other assets | 4,053 | 5,792 | ||||||
| Total assets | $ | 111,799 | $ | 113,141 | ||||
| Liabilities: | ||||||||
| Junior subordinated debenture | $ | - | $ | 7,217 | ||||
| Other liabilities | 10 | 113 | ||||||
| Total liabilities | 10 | 7,330 | ||||||
| Stockholders' equity | 111,789 | 105,811 | ||||||
| Total liabilities and stockholders' equity | $ | 111,799 | $ | 113,141 | ||||
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - PARENT ONLY
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Interest income | $ | 198 | $ | 318 | $ | 419 | ||||||
| Interest expense | 410 | 804 | 1,192 | |||||||||
| Net interest loss | (212 | ) | (486 | ) | (773 | ) | ||||||
| Other Income | 3 | 94 | 7 | |||||||||
| Other expenses | 252 | 226 | 271 | |||||||||
| Loss before income tax benefit and equity in undistributed earnings in subsidiary | (461 | ) | (618 | ) | (1,037 | ) | ||||||
| Income tax | (157 | ) | (210 | ) | (351 | ) | ||||||
| Loss before equity in undistributed earnings in subsidiary | (304 | ) | (408 | ) | (686 | ) | ||||||
| Dividends distributed from subsidiary | 9,000 | 9,000 | 6,000 | |||||||||
| Equity in undistributed earnings of subsidiary | (1,828 | ) | (2,294 | ) | 35 | |||||||
| Net income | $ | 6,868 | $ | 6,298 | $ | 5,349 | ||||||
| Other comprehensive income, net of tax | ||||||||||||
| Unrealized gain (loss) on available for sale securities | $ | 27 | $ | 1,375 | $ | (2,761 | ) | |||||
| Unrealized (loss) gain on post retirement life benefit | 37 | (159 | ) | 138 | ||||||||
| Total other comprehensive income, net of tax | 64 | 1,216 | (2,623 | ) | ||||||||
| Total comprehensive income | $ | 6,932 | $ | 7,514 | $ | 2,726 | ||||||
| 93 |
CONDENSED STATEMENTS OF CASH FLOWS - PARENT ONLY
| Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 6,868 | $ | 6,298 | $ | 5,349 | ||||||
| Equity in undistributed earnings in subsidiary | (7,173 | ) | (6,706 | ) | (6,035 | ) | ||||||
| Net amortization of investment premiums/discounts | 3 | 127 | 4 | |||||||||
| Gain on sale/call of investment securities available for sale | (3 | ) | (95 | ) | - | |||||||
| Dividends from subsidiary | 9,000 | 9,000 | 6,000 | |||||||||
| Premium paid on redemption of junior subordinated debt | 94 | 54 | - | |||||||||
| Changes in assets and liabilities which provided (used) cash: | ||||||||||||
| Accrued interest receivable | 9 | 40 | 10 | |||||||||
| Prepaid expenses and other assets | 1,401 | (427 | ) | 86 | ||||||||
| Other liabilities | (112 | ) | (127 | ) | (204 | ) | ||||||
| Intercompany payables | 9 | (235 | ) | 413 | ||||||||
| Net cash provided by operating activities | 10,096 | 7,929 | 5,623 | |||||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Principal repayment of mortgage backed securities held to maturity | 99 | 134 | 248 | |||||||||
| Principal repayment of mortgage backed securities available for sale | - | 75 | 444 | |||||||||
| Principal payments on ESOP loan | 357 | 342 | 326 | |||||||||
| Proceeds from sale/call of investment securities available for sale | 217 | 2,383 | 155 | |||||||||
| Net cash provided by investing activities | 673 | 2,934 | 1,173 | |||||||||
| FINANCING ACTIVITIES: | ||||||||||||
| Purchase of treasury stock | (3,608 | ) | (7,473 | ) | (966 | ) | ||||||
| Proceeds from stock options exercised | 3,275 | 67 | 436 | |||||||||
| Dividends paid | (1,514 | ) | (1,616 | ) | (1,667 | ) | ||||||
| Redemption of junior subordinated debt | (7,311 | ) | (3,146 | ) | (5,155 | ) | ||||||
| Net cash (used in) financing activities | (9,158 | ) | (12,168 | ) | (7,352 | ) | ||||||
| Net increase (decrease) in cash & cash equivalents | 1,611 | (1,305 | ) | (556 | ) | |||||||
| Cash and cash equivalents - beginning | 2,380 | 3,685 | 4,241 | |||||||||
| Cash and cash equivalents - ending | $ | 3,991 | $ | 2,380 | $ | 3,685 | ||||||
| 94 |
19. QUARTERLY FINANCIAL DATA (unaudited)
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| 2015 | 2015 | 2015 | 2015 | |||||||||||||
| Total interest income | $ | 8,787 | $ | 8,764 | $ | 8,777 | $ | 8,822 | ||||||||
| Total interest expense | 1,695 | 1,708 | 1,685 | 1,608 | ||||||||||||
| Net interest income | 7,092 | 7,056 | 7,092 | 7,214 | ||||||||||||
| Provision for loan losses | 153 | 178 | 165 | 192 | ||||||||||||
| Net interest income after provision for loan losses | 6,939 | 6,878 | 6,927 | 7,022 | ||||||||||||
| Other income | 1,049 | 1,133 | 1,122 | 1,086 | ||||||||||||
| Other expense | 5,442 | 5,373 | 5,536 | 5,539 | ||||||||||||
| Income before income taxes | 2,546 | 2,638 | 2,513 | 2,569 | ||||||||||||
| Income taxes | 833 | 899 | 844 | 821 | ||||||||||||
| Net income | $ | 1,713 | $ | 1,739 | $ | 1,669 | $ | 1,748 | ||||||||
| Earnings per share basic (1) | $ | 0.29 | $ | 0.29 | $ | 0.28 | $ | 0.29 | ||||||||
| Earnings per share diluted (1) | $ | 0.28 | $ | 0.29 | $ | 0.27 | $ | 0.28 | ||||||||
(1) Earnings per share are computed independently for each period presented.
Consequently, the sum of the quarters may not equal the total earnings per share for the year.
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| 2014 | 2014 | 2014 | 2014 | |||||||||||||
| Total interest income | $ | 8,871 | $ | 8,793 | $ | 8,855 | $ | 8,847 | ||||||||
| Total interest expense | 1,911 | 1,908 | 1,897 | 1,850 | ||||||||||||
| Net interest income | 6,960 | 6,885 | 6,958 | 6,997 | ||||||||||||
| Provision for loan losses | 88 | 50 | 125 | 200 | ||||||||||||
| Net interest income after provision for loan losses | 6,872 | 6,835 | 6,833 | 6,797 | ||||||||||||
| Other income | 1,006 | 1,086 | 1,102 | 1,052 | ||||||||||||
| Other expense | 5,446 | 5,530 | 5,451 | 5,337 | ||||||||||||
| Income before income taxes | 2,432 | 2,391 | 2,484 | 2,512 | ||||||||||||
| Income taxes | 845 | 859 | 904 | 914 | ||||||||||||
| Net income | $ | 1,587 | $ | 1,532 | $ | 1,580 | $ | 1,598 | ||||||||
| Earnings per share basic (1) | $ | 0.25 | $ | 0.24 | $ | 0.25 | $ | 0.26 | ||||||||
| Earnings per share diluted (1) | $ | 0.24 | $ | 0.24 | $ | 0.25 | $ | 0.26 | ||||||||
(1) Earnings per share are computed independently for each period presented.
Consequently, the sum of the quarters may not equal the total earnings per share for the year.
******
| 95 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure 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.
(b) Internal Controls over Financial Reporting
Management’s annual report on internal control over financial reporting is located on page 52 of this Form 10-K.
Report of Independent Registered Public Accounting Firm is located on pages 53 and 54 of this Form 10-K.
(c) Changes to Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information relating to the directors and officers of Ocean Shore Holding, information regarding compliance with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee financial expert is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2016 Annual Meeting of Stockholders and to Part I, Item 1, “Business — Executive Officers of the Registrant” to this Annual Report on Form 10-K.
Ocean Shore Holding has adopted a code of ethics that applies to its principal executive officer, the principal financial officer and principal accounting officer. The code of ethics is available under Governance Documents in the Investor Relations section of our website at www.ochome.com. See Exhibit 14.0 to this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2016 Annual Meeting of Stockholders.
| 96 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
| (a) | Security Ownership of Certain Beneficial Owners |
Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in Ocean Shore Holding’s Proxy Statement for the 2016 Annual Meeting of Stockholders.
| (b) | Security Ownership of Management |
Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in Ocean Shore Holding’s Proxy Statement for the 2016 Annual Meeting of Stockholders.
| (c) | Changes in Control |
Management of Ocean Shore Holding knows of no arrangements, including any pledge by any person or securities of Ocean Shore Holding, the operation of which may at a subsequent date result in a change in control of the registrant.
| (d) | Equity Compensation Plan Information |
The following table sets forth information as of December 31, 2015 about Company common stock that may be issued upon the exercise of options under the Company’s equity incentive plans. The plans were approved by the Company’s stockholders.
| Plan Category | Number of securities to be issued upon the exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | |||||||||
| Equity compensation plans approved by security holders | 380,407 | $ | 11.46 | 3,894 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 380,407 | $ | 11.46 | 3,894 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2016 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information relating to the principal accountant fees and expenses is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2016 Annual Meeting of Stockholders.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (1) | The financial statements required in response to this item are incorporated by reference from Item 8 of this report. |
| (2) | All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. |
| (3) | Exhibits |
| Exhibit No. | Description | Incorporated by Reference to: | ||
| 3.1 | Certificate of Incorporation of Ocean Shore Holding Co. | Exhibit 3.1 to Registration Statement on Form S-1 (File No. 333-153454), as amended, initially filed on September 12, 2008. | ||
| 3.2 | Bylaws of Ocean Shore Holding Co. | Exhibit 3.2 to Registration Statement on Form S-1 (File No. 333-153454), as amended, initially filed on September 12, 2008. | ||
| 4.1 | No long-term debt instrument issued by Ocean Shore Holding Co. exceeds 10% of consolidated assets or is registered. In accordance with paragraph 4(iii) of Item 601(b) of Regulation S-K, Ocean Shore Holding Co. will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request | |||
| 10.1* | Amended and Restated Employment Agreement by and between Ocean Shore Holding Co., Ocean City Home Bank and Steven E. Brady | Exhibit 10.1 to Form 10-K for the year ended December 31, 2014, SEC File No. 000-53856 | ||
| 10.2* | Amended and Restated Salary Continuation Agreement by and between Ocean City Home Bank and Steven E. Brady | Exhibit 10.0 to Form 10-Q for the quarter ended June 30, 2008, SEC File No. 000-51000. | ||
| 10.3* | Salary Continuation Agreement by and between Ocean City Home Bank and Kim M. Davidson and all amendments thereto | Exhibit 10.1 to Form 8-K filed on April 22, 2010, SEC File No. 000-53856. | ||
| 10.4* | Salary Continuation Agreement by and between Ocean City Home Bank and Anthony J. Rizzotte and all amendments thereto | Exhibit 10.9 to Registration Statement on Form S-1 (File No. 333-118597), as amended, initially filed on August 27, 2004. | ||
| 10.5* | Split Dollar Life Insurance Agreement by and between Ocean City Home Bank and Steven E. Brady | Exhibit 10.10 to Registration Statement on Form S-1 (File No. 333-118597), as amended, initially filed on August 27, 2004. | ||
| 10.6* | Split Dollar Life Insurance Agreement by and between Ocean City Home Bank and Kim M. Davidson | Exhibit 10.2 to Form 8-K filed on April 22, 2010, SEC File No. 000-53856. |
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| Exhibit No. | Description | Incorporated by Reference to: | ||
| 10.7* | Split Dollar Life Insurance Agreement by and between Ocean City Home Bank and Anthony J. Rizzotte | Exhibit 10.11 to Registration Statement on Form S-1 (File No. 333-118597), as amended, initially filed on August 27, 2004. | ||
| 10.8* | Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Anthony J. Rizzotte | Exhibit 10.6 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000. | ||
| 10.9* | Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Donald Morgenweck | Exhibit 10.1 to Form 8-K filed on February 13, 2015, SEC File No. 000-53856. | ||
| 10.10* | Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Kim M. Davidson | Exhibit 10.8 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000. | ||
| 10.11* | Change in Control Agreement by and between Ocean City Home Bank and Janet Bossi | Exhibit 10.1 to Form 8-K filed on December 20, 2012, SEC File No. 000-53856. | ||
| 10.12* | Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Paul Esposito | Exhibit 10.10 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000. | ||
| 10.13* | Amended and Restated Ocean City Home Bank Directors’ Deferred Compensation Plan | Exhibit 10.11 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000. | ||
| 10.14* | Amended and Restated Ocean City Home Bank Director and Executive Life Insurance Plan | |||
| 10.15* | Amended and Restated Ocean City Home Bank Supplemental Executive Retirement Plan | Exhibit 10.13 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000. | ||
| 10.16 | Amended and Restated Ocean City Home Bank Change in Control Severance Compensation Plan | Exhibit 10.14 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000. | ||
| 10.17* | Ocean City Home Bank Stock-Based Deferred Compensation Plan, as amended | Exhibit 10.15 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000. | ||
| 10.18* | Ocean Shore Holding Co. 2005 Equity Incentive Plan | Appendix A to definitive Proxy Statement filed on June 7, 2005, SEC File No. 000-51000. | ||
| 10.19* | Ocean Shore Holding Co. 2010 Equity Incentive Plan | Appendix A to definitive Proxy Statement filed on May 19, 2010, SEC File No. 000-51000. | ||
| 10.20* | Form of Restricted Stock Award Agreement, Form of Non-Statutory Stock Option Award Agreement, and Form of Incentive Stock Option Award Agreement for the Ocean Shore Holding Co. 2005 Equity Incentive Plan | Exhibit 10 to Registration Statement on Form S-8 (File No. 333-121595) filed on August 15, 2005. | ||
| 10.21* | Form of Incentive Stock Option Award Agreement | Exhibit 99.2 to Registration Statement on Form S-8 (File No. 333-168525) filed on August 4, 2010. |
| 99 |
| Exhibit No. | Description | Incorporated by Reference to: | ||
| 10.22* | Form of Non-Statutory Stock Option Award Agreement | Exhibit 99.3 to Registration Statement on Form S-8 (File No. 333-168525) filed on August 4, 2010). | ||
| 10.23* | Form of Restricted Stock Award Agreement | Exhibit 99.4 to Registration Statement on Form S-8 (File No. 333-168525) filed on August 4, 2010. | ||
| 10.24* | Supplemental Salary Continuation Agreement by and between Ocean City Home Bank and Steven E. Brady | Exhibit 10.1 to Form 8-K filed January 31, 2014, SEC File No. 000-53856. | ||
| 21 | Subsidiaries | |||
| 23 | Consent of Deloitte & Touche LLP | |||
| 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 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | |||
| 101.0 | The following materials from the Ocean Shore Holding Co. Annual Report on Form 10-K for the year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows and (iv) the notes to the Consolidated Statements. |
* Management contract or compensatory plan, contract or arrangement.
| 100 |
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
| Date: March 11, 2016 | By: | /s/ Steven E. Brady |
| Steven E. Brady | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
| Name | Title | Date | ||
| /s/ Steven E. Brady | President, Chief Executive Officer | March 11, 2016 | ||
| Steven E. Brady | (principal executive officer) | |||
| /s/ Donald F. Morgenweck | Senior Vice President and Chief Financial Officer | March 11, 2016 | ||
| Donald F. Morgenweck | (principal accounting and financial officer) | |||
| /s/ Frederick G. Dalzell, M.D. | Director | March 11, 2016 | ||
| Frederick G. Dalzell, M.D. | ||||
| /s/ Christopher J. Ford | Director | March 11, 2016 | ||
| Christopher J. Ford | ||||
| /s/ Dorothy F. McCrosson, Esq | Director | March 11, 2016 | ||
| Dorothy F. McCrosson, Esq. | ||||
| /s/ Robert A. Previti, Ed.D. | Director | March 11, 2016 | ||
| Robert A. Previti, Ed.D. | ||||
| /s/ John L. Van Duyne, Jr. | Director | March 11, 2016 | ||
| John L. Van Duyne, Jr. | ||||
| /s/ Samuel R. Young | Director | March 11, 2016 | ||
| Samuel R. Young |
| 101 |