UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended March 31, 2016

 

OR

 

¨

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

 

For the transition period from                             to                            

 

Commission file number: 0-53856

 

OCEAN SHORE HOLDING CO.

(Exact name of registrant as specified in its charter)

 

New Jersey		80-0282446
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1001 Asbury Avenue, Ocean City, New Jersey		08226
(Address of principal executive offices)		(Zip Code)

 

(609) 399-0012

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No ¨

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨   No x

 

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

At May 1, 2016, the registrant had 6,411,678 shares of $0.01 par value common stock outstanding.

 

 

OCEAN SHORE HOLDING CO.

 

FORM 10-Q

 

INDEX

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Statements of Financial Condition at March 31, 2016 and December 31, 2015	1
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
SIGNATURES		36

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

		March 31,				December 31,
		2016				2015
		(Dollars in thousands)
ASSETS
Cash and amounts due from depository institutions		$	7,811			$	7,496
Interest-earning bank balances			85,743				80,214
Cash and cash equivalents			93,554				87,710
Investment securities held to maturity (estimated fair value—$919 at March 31, 2016; $1,137 at December 31, 2015)			864				1,084
Investment securities available for sale (amortized cost— $108,102 at March 31, 2016; $113,944 at December 31, 2015)			106,761				111,908
Loans—net of allowance for loan losses of $3,220 at March 31, 2016 and $3,190 at December 31, 2015			792,784				783,948
Accrued interest receivable:
Loans			2,451				2,330
Investment securities			15				21
Federal Home Loan Bank stock—at cost			5,864				5,864
Office properties and equipment—net			12,179				12,359
Prepaid expenses and other assets			1,472				2,242
Real estate owned			2,258				1,814
Cash surrender value of life insurance			24,611				24,457
Net deferred tax asset			4,290				4,572
Goodwill			4,630				4,630
Other intangible assets			416				440
TOTAL ASSETS		$	1,052,149			$	1,043,379
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Non-interest bearing deposits		$	192,671			$	190,614
Interest bearing deposits			625,634				621,419
Advances from Federal Home Loan Bank			105,000				105,000
Advances from borrowers for taxes and insurance			4,875				4,591
Accrued interest payable			584				589
Other liabilities			9,541				9,377
Total liabilities			938,305				931,590
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued			—				—
Common stock, $.01 par value, 25,000,000 shares authorized, 7,307,590 shares issued; shares outstanding: 6,411,678 at March 31, 2016; 6,403,058 at December 31, 2015			73				73
Additional paid-in capital			66,515				66,397
Retained earnings - partially restricted			63,851				62,480
Treasury stock—at cost: 895,912 at March 31, 2016; 904,532 at December 31, 2015			(12,573	)			(12,694	)
Common stock acquired by employee benefits plans			(2,212	)			(2,297	)
Deferred compensation plans trust			(839	)			(783	)
Accumulated other comprehensive loss			(971	)			(1,387	)
Total stockholders’ equity			113,844				111,789
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,052,149			$	1,043,379

 

See notes to unaudited condensed consolidated financial statements.

 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

		Three Months Ended March 31,
		2016				2015
		(Dollars in thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Taxable interest and fees on loans		$	8,172			$	8,172
Taxable interest on mortgage-backed securities			400				358
Non-taxable interest on municipal securities			1				1
Taxable interest and dividends on other investment securities			270				256
Total interest and dividend income			8,843				8,787
INTEREST EXPENSE:
Deposits			667				613
Borrowings			897				1,082
Total interest expense			1,564				1,695
NET INTEREST INCOME			7,279				7,092
PROVISION FOR LOAN LOSSES			152				153
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			7,127				6,939
OTHER INCOME:
Service charges			444				507
Cash surrender value of life insurance			154				154
Other			400				388
Total other income			998				1,049
OTHER EXPENSE:
Salaries and employee benefits			3,310				3,299
Occupancy and equipment			1,205				1,249
Federal insurance premiums			145				138
Advertising			90				106
Professional services			302				278
Real estate owned activity			7				(66	)
Charitable contributions			44				38
Other operating expenses			388				400
Total other expenses			5,491				5,442
INCOME BEFORE INCOME TAXES			2,634				2,546
INCOME TAX EXPENSE			878				833
NET INCOME		$	1,756			$	1,713
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gain (loss) on available for sale securities			414				387
Unrealized gain (loss) on post retirement life benefit			3				5
TOTAL COMPREHENSIVE INCOME		$	2,173			$	2,105
Earnings per share, basic:		$	0.29			$	0.29
Earnings per share, diluted:		$	0.28			$	0.28

 

See notes to unaudited condensed consolidated financial statements.

 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three Months Ended March 31,
		2016				2015
		(Dollars in thousands)
OPERATING ACTIVITIES:
Net income		$	1,756			$	1,713
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			191				266
Provision for loan losses			152				153
Stock based compensation expense			227				250
Cash surrender value of life insurance			(154	)			(154	)
Loss on disposal of office properties and equipment			–				1
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable			(115	)			(169	)
Prepaid expenses and other assets			770				734
Accrued interest payable			(5	)			(172	)
Other liabilities			166				(817	)
Net cash provided by operating activities			2,988				1,805
INVESTING ACTIVITIES:
Principal collected on:
Investment securities available for sale			3,762				2,015
Investment securities held to maturity			18				26
Loans originated, net of repayments			(9,674	)			3,227
Purchases of:
Federal Home Loan Bank stock
Investment securities held to maturity			(375	)			(402	)
Investment securities available for sale			(9,977	)			(5,034	)
Office properties and equipment			(32	)			(96	)
Proceeds from sale of:
Real estate owned			344				428
Proceeds from maturities and calls of:
Investment securities held to maturity			577				494
Investment securities available for sale			12,000				-
Cash used for acquisition, net of cash acquired
Net cash (used in) investing activities			(3,357	)			658
FINANCING ACTIVITIES:
Increase in deposits			6,272				5,814
Dividends paid			(384	)			(385	)
Purchase of shares by deferred compensation plans trust			(56	)			(55	)
Purchase of treasury stock			–				(2,456	)
Stock options exercised			97				372
Increase in advances from borrowers for taxes and insurance			284				404
Net cash provided by financing activities			6,213				3,694
NET DECREASE IN CASH AND CASH EQUIVALENTS			5,844				6,157
CASH AND CASH EQUIVALENTS—Beginning of period			87,710				80,307
CASH AND CASH EQUIVALENTS—End of period		$	93,554			$	86,464
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period for:
Interest		$	1,545			$	1,843
Income Taxes		$	100			$	2,080
SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS
Transfers of loans to real estate owned		$	788			$	387

 

See notes to unaudited condensed consolidated financial statements.

 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation - The unaudited condensed consolidated financial statements include the accounts of Ocean Shore Holding Co. (the “Company”) and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions to Form 10-Q, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim information, and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the condensed consolidated financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2015. The results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016 or any other period. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

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

 

New Accounting Pronouncements –In May 2014, the FASB issued ASU 2014-09, which created Accounting Standard Codification (“ASC”) ASC 606 "Revenue from Contracts with Customers," superseding the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. The amendment will be effective for the Company for the first annual period ending after December 15, 2017, including interim periods within that reporting period, and should be applied on a prospective basis. Early adoption of the guidance is not permitted. The Company is currently evaluating the impact of this ASU on its financial position, results of operations and disclosures.

 

In 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.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718)”. The ASU simplifies various aspects relating to share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The amendment will be effective for the Company for the first reporting period beginning after December 15, 2016. Earlier adoption is permitted. If early adopted, an entity must adopt all of the amendments in the same period.  Depending on the area of change, the amendment will be applied either prospectively, retrospectively or by using a modified retrospective approach.  The Company is in the process of evaluating the impacts of the adoption of this ASU on its financial position, results of operations and disclosures.

 

 

2. INVESTMENT SECURITIES

 

Investment securities are summarized as follows:

 

		March 31, 2016
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
		(Dollars in thousands)
Held to Maturity
Debt Securities – Municipal		$	375			$	—			$	—			$	375
U.S. Treasury and government sponsored entity mortgage-backed securities			489				55				—				544
Totals		$	864			$	55			$	—			$	919
Available for Sale
Debt securities:
Corporate		$	7,670			$	17			$	(1,041	)		$	6,646
U.S. Treasury and federal agencies			33				—				—				33
Equity securities			3				38				—				41
U.S. treasury and government sponsored entity mortgage-backed securities			100,396				363				(718	)			100,041
Totals		$	108,102			$	418			$	(1,759	)		$	106,761

 

		December 31, 2015
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
		(Dollars in thousands)
Held to Maturity
Debt Securities - Municipal		$	577			$	—			$	—			$	577
U.S. 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
U.S. Treasury and federal agencies			10,033				7				—				10,040
Equity securities			3				39				—				42
U.S. Treasury and government sponsored entity mortgage-backed securities			94,248				223				(1,489	)			92,982
Totals		$	113,944			$	295			$	(2,331	)		$	111,908

 

 

As of March 31, 2016 and December 31, 2015, the Company had investment securities available for sale with an estimated fair value of $104.0 million and $97.9 million, respectively, pledged as collateral to secure public fund deposits.

 

The following table provides the gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015:

 

		March 31, 2016
		Less Than 12 Months								12 Months or Longer								Total
						Gross								Gross								Gross
		Estimated				Unrealized				Estimated				Unrealized				Estimated				Unrealized
		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
		(Dollars in thousands)
Debt securities - Corporate		$	—			$	—			$	2,645			$	(1,041	)		$	2,645			$	(1,041	)
U.S. treasury and government sponsored entity mortgage-backed securities			14,943				(22	)			49,433				(696	)			64,376				(718	)
Totals		$	14,943			$	(22	)		$	52,078			$	(1,737	)		$	67,021			$	(1,759	)

 

		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
		(Dollars in thousands)
Debt securities - Corporate		$	—			$	—			$	2,843			$	(842	)		$	2,843			$	(842	)
U.S. 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	)

 

Management has reviewed its investment securities as of March 31, 2016 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, while the OTTI is concluded to exists, the Company only recognizes currently in earnings the amount of decline in value attributable to credit deterioration, with the remaining component of OTTI presented in other comprehensive income.

 

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

 

At March 31, 2016, 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 28.3% from the Company’s amortized cost basis. The initial decline of these securities was primarily attributable to depressed market pricing of non-rated issues of trust preferred securities observed during the financial downturn. The unrealized loss position continued to improve, and the current decline of these debt securities is principally attributable to the rising interest rate environment and depressed pricing on lower yielding investments with prolonged maturities, which had an impact for these types of investments. These securities were performing in accordance with their contractual terms as of March 31, 2016, and had paid all contractual cash flows since the Company’s initial investment. Management believes these unrealized losses are not other-than-temporary based upon the Company’s analysis that the securities will perform in accordance with their terms and the Company’s intent not to sell these investments for a period of time sufficient to allow for the anticipated recovery of fair value, which may be maturity. The Company expects recovery of fair value when market conditions have stabilized and that the Company will receive all contractual principal and interest payments related to those investments.

 

United States Treasury, US Federal Agencies and Government Sponsored Enterprise Mortgage-backed Securities - The Company’s investments in the preceding table in United States government sponsored enterprise notes consist of debt obligations of the Federal Home Loan Bank (“FHLB”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Federal National Mortgage Association (“FNMA”). At March 31, 2016 the Company had 13 agency mortgage-backed securities with unrealized losses for 12 months or longer. Those securities had aggregate depreciation of 1.4% from the Company’s amortized cost basis. These securities were performing in accordance with their contractual terms as of March 31, 2016, and had paid all contractual cash flows since the Company’s initial investment and that the Company expects to receive all contractual principal and interest payments related to those investments. Management believes these unrealized losses are not other-than-temporary based upon the Company’s analysis that the securities will perform in accordance with their terms and the Company’s intent not to sell these investments for a period of time sufficient to allow for the anticipated recovery of fair value, which may be maturity.

 

The amortized cost and estimated fair value of debt securities available for sale and held to maturity at March 31, 2016 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.

 

 

		March 31, 2016
		Held to Maturity								Available for Sale Securities
		Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value
		(Dollars in thousands)
Due within 1 year		$	375			$	375			$	3,983			$	4,000
Due after 1 year through 5 years			–				–				33				33
Due after 5 years through 10 years			–				–				–				–
Due after 10 years			–				–				3,687				2,645
Total		$	375			$	375			$	7,703			$	6,678

 

Equity securities had a cost of $3 thousand and a fair value of $41 thousand as of March 31, 2016. Mortgage-backed securities had a cost of $100.9 million and a fair value of $100.6 million as of March 31, 2016.

 

3. LOANS RECEIVABLE ─ NET

 

Loans receivable consist of the following:

 

		March 31, 2016				December 31, 2015
		(Dollars in thousands)
Real estate - mortgage:
One-to-four family residential		$	613,761			$	607,807
Commercial and multi-family			84,639				84,075
Total real estate-mortgage			698,400				691,882
Real estate - construction:
Residential			17,755				14,960
Commercial			5,310				3,595
Total real estate - construction			23,065				18,555
Commercial			20,727				21,383
Consumer:
Home equity			49,515				51,001
Other consumer loans			282				431
Total consumer loans			49,797				51,432
Total loans			791,989				783,252
Net deferred loan cost			4,015				3,886
Allowance for loan losses			(3,220	)			(3,190	)
Net total loans		$	792,784			$	783,948

 

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.

 

Changes in the allowance for loan losses are as follows:

 

		Three months ended March 31,
		2016				2015
		(Dollars in thousands)
Balance, beginning of period		$	3,190			$	3,760
Provision for loan loss			152				153
Charge-offs			(122	)			(529	)
Recoveries			–				–
Balance, end of period		$	3,220			$	3,384

 

 

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

 

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

 

		March 31, 2016				December 31, 2015
		(Dollars in thousands)
Real estate
One-to-four family residential		$	2,753			$	2,597
Commercial and multi-family			926				1,580
Real estate – construction			–				143
Commercial			41				41
Consumer			385				601
Non-accrual loans			4,105				4,962
Troubled debt restructuring, non-accrual			559				708
Total non-performing loans			4,664				5,670
Real estate owned			2,258				1,814
Total non-performing assets		$	6,922			$	7,484

 

 

A rollforward of the Company’s nonaccretable and accretable yield on loans accounted for under ASU 310-30, Loans and Debts Securities Acquired with Deteriorated Credit Quality, is shown below for the three month periods ended March 31, 2016 and 2015:

 

		Contractual Receivable Amount				Nonaccretable (Yield)/Premium				Accretable (Yield)/Premium				Carrying Amount
		(Dollars in thousands)
Balance at January 1, 2016		$	38,621			$	(2,423	)		$	426			$	36,624
Principal reductions			(845	)			—				—				(845	)
Charge-offs, net			(501	)			501				—				—
Accretion of loan discount (premium)			—				—				(27	)			(27	)
Transfer between nonaccretable and accretable yield			—				—				—				—
Balance at March 31, 2016		$	37,275			$	(1,922	)		$	399			$	35,752

 

		Contractual Receivable Amount				Nonaccretable (Yield)/Premium				Accretable (Yield)/Premium				Carrying Amount
		(Dollars in thousands)
Balance at January 1, 2015		$	44,216			$	(2,540	)		$	542			$	42,218
Principal reductions			(1,325	)			—				—				(1,325	)
Charge-offs, net			(62	)			62				—				—
Accretion of loan discount (premium)			—				—				(29	)			(29	)
Transfer between nonaccretable and accretable yield			—				—				—				—
Balance at March 31, 2015		$	42,829			$	(2,478	)		$	513			$	40,864

 

An age analysis of past due loans, segregated by class of loans, as of March 31, 2016 and December 31, 2015 are as follows:

 

		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable
		(Dollars in thousands)
March 31, 2016
Real Estate
1-4 Family Residential		$	962			$	—			$	3,123			$	4,085			$	609,676			$	613,761
Commercial and Multi-Family			—				—				926				926				83,713				84,639
Construction			—				—				—				—				23,065				23,065
Commercial			—				—				41				41				20,686				20,727
Consumer			87				124				385				596				49,201				49,797
Total		$	1,049			$	124			$	4,475			$	5,648			$	786,341			$	791,989
December 31, 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

 

 

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

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment
		(Dollars in thousands)
March 31, 2016
With no related allowance recorded
Real Estate
1-4 Family Residential		$	5,420			$	5,588			$	—			$	143
Commercial and Multi-Family			704				704				—				176
Construction			143				143				—				143
Commercial			41				41				—				41
Consumer			903				903				—				56
With an allowance recorded
Real Estate
1-4 Family Residential			3,459				3,539				624				288
Commercial and Multi-Family			472				497				103				236
Construction			—				—				—				—
Commercial			174				174				4				174
Consumer			324				446				56				65
Total
Real Estate
1-4 Family Residential		$	8,879			$	9,127			$	624			$	178
Commercial and Multi-Family			1,176				1,201				103				196
Construction			143				143				—				143
Commercial			215				215				4				107
Consumer			1,227				1,349				56				58
December 31, 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

 

 

Included in the Company’s loan portfolio are modified commercial loans. Per FASB ASC 310-40, Troubled Debt Restructuring (“TDR”), a modification is one in which the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider, such as providing for a below market interest rate and/or forgiving principal or previously accrued interest; this modification may stem from an agreement or be imposed by law or a court, and may involve a multiple note structure. Generally, prior to the modification, the loans which are modified as a TDR are already classified as non-performing. These loans may only be returned to performing (i.e. accrual status) after considering the borrower’s sustained repayment performance for a reasonable amount of time, generally six months; this sustained repayment performance may include the period of time just prior to the restructuring. As of March 31, 2016, the Company entered into 20 TDR agreements with a total carrying value of $4.3 million of which 4 were not performing totaling $559 thousand. These loans had a specific reserve of $37 thousand. The following table presents an analysis of the Company’s TDR agreements existing as of March 31, 2016 and December 31, 2015, respectively.

 

		As of March 31, 2016												As of December 31, 2015
						Outstanding Recorded Investment												Outstanding Recorded Investment
		Number of Contracts				Pre- Modification				Post- Modification				Number of Contracts				Pre- Modification				Post- Modification
		(Dollars in thousands)												(Dollars in thousands)
1-4 Family Residential			10			$	3,256			$	3,256				10			$	3,378			$	3,378
Commercial Mortgage			2				250				250				2				250				250
Consumer			7				617				617				7				621				621
Commercial			1				174				174				1				179				179
Total			20			$	4,297			$	4,297				20			$	4,428			$	4,428

 

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

 

 

The following table presents classified loans by class of loans as of March 31, 2016 and December 31, 2015.

 

		Real Estate
		1-4 Family Residential								Commercial and Multi-Family								Construction								Commercial								Consumer
		3/31/2016				12/31/2015				3/31/2016				12/31/2015				3/31/2016				12/31/2015				3/31/2016				12/31/2015				3/31/2016				12/31/2015
		(Dollars in thousands)
Grade:
Special Mention		$	2,123			$	3,182			$	1,104			$	321			$	—			$	—			$	—			$	—			$	728			$	807
Substandard			7,994				7,916				2,886				3,989				143				143				552				557				925				1,272
Doubtful and Loss			—				—				—				—				—				—				—				—				—				—
Total		$	10,117			$	11,098			$	3,990			$	4,310			$	143			$	143			$	552			$	557			$	1,653			$	2,079

 

The following table presents the credit risk profile of loans based on payment activity as of March 31, 2016 and December 31, 2015.

 

		Real Estate
		1-4 Family Residential								Commercial and Multi-Family								Construction								Commercial								Consumer
		3/31/2016				12/31/2015				3/31/2016				12/31/2015				3/31/2016				12/31/2015				3/31/2016				12/31/2015				3/31/2016				12/31/2015
		(Dollars in thousands)
Performing		$	611,008			$	605,210			$	83,713			$	82,495			$	23,065			$	18,412			$	20,686			$	21,342			$	49,412			$	50,831
Non-Performing			2,753				2,597				726				1,580				—				143				41				41				385				601
Total		$	613,761			$	607,807			$	84,639			$	84,075			$	23,065			$	18,555			$	20,727			$	21,383			$	49,797			$	51,432

 

 

The following table details activity in the allowance for possible loan losses by portfolio segment for the periods ended March 31, 2016 and December 31, 2015. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

 

		Real Estate
		1-4 Family Residential				Commercial and Multi-Family				Construction				Commercial				Consumer				Total
		(Dollars in thousands)
March 31, 2016
Allowance for credit losses:
Beginning Balance		$	2,051			$	240			$	25			$	236			$	638			$	3,190
Charge-offs			(46	)			—				—				—				(76	)			(122	)
Recoveries			—				—				—				—				—				—
Provision for loan losses			56				98				8				119				(129	)			152
Ending balance		$	2,061			$	338			$	33			$	355			$	433			$	3,220
Ending balance: individually evaluated for impairment		$	624			$	103			$	—			$	4			$	56			$	787
Ending balance: collectively evaluated for impairment		$	1,437			$	235			$	33			$	351			$	377			$	2,433
Loan Receivables:
Ending balance		$	613,761			$	84,639			$	23,065			$	20,727			$	49,797			$	791,989
Ending balance: individually evaluated for impairment		$	8,879			$	1,176			$	143			$	215			$	1,227			$	11,640
Ending balance: collectively evaluated for impairment		$	604,882			$	83,463			$	22,922			$	20,512			$	48,570			$	780,349
December 31, 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 impairment		$	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 impairment		$	597,946			$	82,245			$	18,412			$	21,163			$	49,811			$	769,577

 

 

4. DEPOSITS

 

Deposits consist of the following major classifications:

 

		March 31, 2016								December 31, 2015
						Weighted								Weighted
						Average								Average
		Amount				Interest Rate				Amount				Interest Rate
		(Dollars in thousands)
NOW and other demand deposit accounts		$	454,843				0.13	%		$	457,488				0.13	%
Passbook savings and club accounts			179,350				0.20	%			174,640				0.20	%
Subtotal			634,193								632,128
Certificates with original maturities:
Within one year			28,085				0.30	%			29,341				0.30	%
One to three years			133,103				1.03	%			127,813				1.03	%
Three years and beyond			22,924				1.56	%			22,751				1.56	%
Total certificates			184,112								179,905
Total		$	818,305							$	812,033

 

The aggregate amount of certificate accounts in denominations of $100 thousand or more at March 31, 2016 and December 31, 2015 amounted to $72.9 million and $70.6 million, respectively. Currently, deposits in excess of $250 thousand are generally not federally insured.

 

Municipal demand deposit accounts in denominations of $100 thousand or more at March 31, 2016 and December 31, 2015 amounted to $187.7 million and $194.6 million, respectively.

 

5. EARNINGS PER SHARE

 

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

 

The calculated basic and dilutive EPS are as follows:

 

		Three Months Ended March 31,
		2016				2015
		(Dollars in thousands, except per share data)
Numerator – Net Income		$	1,756			$	1,713
Denominators:
Basic average shares outstanding			6,127,162				5,985,347
Effect of dilutive common stock equivalents			108,609				109,830
Diluted average shares outstanding			6,235,771				6,095,177
Earnings per share:
Basic		$	0.29			$	0.29
Diluted		$	0.28			$	0.28

 

At March 31, 2016 and 2015, there were 280,979 and 575,142 outstanding anti-dilutive options, respectively, and 88,648 and 53,960 outstanding dilutive non-vested shares, respectively.

 

 

6. STOCK-BASED COMPENSATION

 

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

 

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

 

A summary of the status of the Company’s stock options under the Equity Plans as of March 31, 2016 and 2015 and changes during the three months ended March 31, 2016 and 2015 are presented below:

 

		Three Months Ended March 31, 2016								Three Months Ended March 31, 2015
		Number of shares				Weighted average exercise price				Number of shares				Weighted average exercise price
Outstanding at the beginning of the period			380,407			$	11.46				674,391			$	12.15
Granted			—				—				—				—
Exercised			8,620				11.24				28,668				12.97
Forfeited			2,160				13.56				—				—
Outstanding at the end of the period			369,627			$	11.45				645,723			$	12.11
Exercisable at the end of the period			317,273			$	11.10				515,964			$	12.07
Stock options vested or expected to vest (1)			285,546			$	11.10				464,368			$	12.07

 

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

 

The following table summarizes all stock options outstanding under the Equity Plans as of March 31, 2016:

 

		Options Outstanding
Date Issued		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life
November 21, 2006			14,506			$	14.78			0.6 years
November 20, 2007			17,274			$	11.32			1.6 years
August 18, 2010			202,959			$	10.21			4.4 years
March 15, 2011			13,600			$	12.06			5.0 years
August 17, 2011			43,998			$	11.53			5.4 years
November 19, 2012			14,100			$	13.10			6.6 years
November 19, 2013			63,190			$	14.14			7.6 years
Total			369,627			$	11.45			4.9 years

 

 

The compensation expense recognized for the three months ended March 31, 2016 was $45 thousand as compared to $46 thousand for the three months ended March 31, 2015.

 

At March 31, 2016, there was $208 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 1.4 years.

 

Summary of Non-vested Stock Award Activity:

 

		Three Months ended March 31, 2016								Three Months ended March 31, 2015
		Number of shares				Weighted avg grant date fair value				Number of shares				Weighted avg grant date fair value
Outstanding at the beginning of period			26,610			$	14.06				54,950			$	10.74
Issued			—				—				—				—
Forfeited			—				—				—				—
Vested			990			$	12.06				990			$	12.06
Outstanding at the end of the period			25,620			$	14.14				53,960			$	12.73

 

The compensation expense recognized for the three months ended March 31, 2016 was $33 thousand as compared to $81 thousand for the three months ended March 31, 2015.

 

As of March 31, 2016, there was $317 thousand of total unrecognized compensation costs related to nonvested stock awards. That cost is expected to be recognized over a weighted average period of 3 years.

 

7.

INCOME TAXES

 

Income tax expense was $878 thousand for an effective tax rate of 33.3% for the three months ended March 31, 2016 compared to $833 thousand for an effective tax rate of 32.7% for the same period in 2015.

 

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

 

Items considered in this evaluation include historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carryforward periods, experience with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. The evaluation is based on current tax laws as well as expectations of future performance. At March 31, 2016 and December 31, 2015, no valuation allowance has been recorded for any portfolio of the outstanding deferred tax asset.

 

The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. As of March 31, 2016, 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.

 

 

8.

STOCKHOLDERS’ EQUITY

 

During the first quarter of 2016, the Board of Directors of the Company declared a cash dividend of $0.06 per share, which was paid on February 26, 2016 to stockholders of record as of the close of business on February 5, 2016.

 

No reclassification adjustments were recognized in Accumulated Other Comprehensive Income during the three months ended March 31, 2016 and 2015. A summary of the changes in components of Accumulated Other Comprehensive Income for the three months ended March 31, 2016 and 2015 are presented below:

 

		Unrealized Gain (Loss) on Available for Sale Securities				Loss on Post Retirement Life Benefit				Accumulated Other Comprehensive Income
		(Dollars in thousands)
Beginning balance - 01/01/2016		$	(1,255	)		$	(133	)		$	(1,388	)
Current period change			696				3				699
Tax benefit			(282	)			-				(282	)
Ending balance – 03/31/2016		$	(841	)		$	(130	)		$	(971	)

 

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

 

9.

FAIR VALUE MEASUREMENTS

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

The following tables presents assets that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of March 31, 2016 and December 31, 2015:

 

March 31, 2016		Category Used for Fair Value Measurement
Assets:		Level 1				Level 2				Level 3
		(Dollars in thousands)
Securities available for sale:
U.S. government sponsored entity mortgage-backed securities		$	—			$	100,041			$	—
U.S. Treasury and federal agencies			—				33				—
Corporate securities			—				6,646				—
Equity securities			41				—				—
Totals		$	41			$	106,720			$	—

 

December 31, 2015		Category Used for Fair Value Measurement
Assets:		Level 1				Level 2				Level 3
		(Dollars in thousands)
Securities available for sale:
U.S. government sponsored entity mortgage-backed securities		$	—			$	92,982			$	—
U.S. Treasury and federal agencies			—				10,040				—
Corporate securities			—				8,844				—
Equity securities			42				—				—
Totals		$	42			$	111,866			$	—

 

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.

 

Summary of Non-Recurring Fair Value Measurements

 

						Category Used for Fair Value Measurement												Total (Losses) Gains
		Total				Level 1				Level 2				Level 3
		(Dollars in thousands)
March 31, 2016
Assets:
Impaired loans		$	3,642			$	-			$	539			$	3,103			$	(25	)
Real estate owned			788				-				678				110				(46	)
March 31, 2015
Assets:
Impaired loans		$	5,263			$	-			$	3,321			$	1,942			$	(66	)
Real estate owned			195				-				195				-				(306	)

 

Impaired Loans

 

The Company considers a loan to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. Under FASB ASC 310, collateral dependent impaired loans are valued based on the fair value of the collateral, which is based on appraisals, less cost to sell. These adjustments are based upon observable inputs, and therefore, the fair value measurement has been categorized as a level 2 measurement. In some cases, adjustments are made to the appraised values for various factors, including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement.  At March 31, 2016, total loans remeasured at fair value were $3.6 million. Such loans were carried at the value of $3.7 million immediately prior to remeasurement, resulting in the recognition of impairment through earnings for the life of the loans in the amount of $25 thousand. At March 31, 2015, total loans remeasured at fair value were $5.3 million. Such loans were carried at the value of $5.3 million immediately prior to remeasurement, resulting in the recognition of impairment through earnings for the life of the loans in the amount of $66 thousand.

 

Real Estate Owned

 

Once an asset is determined to be uncollectible, the underlying collateral is repossessed and reclassified to foreclosed real estate and repossessed assets. These assets are carried at lower of cost or fair value of the collateral, less cost to sell. These adjustments are based upon observable inputs, and therefore, the fair value measurement has been categorized as a Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors, including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement. Total real estate owned remeasured at fair value for the three months ended March 31, 2016 was $788 thousand, of which none were sold. These properties were carried at a value of $834 thousand immediately prior to remeasurement, resulting in recognition of impairment through earnings of $46 thousand.

 

 

Fair Value of Financial Instruments

 

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

 

						Category Used For Fair Value
March 31, 2016		Carrying Amount				Level 1				Level 2				Level 3
		(Dollars in thousands)
Assets:
Cash and cash equivalents		$	93,554			$	93,554			$	—			$	—
Investment securities:
Held to maturity			864				—				919				—
Available for sale			106,761				41				106,720				—
Loans receivable, net			792,784				—				811,123				—
Federal Home Loan Bank stock			5,864				—				5,864				—
Liabilities:
NOW and other demand deposit accounts			454,843				—				445,681				—
Passbook savings and club accounts			179,350				—				173,355				—
Certificates			184,112				—				185,087				—
Advances from Federal Home Loan Bank			105,000				—				112,447				—

 

						Category Used For Fair Value
December 31, 2015		Carrying Amount				Level 1				Level 2				Level 3
		(Dollars in thousands)
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				—

 

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.

 

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 March 31, 2016. 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.

 

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

 

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2016 and December 31, 2015. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since March 31, 2016 and December 31, 2015, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

10.

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill totaled $4.6 million at March 31, 2016 as compared to $4.6 million at December 31, 2015. The Company completed its annual goodwill impairment test as of August 1, 2015 and concluded that goodwill was not impaired. At March 31, 2016, no triggering events have occurred from the date of the impairment test that would have impaired goodwill.

 

The core deposit intangible totaled $416 thousand at March 31, 2016 as compared to $440 thousand at December 31, 2015. The core deposit intangible is being amortized over its estimated useful life of approximately 15 years from August 1, 2011.

 

 

11.

REAL ESTATE OWNED

 

Summary of Real Estate Owned (“REO”):

 

		2016												2015
		Residential				Commercial								Residential				Commercial
		Property				Property				Total				Property				Property				Total
		(Dollars in thousands)												(Dollars in thousands)
Balance, January 1,		$	1,773			$	41			$	1,814			$	609			$	41			$	650
Transfers into REO			110				678				788				192				195				387
Sales of REO			(344	)			─				(344	)			(429	)			─				(429	)
Balance, March 31,		$	1,539			$	719			$	2,258			$	372			$	236			$	608

 

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

 

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

 

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

 

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Ocean Shore Holding assumes no obligation to update any forward-looking statements.

 

GENERAL

 

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

 

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

 

 

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 are 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.

 

While Ocean City Home Bank is not engaged in lending to the casino industry, the employment or businesses of many of Ocean City Home Bank’s customers directly or indirectly benefit from the industry. As of March 31, 2016, we had $16.4 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 gaming industry, which has experienced declining revenue and employment since 2006.

 

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2016 AND DECEMBER 31, 2015

 

Total assets of the Company increased $8.7 million to $1,052.1 million at March 31, 2016 from $1,043.4 million at December 31, 2015. Loans receivable, net, increased $8.9 million, investment and mortgage-backed securities decreased $5.4 million and cash and cash equivalents increased by $5.8 million. Asset growth was funded by an increase in deposits of $6.3 million while borrowings were unchanged.

 

 

Investments

 

Investments and mortgage-backed securities decreased $5.4 million to $107.6 million at March 31, 2016 from $113.0 million at December 31, 2015. The decrease was primarily the result of repayments, calls and maturities of $16.4 million offset by investment purchases of $10.4 million and an increase in the available for sale valuation of $695 thousand.

 

Loans

 

Loans receivable, net, increased $8.9 million, or 1.1%, to $792.8 million at March 31, 2016 from $783.9 million at December 31, 2015. Loan originations and other advances totaled $39.5 million for the three months ended March 31, 2016 compared to $31.9 million originated in the three months ended March 31, 2015. Real estate mortgage loan originations totaled $23.7 million, real estate and commercial construction loan originations totaled $9.0 million, consumer loan originations totaled $2.6 million and commercial loan originations totaled $4.2 million for the first quarter of 2016. Origination activity was offset by $30.8 million of normal loan payments and payoffs, compared to payments and payoffs of $35.6 million in the same period of the prior year.

 

The following table summarizes changes in the loan portfolio in the three months ended March 31, 2016.

 

		March 31, 2016				December 31, 2015				$ change				% change
		(Dollars in thousands)
Real estate – mortgage:
One-to four-family residential		$	613,761			$	607,807			$	5,954				1.0	%
Commercial and multi-family			84,639				84,075				564				0.7
Total real estate – mortgage			698,400				691,882				6,518				0.9
Real estate – construction:
Residential			17,755				14,960				2,795				18.7
Commercial			5,310				3,595				1,715				47.7
Total real estate – construction			23,065				18,555				4,510				24.3
Commercial			20,727				21,383				(656	)			(3.1	)
Consumer
Home equity			49,515				51,001				(1,486	)			(2.9	)
Other consumer loans			282				431				(149	)			(34.6	)
Total consumer loans			49,797				51,432				(1,635	)			(3.2	)
Total loans			791,989				783,252				8,787				1.1
Net deferred loan cost			4,015				3,886				129				3.3
Allowance for loan losses			(3,220	)			(3,190	)			(30	)			0.9
Net total loans		$	792,784			$	783,948				8,836				1.1	%

 

Non-Performing Assets

 

Non-performing assets totaled $6.9 million, or 0.66% of total assets, at March 31, 2016 compared to $7.5 million, or 0.72% of total assets, at December 31, 2015 and $7.0 million, or 0.68% of total assets, at March 31, 2015. The decrease from December 31, 2015 was the result of decreases in non-performing loans of $857 thousand and TDR non-accrual loans of $149 thousand offset by an increase in real estate owned of $444 thousand. Non-performing assets consisted of 18 residential mortgages totaling $2.8 million, four commercial mortgages totaling $926 thousand, one commercial loan totaling $41 thousand, nine consumer equity loans totaling $385 thousand, four TDR non-accrual loans totaling $559 thousand and ten real estate owned properties totaling $2.3 million. Real estate owned increased by four properties while the total balance increased $444 thousand at March 31, 2016 to $2.3 million from $1.8 million at December 31, 2015.

 

 

The allowance for loan losses was essentially unchanged at $3.2 million, or 0.41% of total net loans at March 31, 2016 from December 31, 2105. The changes in the allowance for loan losses resulted from an addition to the allowance of $152 thousand offset by net charge-offs of $122 thousand. Net charge-offs totaled $122 thousand in 2016 compared to $529 thousand for the same period in 2015. The allowance was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of non-performing loans, growth in the loan portfolio and the current economic conditions. The loss factors used to calculate the allowance were unchanged in March 2016 from December 2015. At March 31, 2016, the specific allowance on loans individually evaluated for impairment was $787 thousand and pooled allowance on the remainder of the loan portfolio was $2.4 million as compared to specific allowance on loans individually evaluated for impairment of $804 million and pooled allowance on the reminder of the loan portfolio of $2.4 million at December 31, 2015.

 

		Three months Ended March 31,
		2016				2015
		(Dollars in thousands)
Allowance for loan losses:
Allowance at beginning of period		$	3,190			$	3,760
Provision for loan losses			152				153
Recoveries			–				–
Charge-offs			(122	)			(529	)
Net (charge-offs) recoveries			(122	)			(529	)
Allowance at end of period		$	3,220			$	3,384
Allowance for loan losses as a percent of total  loans			0.41	%			0.44	%
Allowance for loan losses as a percent of  non-performing loans			69.0	%			52.7	%

 

		March 31, 2016				December 31, 2015
		(Dollars in thousands)
Nonaccrual loans:
Real estate - residential		$	2,753			$	2,597
Real estate – mortgage loans			926				1,580
Real estate – commercial and multi-family			–				143
Commercial			41				41
Consumer			385				601
Total			4,105				4,962
Troubled debt restructurings – nonaccrual			559				708
Total nonaccrual loans			4,664				5,670
Real estate owned			2,258				1,814
Total non-performing assets		$	6,922			$	7,484
Total non-performing loans to total loans			0.59	%			0.72	%
Total non-performing loans to total assets			0.44	%			0.54	%
Total non-performing assets to total assets			0.66	%			0.72	%

 

Deposits

 

Deposits increased by $6.3 million, or 0.8%, to $818.3 million at March 31, 2016 from $812.0 million at December 31, 2015. Non-interest bearing demand deposits increased $2.1 million, interest bearing checking decreased $4.7 million, savings accounts increased by $4.7 million and certificates of deposit increased by $4.2 million. A repricing of interest bearing demand deposits to non-interest bearing demand deposits led to the change of category of those deposits. The Company continued its focus on attracting core deposits, which increased $2.1 million to $634.2 million at March 31, 2016.

 

 

The following table summarizes changes in deposits in the three months ended March 31, 2016.

 

		March 31,				December 31,
		2016				2015				$ change				% change
		(Dollars in thousands)
Non-interest-bearing demand deposits		$	192,671			$	190,614			$	2,057				1.1	%
Interest-bearing demand deposits			262,172				266,874				(4,702	)			(1.8	)
Savings accounts			179,350				174,640				4,710				2.7
Time deposits			184,112				179,905				4,207				2.3
Total		$	818,305			$	812,033			$	6,272				0.8	%

 

Borrowings

 

Federal Home Loan Bank advances were unchanged at $105.0 million at March 31, 2016 from December 31, 2015.

 

Stockholders’ Equity

 

Stockholders’ equity increased $2.1 million to $113.8 million at March 31, 2016, primarily as a result of $1.8 million of net income, proceeds from exercises of stock options of $97 thousand, an increase in other comprehensive income of $416 thousand and increases in contra benefit plans of $62 thousand offset by dividends paid of $384 thousand.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Net income was $1.8 million for the three months ended March 31, 2016 as compared to $1.7 million for the three months ended March 31, 2015. The increase of $43 thousand, or 2.5%, in 2016 from 2015 was due primarily to an increase in net interest income offset by a decrease in other income and increases in operating expenses and income tax expense.

 

		Three Months Ended March 31,
		2016				2015
		(Dollars in thousands, except per share data)
Net income		$	1,756			$	1,713
Basic earnings per share		$	0.29			$	0.29
Diluted earnings per share		$	0.28			$	0.28
Return on average assets (annualized)			0.67	%			0.66	%
Return on average equity (annualized)			6.20	%			6.43	%

 

 

Net Interest Income

 

The following table summarizes changes in interest income and interest expense for the three-month periods ended March 31, 2016 and 2015.

 

		Three Months Ended March 31,
		2016				2015				$ change				% change
		(Dollars in thousands)
INTEREST INCOME:
Loans		$	8,172			$	8,172			$	—				—
Investment securities			671				615				56				9.1
Total interest income			8,843				8,787				56				0.6
INTEREST EXPENSE:
Deposits			667				613				54				8.8
Borrowings			897				1,082				(185	)			(17.1	)
Total interest expense			1,564				1,695				(131	)			(7.7	)
Net interest income		$	7,279			$	7,092			$	187				2.6

 

Net interest income increased by $187 thousand, or 2.6%, for the quarter ended March 31, 2016. The interest rate spread and net interest margin of the Company were 3.09% and 3.24% respectively, for the three months ended March 31, 2016, compared to 3.04% and 3.19% for the same period in 2015. The increase in the net interest margin of five basis points resulted from an increase in the average balance of interest-earning assets of $10.9 million and a decrease in the cost of interest-bearing liabilities of seven basis points offset by a decrease in the yield on interest-earning assets of two basis points and an increase in the average balance of interest-bearing liabilities of $2.5 million.

 

Interest income increased by $56 thousand, or 0.6%, for the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015. The increase in interest income resulted from increases in the average balance of loans of $14.7 million and investments of 28 basis points offset by a decrease in the average balance of investments of $3.7 million and lower yields on loans of eight basis points. The decrease in average balance of investments resulted from investment calls and maturities. The decrease in loan yield resulted from lower rates on new loans originated and payoffs or refinances of higher yielding loans offset by increased loan balances from new originations at lower rates.

 

Interest expense decreased by $131 thousand, or 7.7%, for the quarter ended March 31, 2016 over the same period in 2015. The decrease in interest expense resulted from decreases in borrowings of $12.2 million and rates paid on borrowings of 27 basis points offset by increases in the average balance of interest-bearing deposits of $14.7 million and the cost of deposits of two basis points. The increase in the average balance of interest-bearing deposits resulted primarily from deposit growth while the decrease in the cost of FHLB advances resulted from refinancing of maturing advances to a lower rate.

 

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

 

 

Average Balance Tables

		Three Months Ended March 31, 2016												Three Months Ended March 31, 2015
		Average Balance				Interest and Dividends				Yield/ Cost				Average Balance				Interest and Dividends				Yield/ Cost
		(Dollars in thousands)												(Dollars in thousands)
Assets:
Interest-earning assets:
Loan		$	788,624			$	8,172				4.14	%		$	773,955			$	8,172				4.22	%
Investment securities			110,296				671				2.44	%			114,032				615				2.16	%
Total interest-earning assets			898,920				8,843				3.94	%			887,987				8,787				3.96	%
Noninterest-earning assets			155,506												150,433
Total assets		$	1,054,426											$	1,038,420
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits		$	276,082			$	116				0.17	%		$	272,583			$	118				0.17	%
Savings accounts			176,425				88				0.20	%			168,857				84				0.20	%
Certificates of deposit			182,162				463				1.02	%			178,493				411				0.92	%
Total interest-bearing deposits			634,669				667				0.42	%			619,933				613				0.40	%
FHLB advances			105,000				897				3.42	%			110,000				925				3.36	%
Subordinated debt			—				—				—	%			7,217				157				8.67	%
Total borrowings			105,000				897				3.42	%			117,217				1,082				3.69	%
Total interest-bearing liabilities			739,669				1,564				0.85	%			737,150				1,695				0.92	%
Noninterest-bearing demand accounts			187,928												182,659
Other liabilities			13,564												12,014
Total liabilities			941,161												931,823
Stockholders’ equity			113,265												106,597
Total liabilities and stockholders’ equity		$	1,054,426											$	1,038,420
Net interest income						$	7,279											$	7,092
Interest rate spread											3.09	%											3.04	%
Net interest margin											3.24	%											3.19	%
Average interest-earning assets to average interest-bearing liabilities			121.53	%											120.46	%

 

Provision for Loan Losses

 

We review the level of the allowance for loan losses on a monthly basis and establish the provision for loan losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the collectability of the loan portfolio. The provision for loan losses was $152 thousand in the three months ended March 31, 2016 compared to $153 thousand in the three months ended March 31, 2015. The provision was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of non-performing loans and the current economic environment.

 

 

Other Income

 

The following table summarizes other income for the three months ended March 31, 2016 and 2015 and the changes between the periods.

 

		Three Months Ended March 31,
		2016				2015				% Change
		(Dollars in thousands)
OTHER INCOME:
Service charges		$	444			$	507				(12.4	)
Cash surrender value of life insurance			154				154				—
Other			400				388				3.1
Total other income		$	998			$	1,049				(4.9	)

 

Other income decreased $51 thousand, or 4.9%, to $1.0 million for the three-month period ended March 31, 2016 from the same period in 2015. A decrease in service charges income of $63 thousand resulted from lower service charges collected on deposit accounts. Other income increased $12 thousand primarily from increases in fees earned on loans and other income.

 

Other Expense

 

The following table summarizes other expense for the three months ended March 31, 2016 and 2015 and the changes between periods.

 

		Three Months Ended March 31,
		2016				2015				% Change
		(Dollars in thousands)
OTHER EXPENSE:
Salaries and employee benefits		$	3,310			$	3,299				0.3
Occupancy and equipment			1,205				1,249				(3.5	)
Federal insurance premiums			145				138				5.1
Advertising			90				106				(15.1	)
Professional services			302				278				8.6
Real estate owned expense			7				(66	)			N/M
Other operating expense			432				438				(1.4	)
Total other expense		$	5,491			$	5,442				0.9

N/M – not measurable

 

Other expenses increased $49 thousand, or 0.9%, to $5.5 million for the three-month period ended March 31, 2016 from the same period in 2015. Increases in salary and benefits, FDIC insurance, professional services and REO expense totaling $115 thousand were offset by decreases in occupancy and equipment, advertising and other expenses totaling $66 thousand for the first quarter of 2016. The increase in REO expense resulted from lesser gains on sale of properties of $53 thousand in the first three months of 2015. The remainder of the changes resulted from a normal course of business.

 

Income Taxes

 

Income taxes increased $45 thousand to $878 thousand for an effective tax rate of 33.3% for the three months ended March 31, 2016, compared to $833 thousand for an effective tax rate of 32.7% for the same period in 2015. The increased in the effective rate was primarily based upon a change in the mix of assets with a tax preference offset by higher net income before taxes.

 

 

Liquidity and Capital Resources

 

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

 

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

 

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2016, cash and cash equivalents totaled $93.6 million. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $39.7 million at March 31, 2016. In addition, at March 31, 2016, we had the ability to borrow a total of approximately $293.3 million from the Federal Home Loan Bank of New York.

 

At March 31, 2016, we had $73.2 million in loan commitments outstanding, which included $26.8 million in undisbursed loans, $27.4 million in unused home equity lines of credit and $19.0 million in commercial lines and letters of credit. Certificates of deposit due within one year of March 31, 2016 totaled $127.0 million, or 69.0% of certificates of deposit. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

At March 31, 2016, the Bank exceeded all of its regulatory capital requirements with Tier 1 leverage capital of $99.6 million, or 9.51% of total adjusted assets, which is above the required level of $41.9 million or 4.0%; common equity Tier 1 risk-based capital of $99.6 million, or 18.10% of total adjusted assets which is above the required level of $24.7 million or 4.5%; Tier 1 risk-based capital of $99.6 million, or 18.10% of total adjusted assets which is above the required level of $33.0 million or 6.0%; and total risk-based capital of $102.8 million, or 18.69% of risk-weighted assets, which is above the required level of $44.0 million or 8.0%. The Bank is considered a “well-capitalized” institution under the applicable prompt corrective action regulations.

 

At March 31, 2016, the Company had the following levels of regulatory capital: Tier 1 leverage capital ratio 10.47% of total adjusted assets, common equity Tier 1 risk-based capital ratio of 19.88% of risk-weighted assets; Tier 1 risk-based capital ratio of 19.88% of risk-weighted assets and total risk-based capital ratio 20.46% of risk-weighted assets.

 

MARKET RISK MANAGEMENT

 

Net Interest Income Simulation Analysis

 

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

 

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

 

 

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

 

		At December 31, 2015 Change in Estimated Net Interest Income Over
		12 Months				24 Months
		(Dollars in Thousands)
200 basis point increase in rates		$	2,586			$	7,713
100 basis point decrease in rates		$	(571	)		$	(2,717	)

N/M – not measurable

 

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

 

Economic Value of Equity Analysis

 

In addition to a net interest income simulation analysis, we use an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in economic value of equity of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Economic value of equity (EVE) represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 50 to 300 basis point increase or a sustained 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table presents the change in our net portfolio value at December 31, 2015 that would occur in the event of an immediate change in interest rates based on management’s assumptions, with no effect given to any steps that we might take to counteract that change.

 

		Economic Value of Equity (Dollars in Thousands)												Economic Value of Equity as % of Portfolio Value of Assets
Basis Point (“bp”) Change in Rates		$ Amount				$ Change				% Change				EVE Ratio				Change
300 bp		$	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				1,639				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.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

For the three months ended March 31, 2016 and 2015, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

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

 

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.0		Section 1350 Certification of Chief Executive Officer and Chief Financial Office.
101.0		The following materials from the Ocean Shore Holding Co. Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Financial Condition, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes.

 

 

SIGNATURES

 

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

 

	OCEAN SHORE HOLDING CO.
	(Registrant)
Date: May 6, 2016	/s/ Steven E. Brady
	Steven E. Brady
	President and Chief Executive Officer
Date: May 6, 2016	/s/ Donald F. Morgenweck
	Donald F. Morgenweck
	Chief Financial Officer and Senior Vice President