XNAS:OSHC Ocean Shore Holding Co Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2012

 

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 T 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 T 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 T
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 T

 

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, 2012, the registrant had 7,291,643 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, 2012 and December 31, 2011 1
     
  Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011 2
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 3
     
Notes to Unaudited Condensed Consolidated Financial Statements    4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
     
Item 4. Controls and Procedures 32
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 32
     
Item 1A. Risk Factors 32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
     
Item 3. Defaults upon Senior Securities 33
     
Item 4. Mine Safety Disclosures 33
     
Item 5. Other Information 33
     
Item 6. Exhibits 33
     
SIGNATURES    

 

 
 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES        
         
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 
   March 31,   December 31, 
ASSETS  2012   2011 
           
Cash and amounts due from depository institutions  $7,839,420   $6,616,214 
Interest-earning bank balances   145,647,408    149,036,727 
           
Cash and cash equivalents   153,486,828    155,652,941 
           
Investment securities held to maturity
          
 (estimated fair value—$5,877,814 at March 31, 2012; $6,147,579 at December 31, 2011)   5,714,661    5,964,393 
Investment securities available for sale          
 (amortized cost— $70,501,510 at March 31, 2012; $47,639,832 at December 31, 2011)   69,551,081    46,767,668 
Loans—net of allowance for loan losses of $3,894,735 at March 31, 2012 and $3,762,295 at December 31, 2011   714,993,046    727,626,278 
Accrued interest receivable:          
Loans   2,530,182    2,550,769 
Investment securities   195,052    294,492 
Federal Home Loan Bank stock—at cost   6,434,800    6,434,800 
Office properties and equipment—net   13,923,589    14,054,679 
Prepaid expenses and other assets   6,094,964    6,033,252 
Real estate owned   243,176    97,500 
Cash surrender value of life insurance   18,960,774    18,812,573 
Deferred tax asset   4,516,396    4,484,212 
Goodwill   5,364,991    5,279,609 
Other intangible assets   680,750    677,000 
           
TOTAL ASSETS  $1,002,690,290   $994,730,166 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
LIABILITIES:          
Non-interest bearing deposits  $81,844,084   $75,551,232 
Interest bearing deposits   676,962,271    676,903,679 
Advances from Federal Home Loan Bank   110,000,000    110,000,000 
Junior subordinated debenture   15,464,000    15,464,000 
Advances from borrowers for taxes and insurance   4,161,577    3,999,306 
Accrued interest payable   802,618    1,146,482 
Other liabilities   7,898,202    6,985,863 
           
Total liabilities   897,132,752    890,050,562 
           
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;          
7,291,643 shares outstanding at March 31, 2012 and December 31, 2011   73,076    73,076 
Additional paid-in capital   64,509,630    64,408,624 
Retained earnings - partially restricted   46,064,336    45,147,396 
Treasury stock – at cost: 15,947 shares at March 31, 2012 and December 31, 2011   (174,232)   (174,232)
Common stock acquired by employee benefits plans   (3,579,978)   (3,665,478)
Deferred compensation plans trust   (553,390)   (538,982)
Accumulated other comprehensive loss   (781,904)   (570,800)
           
Total stockholders’ equity   105,557,538    104,679,604 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $1,002,690,290   $994,730,166 
           
 See notes to unaudited condensed consolidated financial statements.          

 

1
 

  

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES        
         
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME 
         
   Three Months Ended March 31, 
   2012   2011 
INTEREST AND DIVIDEND INCOME:          
Taxable interest and fees on loans  $9,000,535   $8,554,572 
Taxable interest on mortgage-backed securities   165,401    164,636 
Non-taxable interest on municipal securities   54,284    10,646 
Taxable interest and dividends on other investment securities   391,035    307,874 
           
Total interest and dividend income   9,611,255    9,037,728 
           
INTEREST EXPENSE:          
Deposits   1,215,444    1,565,988 
Advances from Federal Home Loan Bank          
and other borrowed money   1,510,333    1,497,431 
           
Total interest expense   2,725,777    3,063,419 
           
NET INTEREST INCOME   6,885,478    5,974,309 
           
PROVISION FOR LOAN LOSSES   172,900    74,800 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   6,712,578    5,899,509 
           
OTHER INCOME:          
Service charges   410,848    359,795 
Cash surrender value of life insurance   148,201    128,469 
Gain on call of AFS security       10,014 
Other   345,941    303,811 
           
Total other income   904,990    802,089 
           
OTHER EXPENSE:          
Salaries and employee benefits   3,129,921    2,612,693 
Occupancy and equipment   1,235,287    984,192 
Federal insurance premiums   127,692    187,080 
Advertising   116,945    106,030 
Professional services   252,057    294,447 
Real estate owned activity   2,678    1,250 
Charitable contributions   37,500    36,000 
Other operating expenses   498,924    434,174 
           
Total other expenses   5,401,004    4,655,866 
           
INCOME BEFORE INCOME TAXES   2,216,564    2,045,732 
           
INCOME TAX EXPENSE   862,126    841,146 
           
NET INCOME  1,354,438   1,204,586 
Other comprehensive income, net of tax:          
Unrealized (loss) gain on securities   (211,104)   251,164 
           
COMPREHENSIVE INCOME  $1,143,334   $1,455,750 
           
Earnings per share basic:  $0.20   $0.18 
Earnings per share diluted:  $0.20   $0.18 
           
See notes to unaudited condensed consolidated financial statements.          

 

2
 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         
   Three Months Ended March 31, 
   2012   2011 
OPERATING ACTIVITIES:          
Net income  $1,354,438   $1,204,586 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   272,825    222,461 
Provision for loan losses   172,900    74,800 
Stock based compensation expense   186,506    181,641 
Gain on call of AFS securities       (10,014)
Cash surrender value of life insurance   (148,201)   (128,469)
Changes in assets and liabilities which provided (used) cash:          
Accrued interest receivable   120,027    44,392 
Prepaid expenses and other assets   (226,735)   (20,434)
Accrued interest payable   (343,864)   (348,804)
Other liabilities   912,339    75,388 
Net cash provided by operating activities   2,300,235    1,295,547 
           
INVESTING ACTIVITIES:          
Principal collected on:          
Mortgage-backed securities available for sale   1,005,876    1,125,283 
Mortgage-backed securities held to maturity   217,826    153,558 
Loan repayments, net of originations   12,223,601    (111,081)
Purchases of:          
Investment securities available for sale   (13,764,580)   (20,005,000)
Investment securities held to maturity   (88,000)    
Mortgage-backed securities available for sale   (20,132,422)    
Office properties and equipment   (131,707)   (177,947)
Proceeds from maturities/ calls of:          
Investment securities held to maturity   120,000     
Mortgage-backed securities available for sale       124,361 
Investment securities available for sale   10,000,000    600,000 
Net cash used in investing activities   (10,549,406)   (18,290,826)
           
FINANCING ACTIVITIES:          
Increase in deposits   6,372,694    20,350,589 
Dividends paid   (437,499)   (437,807)
Purchase of shares by deferred compensation plans trust   (14,408)   (2,752)
Increase in advances from borrowers for taxes and insurance   162,271    234,185 
Net cash provided by financing activities   6,083,058    20,144,215 
           
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (2,166,113)   3,148,936 
           
CASH AND CASH EQUIVALENTS—Beginning of period   155,652,941    110,865,154 
           
CASH AND CASH EQUIVALENTS—End of period  $153,486,828   $114,014,090 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW          
INFORMATION—Cash paid during the period for:          
Interest  $3,090,891   $3,412,222 
Income Taxes  $222,000   $609,574 
SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS          
Transfers of loans to real-estate owned  $145,676   $ 
Adjustments to goodwill  $85,382   $ 
           
 See notes to unaudited condensed consolidated financial statements.          

 

 

3
 

   

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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. All significant 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, 2011. The results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012 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 accounting principles generally accepted in the United States of America 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, deferred income taxes and the fair value measurement for investment securities available for sale. Actual results could differ from those estimates.

 

New Accounting Pronouncements – In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment.  This update amends the current guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. This update does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the update does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider. The amendments became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income.  This update to comprehensive income guidance requires all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  This update also requires additional changes to the face of the financial statements including eliminating the presentation of other comprehensive income as a part of stockholders’ equity, and the presentation of certain reclassification adjustments between net income and other comprehensive income.  The new accounting guidance was effective beginning January 1, 2012, and was applied retrospectively.  The adoption of this update impacted the presentation and disclosure of the Company’s financial statements but did not impact its results of operations, financial position, or cash flows.

  

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.  This update to fair value measurement guidance addresses changes to concepts regarding performing fair value measurements including: (i) the application of the highest and best use and valuation premise; (ii) the valuation of an instrument classified in the reporting entity’s shareholders’ equity; (iii) the valuation of financial instruments that are managed within a portfolio; and (iv) the application of premiums and discounts.  This update also enhances disclosure requirements about fair value measurements, including providing information regarding Level 3 measurements such as quantitative information about unobservable inputs, further discussion of the valuation processes used and assumption sensitivity analysis.  The new accounting guidance was effective beginning January 1, 2012.  The adoption of this update impacted the presentation and disclosure of the Company’s financial statements but did not impact its results of operations, financial position, or cash flows.

 

In December 2011, the FASB issued ASU No. 2011-12, ASU No. 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update defers the effective date for the part of ASU No. 2011-05 that would have required adjustments of items out of accumulated other comprehensive income to be presented on the components of both net income and other comprehensive income in the financial statements until FASB can adequately evaluate the costs and benefits of this presentation requirement. The Company has deferred this presentation, as permitted, and continues to evaluate the impact of the adoption of this accounting standards update on the Company's financial statements.

 

4
 

  

2.  INVESTMENT SECURITIES
 
Investment securities are summarized as follows:
   March 31, 2012 
         Gross    Gross    Estimated 
    Amortized    Unrealized    Unrealized    Fair 
    Cost    Gain    Loss    Value 
Held to Maturity                    
Debt Securities - Municipal  $3,988,000   $   $   $3,988,000 
U.S. Treasury and government sponsored entity mortgage-backed securities   1,726,661    163,153        1,889,814 
Totals  $5,714,661   $163,153   $   $5,877,814 
                     
Available for Sale                    
Debt securities:                    
Municipal securities  $830,000   $8,532   $   $838,532 
Corporate   11,473,842    66,557    (1,583,408)   9,956,991 
U.S. Treasury and federal agencies   25,659,454    224    (92,308)   25,567,370 
Equity securities   2,596    12,962    (1,737)   13,821 
U.S. Treasury and government sponsored entity mortgage-backed securities   32,535,618    690,157    (51,408)   33,174,367 
Totals  $70,501,510   $778,432   $(1,728,861)  $69,551,081 
                     
    December 31, 2011 
         Gross    Gross    Estimated 
    Amortized    Unrealized    Unrealized    Fair 
    Cost    Gain    Loss    Value 
Held to Maturity                    
Debt Securities - Municipal  $4,020,000   $   $   $4,020,000 
U.S. Treasury and government sponsored entity mortgage-backed securities   1,944,393    183,186        2,127,579 
Totals  $5,964,393   $183,186   $   $6,147,579 
                     
Available for Sale                    
Debt securities:                    
Municipal  $830,000   $2,000   $   $832,000 
Corporate   7,700,531    35,450    (1,625,673)   6,110,308 
U.S. Treasury and federal agencies   25,660,016    24,720    (148)   25,684,588 
Equity securities   2,596    11,980    (2,034)   12,542 
U.S. Treasury and government sponsored entity mortgage-backed securities   13,446,689    707,047    (25,506)   14,128,230 
Totals  $47,639,832   $781,197   $(1,653,361)  $46,767,668 

  

5
 

 

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, 2012 and December 31, 2011:

 

   March 31, 2012 
   Less Than 12 Months   12 Months or Longer   Total 
       Gross       Gross       Gross 
   Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized 
   Fair Value   Loss   Fair Value   Loss   Fair Value   Loss 
Debt securities -                              
U.S. Treasuries and agencies  $19,977,146   $(92,308)  $   $   $19,977,146   $(92,308)
Corporate           3,119,275    (1,583,408)   3,119,275    (1,583,408)
U.S. Treasury and government sponsored entity mortgage-backed securities   22,858,788    (51,408)           22,858,788    (51,408)
Equity securities           859    (1,737)   859    (1,737)
Totals  $42,835,934   $(143,716)  $3,120,134   $(1,585,145)  $45,956,068   $(1,728,861)

 

   December 31, 2011 
   Less Than 12 Months   12 Months or Longer   Total 
       Gross       Gross       Gross 
   Estimated   Unrealized   Estimated   Unrealized   Estimated   Unrealized 
   Fair Value   Loss   Fair Value   Loss   Fair Value   Loss 
Debt securities -                              
U.S. Treasury  $32,797   $(148)  $   $   $32,797   $(148)
Corporate           4,076,639    (1,625,673)   4,076,639    (1,625,673)
US Treasury and government sponsored entity mortgage-backed securities   2,685,526    (25,506)           2,685,526    (25,506)
Equity securities           562    (2,034)   562    (2,034)
Totals  $2,718,323   $(25,564)  $4,077,201   $(1,627,707)  $6,795,524   $(1,653,361)

 

Management has reviewed its investment securities as of March 31, 2012 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 Company determines whether the unrealized losses are temporary in accordance with FASB ASC 325-40, when applicable, and FASB ASC 320-10. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

 

Below is a roll forward of the anticipated credit losses on securities for which the Company has recorded other than temporary impairment charges through earnings and other comprehensive income.

 

6
 

 

 

   2012   2011 
Credit component of OTTI as of January 1  $3,000,000   $3,000,000 
Additions for credit related OTTI charges on previously unimpaired securities        
Reductions for securities sold during the period        
Reductions for increases in cash flows expected to be collected and recognized over the remaining life of the security        
Additional increases as a result of impairment charges recognized on investments for which an OTTI was previously recognized        
Credit component of OTTI as of March 31,  $3,000,000   $3,000,000 

 

Two pooled trust preferred collateralized debt obligations (“CDOs”) backed by bank trust capital securities have been determined to be other-than-temporarily impaired in 2009 and 2008, due solely to credit related factors. These securities have Fitch credit ratings below investment grade at March 31, 2012. Each of the securities is in the mezzanine levels of credit subordination. The underlying collateral consists of the bank trust capital securities of over 50 institutions. A summary of key assumptions utilized to forecast future expected cash flows on the securities determined to have OTTI were as follows as of March 31, 2012 and 2011:

 

   March 31, 2012  March 31, 2011
Future loss rate assumption per annum  .8% to 1.2%  .8% to 1.2%
Expected cumulative loss percentage  27.8%  27.8%
Cumulative loss percentage to date  37.0% to 33.2%  37.0% to 33.2%
Remaining life  29 years  30 years

 

 

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 CDOs backed by bank trust preferred capital securities.

 

At March 31, 2012, two single issue trust preferred securities had been in a continuous unrealized loss position for 12 months or longer. Those securities had aggregate depreciation of 41.3% from the Company’s amortized cost basis. The decline is primarily attributable to depressed pricing of two private placement single issuer trust preferred securities. There has been limited secondary market trading for these types of securities, as a declining domestic economy and increasing credit losses in the banking industry have led to illiquidity in the market for these types of securities. The unrealized loss on these debt securities relates principally to the increased credit spread and a lack of liquidity currently in the financial markets for these types of investments. These securities were performing in accordance with their contractual terms as of March 31, 2012, 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 or lack of requirement 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 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, 2012, the Company had no agency mortgage-backed securities that had been in a continuous unrealized loss position for 12 months or longer.

 

7
 

  

The amortized cost and estimated fair value of debt securities available for sale and held to maturity at March 31, 2012 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, 2012 
   Held to Maturity   Available for Sale Securities 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 
                 
Due within 1 year  $3,988,000   $3,988,000           $            ─           $            ─ 
Due after 1 year through 5 years           4,805,525    4,866,428 
Due after 5 years through 10 years           36,839    36,666 
Due after 10 years           33,120,932    33,459,799 
Total  $3,988,000   $3,988,000   $37,963,296   $36,362,893 

  

Equity securities had a cost of $2,596 and a fair value of $13,821 as of March 31, 2012. Mortgage-backed securities had a cost of $32,535,618 and a fair value of $33,174,367 as of March 31, 2012.

 

8
 

   

3. LOANS RECEIVABLE NET        
         
Loans receivable consist of the following:    
         
   March 31, 2012   December 31, 2011 
Real estate - mortgage:          
One-to-four family residential  $533,429,926   $547,906,420 
Commercial and multi-family   77,206,197    77,072,427 
Total real estate-mortgage   610,636,123    624,978,847 
Real estate - construction:          
Residential   9,369,764    8,057,416 
Commercial   2,930,129    3,790,673 
Total real estate - construction   12,299,893    11,848,089 
Commercial   26,077,057    23,937,050 
Consumer:          
Home equity   65,994,599    66,787,820 
Other consumer loans   783,729    809,965 
Total consumer loans   66,778,328    67,597,785 
Total  loans   715,791,401    728,361,771 
Net deferred loan cost   3,096,380    3,026,802 
Allowance for loan losses   (3,894,735)   (3,762,295)
Net total loans  $714,993,046   $727,626,728 

 

Changes in the allowance for loan losses are as follows: 

    

   Three Months Ended March 31, 
   2012   2011 
         
Balance, beginning of period  $3,762,295   $3,988,076 
Provision for loan loss   172,900    74,800 
Charge-offs   (50,408)    
Recoveries   9,948     
Balance, end of period  $3,894,735   $4,062,876 

 

The provision for loan losses charged to expense is based upon past loan loss experiences and an evaluation of losses in the current loan portfolio, including the evaluation of impaired loans. The Company established a provision for loan losses of $172,900 for the quarter ended March 31, 2012 as compared to $74,800 for the comparable period in 2011. The increase in the provision for loan losses was a result of required reserves for an increase in classified loans.

 

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. As of March 31, 2012, and December 31, 2011, the impaired loan balance was measured for impairment based on the fair value of the loans’ collateral. Loans collectively evaluated for impairment include residential real estate loans, consumer loans, and smaller balance commercial and commercial real estate loans.

 

9
 

  

Non-performing loans at March 31, 2012 and December 31, 2011 consisted of non-accrual loans that amounted to $5,659,199 and $5,676,819, respectively, and non-accrual troubled debt restructurings of $801,028 and $805,095, respectively. The reserve for delinquent interest on loans totaled $467,848 and $425,384 at March 31, 2012 and December 31, 2011, respectively.


Non-accrual loans segregated by class of loans are as follows:

   March 31, 2012   December 31, 2011 
Real estate          
One-to-four family residential  $4,166,118   $4,768,395 
Commercial and multi-family   890,073    392,146 
Commercial   298,885    318,230 
Consumer   304,123    198,048 
Non-accrual loans   5,659,199    5,676,819 
Troubled debt restructuring, non-accrual   801,028    805,095 
Total non-accrual loans  $6,460,227   $6,481,914 

 

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 Quailty, is shown below for the three month period ended March 31, 2012: 

  

   Contractual Receivable Amount   Nonaccretable (Yield) / Premium   Accretable (Yield) / Premuim   Carrying Amount 
Balance at January 1, 2012  $78,039,662   $(3,835,961)  $1,284,000   $75,487,701 
Principal reductions   (4,355,207)           (4,355,207)
Charge-offs, net       2,079         
Amortization of loan premium           (75,250)   (75,250)
Settlement adjustments       (85,382)       (85,382)
Balance at March 31, 2012  $73,682,376   $(3,919,264)  $1,208,750   $70,971,862 

   

An age analysis of past due loans, segregated by class of loans, as of March 31, 2012 and December 31, 2011 is as follows:

 

   30-59 Days Past Due   60-89 Days
Past Due
   Greater Than
90 Days
   Total Past Due   Current   Total Loans Receivable 
March 31, 2012                        
Real Estate                              
1-4 Family Residential  $381,568   $   $4,166,118   $4,547,686   $528,882,240   $533,429,926 
Commercial and Multi-Family   476,424        890,073    1,366,497    75,839,700    77,206,197 
Construction                   12,299,893    12,299,893 
Commercial           298,885    298,885    25,778,172    26,077,057 
Consumer   173,014    50,188    304,123    527,325    66,251,003    66,778,328 
Total  $1,031,006   $50,188   $5,659,199   $6,740,393   $709,051,008   $715,791,401 
                               
December 31, 2011                              
Real Estate                              
1-4 Family Residential  $665,563   $   $4,768,395   $5,433,958   $542,472,462   $547,906,420 
Commercial and Multi-Family   12,318        392,146    404,464    76,667,963    77,072,427 
Construction                   11,848,089    11,848,089 
Commercial           318,230    318,230    23,618,820    23,937,050 
Consumer   218,766    198,995    198,048    615,809    66,981,976    67,597,785 
Total  $896,647   $198,995   $5,676,819   $6,772,461   $721,589,310   $728,361,771 

 

10
 

   

Impaired loans are set forth 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 
March 31, 2012                
With no related allowance recorded                    
Real Estate                    
1-4 Family Residential  $1,164,159   $1,164,159   $   $129,351 
Commercial and Multi-Family   890,073    890,073        148,345 
Commercial   98,885    98,885        98,885 
Consumer   290,012    290,012        58,002 
With an allowance recorded                    
Real Estate                    
1-4 Family Residential   3,802,987    4,141,416    455,529    380,299 
Commercial and Multi-Family                
Commercial   200,000    200,000    18,986    200,000 
Consumer   14,111    14,111    14,111    14,111 
Total                    
Real Estate                    
1-4 Family Residential   4,967,146    5,305,575    455,529    509,650 
Commercial and Multi-Family   890,073    890,073        148,345 
Commercial   298,885    298,885    18,986    298,885 
Consumer   304,123    304,123    14,111    72,113 
                     
December 31, 2011                    
With no related allowance recorded                    
Real Estate                    
1-4 Family Residential  $2,287,176   $2,287,176   $   $190,598 
Commercial and Multi-Family   392,146    392,146        130,715 
Commercial   318,230    318,230        106,077 
Consumer   183,937    183,937        36,787 
With an allowance recorded                    
Real Estate                    
1-4 Family Residential   3,286,313    3,764,871    371,554    328,631 
Commercial and Multi-Family                
Commercial                
Consumer   14,111    14,111    14,286    14,111 
Total                    
Real Estate                    
1-4 Family Residential   5,573,489    6,052,047    371,554    519,229 
Commercial and Multi-Family   392,146    392,146        130,715 
Commercial   318,230    318,230        106,077 
Consumer   198,048    198,048    14,286    50,898 

  

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. The Company entered into two TDR agreements. As of March 31, 2012, the total carrying value of the TDRs were $912 thousand, of which $111 thousand was performing.

 

Included in impaired loans at March 31, 2012 was one troubled debt restructuring (“TDR”) which had a specific reserve of $157,028. The following table presents an analysis of the Company’s TDR agreements existing as of March 31, 2012 and December 31, 2011, respectively. 

 

11
 

     

   As of March 31, 2012     As of December 31, 2011 
       Outstanding Recorded Investment         Outstanding Recorded Investment 
   Number of Contracts   Pre-
Modification
   Post-
Modification
   Number of Contracts   Pre-
Modification
   Post-
Modification
 
1-4 Family Residential   2   $912,031   $912,031    1   $805,095   $805,095 

  

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

 

12
 

  

The following table presents classified loans by class of loans as of March 31, 2012 and December 31, 2011.

 

   Real Estate                 
  

1-4 Family

Residential

  

Commercial

and Multi-Family

   Construction   Commercial   Consumer 
   3/31/2012   12/31/2011   3/31/2012   12/31/2011   3/31/2012   12/31/2011   3/31/2012   12/31/2011   3/31/2012   12/30/2011 
Grade:                                                  
Special Mention  $3,147,386   $1,779,742   $3,493,825   $3,518,440   $   $   $   $   $226,020   $229,156 
Substandard   6,879,130    6,134,849    3,966,827    2,760,244            1,485,204    1,494,731    676,631    538,676 
Doubtful and Loss       148,849                            14,111     
Total  $10,026,516   $8,063,440   $7,460,652   $6,278,684   $   $   $1,485,204   $1,494,731   $916,762   $767,832 

    

The following table presents the credit risk profile of loans based on payment activity as of March 31, 2012 and December 31, 2011.

 

    Real Estate                 
   

1-4 Family

Residential

  

Commercial

and Multi-Family

   Construction   Commercial   Consumer 
    3/31/2012   12/31/2011   3/31/2012   12/31/2011   3/31/2012   12/31/2011   3/31/2012   12/31/2011   3/31/2012   12/30/2011 
 Performing   $529,263,808   $542,332,930   $76,316,124   $76,680,281   $12,299,893   $11,848,089   $25,778,172   $23,618,820   $66,474,205   $67,399,737 
 Non-Performing    4,166,118    5,573,490    890,073    392,146            298,885    318,230    304,123    198,048 
 Total   $533,429,926   $547,906,420   $77,206,197   $77,072,427   $12,299,893   $11,848,089   $26,077,057   $23,937,050   $66,778,328   $67,597,785 

 

The following table details activity in the allowance for possible loan losses by portfolio segment for the periods ended March 31, 2012 and December 31, 2011. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

 

13
 

  

   Real Estate             
   1-4 Family
Residential
   Commercial
and
Multi-Family
   Construction   Commercial   Consumer   Total 
March 31, 2012                        
Allowance for credit losses:                              
Beginning Balance  $2,512,970   $459,987   $97,825   $229,055   $462,458   $3,762,295 
Charge-offs   (50,408)                   (50,408)
Recoveries               9,948        9,948 
Provision for loan losses   54,410    58,061    19,219    81,557    (40,347)   172,900 
Ending balance  $2,516,972   $518,048   $117,044   $320,560   $422,111   $3,894,735 
Ending balance:  individually evaluated for impairment   455,529            18,986    14,111    488,626 
Ending balance:  collectively evaluated for impairment  $2,061,443   $518,048   $117,044   $301,574   $408,000   $3,406,109 
Loan Receivables:                              
Ending balance  $533,429,926   $77,206,197   $12,299,893   $26,077,057   $66,778,328   $715,791,401 
Ending balance:  individually evaluated for impairment   4,967,146    890,073        298,885    304,123    6,460,227 
Ending balance:  collectively evaluated for impairment  $528,462,780   $76,316,124   $12,299,893   $25,778,172   $66,474,205   $709,331,174 
                               
December 31, 2011                              
Allowance for credit losses:                              
Beginning Balance  $2,731,325   $281,762   $32,494   $268,411   $674,084   $3,988,076 
Charge-offs   (558,727)           (90,694)   (50,904)   (700,325)
Recoveries                   1,309    1,309 
Provision for loan losses   340,372    178,225    65,331    51,338    (162,031)   473,235 
Ending balance  $2,512,970   $459,987   $97,825   $229,055   $462,458   $3,762,295 
Ending balance:  individually evaluated for impairment   371,554                14,286    385,840 
Ending balance:  collectively evaluated for impairment  $2,141,416   $459,987   $97,825   $229,055   $448,172   $3,376,455 
Loan Receivables:                              
Ending balance  $547,906,420   $77,072,427   $11,848,089   $23,937,050   $67,597,785   $728,361,771 
Ending balance:  individually evaluated for impairment   5,573,490    392,146        318,230    198,048    6,481,914 
Ending balance:  collectively evaluated for impairment  $542,332,930   $76,680,281   $11,848,089   $23,618,820   $67,399,737   $721,879,857 

 

  

14
 

  

4.  DEPOSITS              
               
Deposits consist of the following major classifications:
               
   March 31, 2012  December 31, 2011
       Weighted      Weighted
       Average      Average
   Amount   Interest Rate  Amount   Interest Rate
               
NOW and other demand deposit accounts  $380,023,435   0.23%  $378,271,640   0.28%
Passbook savings and club accounts   137,358,453   0.29%   130,324,314   0.46%
Subtotal   517,381,888       508,595,954    
Certificates with original maturities:                
Within one year   80,634,614   0.55%   83,200,428   0.66%
One to three years   133,552,505   1.63%   135,954,595   1.76%
Three years and beyond   27,237,348   2.88%   23,703,934   3.10%
Total certificates   241,424,467       243,858,957    
Total  $758,806,355      $752,454,911    

  

The aggregate amount of certificate accounts in denominations of $100,000 or more at March 31, 2012 and December 31, 2011 amounted to $90,586,608 and $90,275,593, respectively.

 

Municipal demand deposit accounts in denominations of $100,000 or more at March 31, 2012 and December 31, 2011 amounted to $113,290,916 and $118,827,074, 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 Earnings Per Share (“ EPS”) are as follows:

 

   Three Months Ended March 31, 
   2012   2011 
Numerator – Net Income  $1,354,438   $1,204,586 
Denominators:          
Basic average shares outstanding   6,778,305    6,730,331 
Net effect of dilutive common stock equivalents   65,920    71,227 
Dilutive average shares outstanding   6,844,225    6,801,558 
           
Earnings per share:          
Basic  $0.20   $0.18 
Dilutive  $0.20   $0.18 

 

At March 31, 2012 and 2011, there were 650,804 and 601,104 outstanding options that were anti-dilutive, respectively.

 

15
 

   

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, 2012 and changes during the three months ended March 31, 2012 and 2011 are presented below:

 

    Three Months Ended
March 31, 2012
   Three Months Ended
March 31, 2011
   Number
of shares
  

Weighted average

exercise price

  Number
of shares
   Weighted average
exercise price
Outstanding at the beginning of the period   650,804   $11.90   587,504   $11.92
Granted          13,600   $12.06
Exercised              
Forfeited              
Outstanding at the end of the period   650,804   $11.90   601,104   $11.92
Exercisable at the end of the period   389,085   $12.79   329,144   $13.16


The following table summarizes all stock options outstanding under the Equity Plans as of March 31, 2012:

 

   Options Outstanding
Date Issued  Number of
Shares
   Weighted Average Exercise Price   Weighted Average
Remaining
Contractual Life
August 10, 2005   294,127   $13.19    3.4 years
November 21, 2006   19,784   $14.78    4.6 years
November 20, 2007   30,665   $11.32    5.6 years
August 18, 2010   239,610   $10.21    8.4 years
March 15, 2011   13,600   $12.06    9.0 years
August 17, 2011   53,018   $11.53    9.4 years
Total   650,804   $11.90    6.0 years

 

The option compensation expense recognized for the three ended March 31, 2012 was $36,750 as compared to $32,484 for the three months ended March 31, 2011.

 

16
 

  

At March 31, 2012, there was $652,658 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 3.3 years.

 

Summary of Non-vested Stock Award Activity:

 

   Three Months Ended
March 31, 2012
   Number
of shares
   Weighted average
grant date
fair value
Outstanding at January 1, 2012   80,190   $10.32
Issued    ─    
Forfeited    ─    
Vested   990   $12.06
Outstanding at March 31, 2012   79,200   $10.30

 

The non-vested stock award compensation expense recognized for the three ended March 31, 2012 was $51,000 as compared to $44,730 for the three months ended March 31, 2011.

 

At March 31, 2012, there was $682,397 of total unrecognized compensation cost related to non-vested stock awards. The cost is expected to be recognized over a weighted average period of 3.4 years.

 

7.INCOME TAXES

 

Income taxes increased $21,000 to $862,000 for an effective tax rate of 38.9% for the three months ended March 31, 2012 compared to $841,000 for an effective tax rate of 41.1% for the same period in 2011.

 

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 carry forward periods, experience with operating loss and tax credit carry forwards 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, 2012 and December 31, 2011, no valuation allowance was recorded for any 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, 2012, the tax years ended December 31, 2008 through 2011 were subject to examination by the Internal Revenue Service, while the tax years ended December 31, 2007 through 2011 were subject to state examination. As of March 31, 2012, the Internal Revenue Service is reviewing the Company’s 2009 tax return.

 

8.DECLARATION OF DIVIDEND

 

During first quarter of 2012, the Board of Directors of the Company declared a cash dividend of $0.06 per share, which was paid on February 24, 2012 to stockholders of record as of the close of business on February 3, 2012.

 

17
 

  

9.FAIR VALUE MEASUREMENT

 

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.

 

Those assets at March 31, 2012 which will continue to be measured at fair value on a recurring basis are as follows:

 

   Category Used for Fair Value Measurement 
Assets:  Level 1   Level 2   Level 3 
Securities available for sale:               
U.S. Government agencies and mortgage-backed securities  $   $58,741,737   $ 
State and municipal obligations       838,532     
Corporate securities       9,956,791    200 
Equity securities   13,821         
Totals  $13,821   $69,537,060   $200 

 

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Those assets at December 31, 2011 which will continue to be measured at fair value on a recurring basis are as follows:

   Category Used for Fair Value Measurement 
Assets:  Level 1   Level 2   Level 3 
Securities available for sale:               
U.S. Government agencies and mortgage-backed securities  $   $39,812,818   $ 
State and municipal obligations       832,000     
Corporate securities       6,110,108    200 
Equity securities   12,542         
Totals  $12,542   $46,754,926   $200 

 

In 2008, as a result of general market conditions and the illiquidity in the market for both single issuer and pooled trust preferred securities, management deemed it necessary to shift its market value measurement of each of the trust preferred securities from quoted prices for similar assets (Level 2) to an internally developed discounted cash flow model (Level 3).  In arriving at the discount rate used in the model for each issue, the Company determined a trading group of similar securities quoted on the New York Stock Exchange or the NASDAQ over the counter market, based upon its review of market data points, such as Moody’s or comparable credit ratings, maturity, price, and yield.  The Company indexed the individual securities within the trading group to a comparable interest rate swap (to maturity) in determining the spread.  The average spread on the trading group was matched with the individual trust preferred issues based on their comparable credit rating which was then used in arriving at the discount rate input to the model.

 

The following provides details of the fair value measurement activity for Level 3 for the quarters ended March 31, 2012 and March 31, 2011:

 

Fair Value Measurement Activity – Level 3 (only)

   Fair Value Measurement Using Significant Unobservable Inputs (Level 3) 
   Trust Preferred Securities   Total 
         
Balance, January 1, 2012  $200   $200 
Total gains (losses), realized/unrealized:          
Included in earnings (1)        
Included in accumulated other comprehensive loss        
Purchases, maturities, prepayments and call, net        
Transfers into Level 3 (2)        
Balance, March 31, 2012  $200   $200 

 

(1)Amount included in impairment charge on available for sale securities on Consolidated Statement of Income.
(2)Transfers into Level 3 are assumed to occur at the end of the quarter in which the transfer occurred.

 

Fair Value Measurement Activity – Level 3 (only)

   Fair Value Measurement Using Significant Unobservable Inputs (Level 3) 
   Trust Preferred Securities   Total 
Balance, January 1, 2011  $200   $200 
Total gains (losses), realized/unrealized:          
Included in earnings (1)        
Included in accumulated other comprehensive loss        
Purchases, maturities, prepayments and call, net        
Transfers into Level 3 (2)        
Balance, March 31, 2011  $200   $200 

 

(1)Amount included in impairment charge on available for sale securities on Consolidated Statement of Income.
(2)Transfers into Level 3 are assumed to occur at the end of the quarter in which the transfer occurred.

 

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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. Fair value for these 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.

 

Impaired Loans

        Category Used for Fair Value Measurement   Total 
   Total   Level 1  

Level 2

  

Level 3

   (Losses)  
March 31, 2012                    
Assets:                         
Impaired loans  $1,626,037   $-   $1,626,037   $-   $(128,705)
Real estate owned   145,676    -    145,676    -    - 
                          
March 31, 2011                         
Assets:                         
Impaired loans  $1,411,963   $-   $864,541   $547,422   $(558,739)

 

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.  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, 2012, total loans remeasured at fair value were $1,626,037. Such loans were carried at the value of $1,754,742 immediately prior to remeasurement, resulting in the recognition of impairment through earnings for the life of the loans in the amount of $128,705. At March 31, 2011, total loans remeasured at fair value were $1,411,963. Such loans were carried at the value of $1,970,702 immediately prior to remeasurement, resulting in the recognition of impairment through earnings for the life of the loans in the amount of $558,739.

 

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. 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 observable inputs, and therefore, the fair value measurement has been categorized as a Level 2 measurement. At March 31, 2012, the Company did not have any remeasurement to fair value to its foreclosed real estate and repossessed assets since the original recordings. At March 31, 2012, the Company had two properties totaling $243,176 compared to one property totaling $97,500 at December 31, 2011.

 

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Fair Value of Financial Instruments

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

 

       Category Used For Fair Value 
March 31, 2012  Carrying Amount   Level 1   Level 2   Level 3 
Assets:                    
Cash and cash equivalents  $153,486,828   $153,486,828    $                  ─    $           ─ 
Investment securities:                    
Held to maturity   5,714,661        5,877,814     
Available for sale   69,551,081    13,821    69,537,060    200 
Loans receivable, net   714,993,046        729,879,089     
Federal Home Loan Bank stock   6,434,800        6,434,800     
                     
Liabilities:                    
NOW and other demand deposit accounts   380,023,434        388,113,434     
Passbook savings and club accounts   137,358,453        143,933,453     
Certificates   241,424,467        244,463,339     
Advances from Federal Home Loan Bank   110,000,000        ─    124,759,778        ─ 
Junior subordinated debenture   15,464,000           ─    10,824,800           ─ 

   

         Category Used For Fair Value 
December 31, 2011     Carrying Amount    Level 1     Level 2     Level 3 
Assets:                    
Cash and cash equivalents  $155,652,941   $155,652,941    $                  ─    $          ─ 
Investment securities:                    
Held to maturity   5,964,393        6,147,579     
Available for sale   46,767,668    12,542    46,754,926    200 
Loans receivable, net   727,626,278        742,868,929     
Federal Home Loan Bank stock   6,434,800        6,434,800     
                     
Liabilities:                    
NOW and other demand deposit accounts   378,271,640        386,987,640     
Passbook savings and club accounts   130,324,313        137,074,313     
Certificates   243,858,957        242,343,751     
Advances from Federal Home Loan Bank   110,000,000        ─    131,036,958        ─ 
Junior subordinated debenture   15,464,000           ─    10,824,800           ─ 

       

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.

 

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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, 2012 and December 31, 2011. The estimated fair value approximates the carrying amount.

 

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

 

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

 

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

 

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2012 and December 31, 2011. 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, 2012 and December 31, 2011, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

10.GOODWILL AND INTANGIBLE ASSETS

 

Goodwill totaled $5.4 million at March 31, 2012 as compared to $5.3 million at December 31, 2011. Goodwill was not impaired at March 31, 2012 as no impairment indicators have been noted. The Company will perform its annual goodwill impairment test at August 1, 2012.

 

The core deposit intangible totaled $681 thousand at March 31, 2012 as compared to $677 thousand at December 31, 2011. 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”):

 

   2012   2011 
   Residential       Residential     
   Property   Total   Property   Total 
                 
Balance, January 1,  $97,500   $97,500   $97,500   $97,500 
Transfers into Real Estate Owned   145,676    145,676     ─     ─ 
Sales of Real Estate Owned        ─     ─     ─ 
Balance, March 31,  $243,176   $243,176   $97,500   $97,500 

 

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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, 2011 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.

 

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2012 AND DECEMBER 31, 2011

 

Total assets of the Company increased $8.0 million, or 0.8%, to $1,002.7 million at March 31, 2012 from $994.7 million at December 31, 2011. Loans receivable, net, decreased $12.6 million to $715.0 million at March 31, 2012, investments and mortgage-backed securities increased $ 22.6 million and cash and cash equivalents decreased by $2.2 million. Asset growth was funded by an increase in deposits of $6.4 million.

 

Investments

 

Investments and mortgage-backed securities increased $22.6 million, or 42.7%, to $75.3 million at March 31, 2012 from $52.7 at December 31, 2011. The increase was the result of purchases of $23.9 million of GNMA mortgage-backed and corporate securities offset by normal repayment and payoffs of $1.3 million.

 

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Loans

 

Loans receivable, net, decreased $12.6 million, or 1.7%, to $715.0 million at March 31, 2012 from $727.6 million at December 31, 2011. Loan originations totaled $37.2 million for the three months ended March 31, 2012 compared to $34.7 million originated in the three months ended March 31, 2011. Real estate mortgage loan originations totaled $25.2 million, real estate construction loan originations totaled $3.8 million, consumer loan originations totaled $3.6 million and commercial loan originations totaled $4.7 million for the first quarter of 2012. Origination activity was offset by $49.8 million of normal loan payments and payoffs.

 

The following table summarizes changes in the loan portfolio in the three months ended March 31, 2012.

 

   March 31,
2012
   December 31,
2011
   $ change   % change 
   (Dollars in thousands) 
Real estate – mortgage:                    
One-to-four-family residential  $533,430   $547,906   $(14,476)   (2.6)%
Commercial and multi-family   77,206    77,073    133    0.2 
Total real estate – mortgage   610,636    624,979    (14,343)   (2.3)
                     
Real estate – construction:                    
Residential   9,370    8,057    1,313    16.3 
Commercial   2,930    3,791    (861)   (22.7)
Total real estate – construction   12,300    11,848    452    3.8 
                     
Commercial   26,077    23,937    2,140    8.9 
                     
Consumer                    
Home equity   65,995    66,788    (793)   (1.2)
Other consumer loans   784    810    (26)   (3.2)
Total consumer loans   66,779    67,598    (819)   (1.2)
                     
Total loans   715,792    728,362    (12,570)   (1.7)
                     
Net deferred loan cost   3,096    3,026    70    2.3 
Allowance for loan losses   (3,895)   (3,762)   (133)   3.5 
                     
Net total loans  $714,993   $727,626   $(12,633)   (1.7)%

 

Non-Performing Assets

 

Non-performing assets totaled $6.7 million or 0.67% of total assets at March 31, 2012 compared to $6.6 million or 0.66% of total assets at December 31, 2011 and $5.9 million or 0.88% of total assets at March 31, 2011. The increase at March 31, 2012 from December 31, 2011 was the result of increases in non-performing commercial mortgages of $498 thousand and consumer loans of $106 thousand offset by decreases in non-performing residential mortgages of $602 thousand and commercial loans of $19 thousand. Non-performing assets consisted of eighteen residential mortgages totaling $4.2 million, three commercial mortgages totaling $890 thousand, two commercial loans totaling $299 thousand, six consumer equity loans totaling $304 thousand and two real estate owned properties totaling $243 thousand. Specific reserves were recorded for twelve of the loans included above in the amount of $489 thousand at March 31, 2012 as compared to eleven loans with specific reserves of $386 thousand at December 31, 2011. Real estate owned increased by one property totaling $145 thousand to $243 thousand at March 31, 2012. The Company recorded $40 thousand in net charge-off activity for the quarter-ended March 31, 2012 as compared to no charge-off activity for the same period in 2011.

 

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The allowance for loan losses increased $133 thousand to $3.9 million, or 0.54% of total net loans, from $3.8 million at December 31, 2011, or 0.52% of total net loans. The increase in the provision for loan losses was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of non-performing loans, classified loans, growth in the loan portfolio and the current economic conditions. The loss factors used to calculate the allowance in March 2012 from December 31, 2011 were slightly higher due to increases in delinquencies and charge-offs. At March 31, 2012, the specific allowance on loans individually evaluated for impairment was $489 thousand and pooled allowance on the remainder of the loan portfolio was $3.4 million as compared to specific allowance on impaired or collateral-dependent loans of $386 thousand and a general valuation allowance on the remainder of the loan portfolio of $3.3 million at December 31, 2011.

 

   Three Months Ended March 31, 
   2012   2011 
Allowance for loan losses:  (Dollars in thousands) 
Allowance at beginning of period  $3,762   $3,988 
Provision for loan losses   173    75 
           
Charge-offs   (50)   - 
Recoveries   10    - 
Net charge-offs   (40)   - 
Allowance at end of period  $3,895   $4,063 
           
Allowance for loan losses as a percent of total loans   0.54%   0.62%
Allowance for loan losses as a percent of non-performing loans   60.27%   69.91%

  

   March 31,
2012
   December 31,
2011
 
Nonaccrual loans:  (Dollars in thousands) 
Real estate - residential  $4,166   $4,768 
Real estate - commercial   890    392 
Commercial   299    318 
Consumer   304    198 
Total   5,659    5,676 
Troubled debt restructurings - nonaccrual   801    805 
Total nonaccrual loans   6,460    6,481 
Real estate owned   243    98 
Total non-performing assets  $6,703   $6,579 
           
Total non-performing loans to total loans   0.90%   0.89%
Total non-performing loans to total assets   0.64%   0.65%
Total non-performing assets to total assets   0.67%   0.66%

 

Deposits

 

Deposits increased by $6.4 million, or 0.8%, to $758.8 million at March 31, 2012 from $752.5 million at December 31, 2011. Interest bearing demand deposits decreased $4.5 million, certificates of deposit decreased by $2.4 million, savings accounts increased by $7.0 million and non-interest bearing checking increased $6.3 million. The Company continued its focus on attracting core deposits, which increased $8.8 million.

 

The following table summarizes changes in deposits in the three months ended March 31, 2012.

 

   March 31,   December 31,         
   2012   2011   $ change   % change 
    (Dollars in thousands)     
Non-interest-bearing demand deposits  $81,844   $75,551   $6,293    8.3%
Interest-bearing demand deposits   298,179    302,721    (4,542)   (1.5)
Savings accounts   137,358    130,324    7,034    5.4 
Time deposits   241,425    243,859    (2,434)   (1.0)
Total  $758,806   $752,455   $6,351    0.8%

 

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Borrowings

 

Federal Home Loan Bank advances were unchanged at $110.0 million at March 31, 2012 compared to December 31, 2011. Other borrowings were unchanged at $15.5 million at March 31, 2012 compared to December 31, 2011.

 

Stockholders’ Equity

 

Stockholders’ equity increased $878 thousand to $105.6 million at March 31, 2012, from $104.7 million at December 31, 2011, primarily as a result of net income of $1.4 million offset by cash dividends paid to shareholders of $437 thousand.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

Net income was $1.4 million for the three months ended March 31, 2012 as compared to $1.2 million for the three months ended March 31, 2011. The $150 thousand, or 12.4%, increase in 2012 from 2011 was due primarily to increases in net interest income of $911 thousand and other income of $103 thousand offset by increases in provision for loan losses of $98 thousand, operating expenses of $745 thousand and income taxes of $21 thousand.

 

   Three Months Ended March 31, 
   2012   2011 
         
Net income (in thousands)  $1,354   $1,205 
Basic and diluted earnings per share  $0.20   $0.18 
Return on average assets (annualized)   0.54%   0.55%
Return on average equity (annualized)   5.12%   4.74%

 

Net Interest Income

 

The following table summarizes changes in interest income and interest expense for the three-month periods ended March 31, 2012 and 2011.

 

   Three Months Ended
March 31,
         
   2012   2011   $ change   % change 
    (Dollars in thousands)     
INTEREST INCOME:                    
Loans  $9,000   $8,555   $445    5.2%
Investment securities   611    483    128    26.5 
Total interest income   9,611    9,038    573    6.3 
                     
INTEREST EXPENSE:                    
Deposits   1,216    1,566    (350)   (22.3)
Borrowings   1,510    1,497    13    0.9 
Total interest expense   2,726    3,063    (337)   (11.1)
Net interest income  $6,885   $5,975   $910    15.2 

 

Interest income increased by $573 thousand for the quarter ended March 31, 2012 compared to March 31, 2011. The increase resulted from an increase in the average balance of loans and investments offset by a decrease in the average rate earned on loans and investments.

 

26
 

  

Interest expense decreased by $337 thousand over the same period last year due primarily to a decrease in the rate paid on deposits offset by an increase in the average balance of interest-bearing deposits.

 

The increase in the average balances of loans and investments and interest-bearing deposits over 2011 reflect the acquisition of CBHC Financialcorp, Inc., which was completed in the third quarter of 2011.

 

The interest rate spread and net interest margin of the Company were 3.58% and 3.53%, respectively, for the three months ended March 31, 2012, compared to 3.50% and 3.47% for the same period in 2011. The increase in the interest rate spread of 8 basis points and margin of 6 basis points resulted from a decrease in the average rate paid on interest-bearing liabilities of 40 basis points offset by a decrease in the rate earned on interest-earning assets of 32 basis points. The decrease in cost of interest bearing liabilities resulted from a decrease in the average rate paid on deposits of 38 basis points offset by an increase in the average balances on deposits of $111.2 million. The decrease in rate earned on interest earnings assets resulted from a decrease in the average rate earned on loans of 19 basis points and investments of 230 basis points offset by an increase in the average balance of loans of $60.9 million and investments of $30.3 million.

 

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.

 

27
 

 

Average Balance Tables 

   

   Three Months Ended March 31, 2012  Three Months Ended March 31, 2011 
   Average Balance   Interest and Dividends   Yield/
Cost
  Average Balance   Interest and Dividends   Yield/
Cost
Assets:  (Dollars in thousands)
Interest-earning assets:                          
Loans  $718,892   $9,000   5.01%  $657,986   $8,555   5.20%
Investment securities   61,001    611   4.00%   30,656    483   6.30%
Total interest-earning assets   779,893    9,611   4.93%   688,642    9,038   5.25%
Noninterest-earning assets   222,903            184,217         
Total assets  $1,002,796           $872,859         
                           
Liabilities and equity:                          
Interest-bearing liabilities:                          
Interest-bearing demand deposits  $310,856    254   0.33%  $261,649    432   0.66%
Savings accounts   132,469    112   0.34%   104,519    207   0.79%
Certificates of deposit   242,022    850   1.41%   207,934    927   1.78%
Total interest-bearing deposits   685,347    1,216   0.71%   574,102    1,566   1.09%
                           
FHLB advances   110,000    1,175   4.27%   110,000    1,162   4.23%
Subordinated debt   15,464    335   8.67%   15,464    335   8.67%
Total borrowings   125,464    1,510   4.82%   125,464    1,497   4.77%
Total interest-bearing liabilities   810,811    2,726   1.35%   699,566    3,063   1.75%
Noninterest-bearing deposits   75,729            62,493         
Noninterest-bearing liabilities   10,426            9,196         
Total liabilities   896,966            771,255         
Retained earnings   105,830            101,604         
Total liabilities and retained earnings  $1,002,796           $872,859         
                           
Net interest income       $6,885           $5,975    
Interest rate spread            3.58%            3.50%
Net interest margin            3.53%            3.47%
Average interest-earning assets to average interest-bearing liabilities   96.19%           98.44%        

 

  

Provision for Loan Losses

 

We review the level of the allowance for loan losses on a monthly basis and establish the provision for loan losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the collectability of the loan portfolio. The provision for loan losses was $173 thousand in the three months ended March 31, 2012 compared to $75 thousand in the three months ended March 31, 2011. 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, classified loans, growth in the loan portfolio and the current economic environment.

 

28
 

  

Other Income

 

The following table summarizes other income for the three months ended March 31, 2012 and 2011 and the changes between the periods.

 

   Three Months Ended March 31,     
   2012   2011   % Change 
   (Dollars in thousands)     
OTHER INCOME:               
                
Service charges  $411   $360    14.2%
Cash surrender value of life insurance   148    128    15.6 
Gain on call of AFS securities                 ─    10        N/M 
Other   346    304    13.8 
Total other income  $905   $802    12.8 

N/M – Not measurable

 

Other income increased $103 thousand to $905 thousand, or 12.8%, for the three-month period ended March 31, 2012 from $802 thousand for the same period in 2011. Increases in service charge income of $51 thousand resulted from increases in fees collected on deposit accounts. The increase in cash surrender value of life insurance resulted from new policies offset by a decrease in yield earned on existing policies. Other income increased $42 thousand primarily from higher debit card commissions received.

 

Other Expense

 

The following table summarizes other expense for the three months ended March 31, 2012 and 2011 and the changes between periods.

 

   Three Months Ended March 31,     
   2012   2011   % Change 
   (Dollars in thousands)     
OTHER EXPENSE:               
                
Salaries and employee benefits  $3,130   $2,613    19.8%
Occupancy and equipment   1,235    984    25.5 
Federal insurance premiums   128    187    (31.6)
Advertising   117    106    10.4 
Professional services   252    294    (14.3)
Other operating expense   539    472    14.2 
Total other expense  $5,401   $4,656    16.0%

 

 

Other expenses increased $745 thousand or 16.0%, to $5.4 million for the three-month period ended March 31, 2012 from $4.7 million for the same period in 2011. Costs associated with locations added from the 2011 acquisition of Select Bank totaled $322,000. Additionally, increases in salaries and benefits, occupancy and equipment, marketing and other expenses of $524,000 were offset by a decrease in federal insurance premiums and professional services of $101,000.

 

Income Taxes

 

Income taxes increased $21 thousand to $862 thousand for an effective tax rate of 38.9% for the three months ended March 31, 2012, compared to $841 thousand for an effective tax rate of 41.1% from the same period in 2011. The increase was a result of higher taxable income offset by a lower effective tax rate.

 

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.

 

29
 

  

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, 2012, cash and cash equivalents totaled $153.5 million. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $22.8 million at March 31, 2012. In addition, at March 31, 2012, we had the ability to borrow a total of approximately $278.5 million from the Federal Home Loan Bank of New York, which included available overnight lines of credit of $278.5 million. On that date, we had no overnight advances outstanding.

 

At March 31, 2012, we had $64.7 million in loan commitments outstanding, which included $10.4 million in undisbursed loans, $26.7 million in unused home equity lines of credit and $19.0 million in commercial lines of credit. Certificates of deposit due within one year of March 31, 2012 totaled $108.8 million, or 45.1% 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, 2012, the Bank exceeded all of its regulatory capital requirements with tangible capital of $95.9 million, or 9.70% of total adjusted assets, which is above the required level of $14.8 million or 1.5%; tier 1 core capital of $95.9 million, or 9.70% of total adjusted assets which is above the required level of $39.6 million or 4.0%; and total risk-based capital of $99.3 million, or 19.75% of risk-weighted assets, which is above the required level of $40.2 million or 8.0%. The Bank is considered a “well-capitalized” institution under the applicable prompt corrective action regulations.

 

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, 2011
Percentage Change in Estimated
Net Interest Income Over
   12 Months  24 Months
    
200 basis point increase in rates  2.05%  3.97%
100 basis point decrease in rates  N/M  N/M
N/M - not measurable      

 

30
 

  

The 200 and 100 basis point change in rates in the above table is assumed to occur evenly over the following 12- and 24-months periods. Based on the scenario above, net interest income would be positively affected (within our internal guidelines) in the 12-month if rates rose by 200 basis points. In addition, a decline in rates by 100 basis points in both the 12- and 24-month periods has been determined by management as not possible and therefore deemed not measurable.

 

 

Net Portfolio Value Analysis

 

In addition to a net interest income simulation analysis, we use an interest rate sensitivity analysis prepared by the Office of the Comptroller of the Currency to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value 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. Net portfolio value 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 100 to 300 basis point increase or 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table, which is based on information that we provide to the Office of the Comptroller of the Currency, presents the change in our net portfolio value at December 31, 2011 that would occur in the event of an immediate change in interest rates based on Office of the Comptroller of the Currency assumptions, with no effect given to any steps that we might take to counteract that change.

  

   Net Portfolio Value
(Dollars in Thousands)
   Net Portfolio Value as % of
Portfolio Value of Assets
 
Basis Point (“bp”)
Change in Rates
  $ Amount   $ Change   % Change   NPV Ratio   Change 
300 bp  $127,130   $(9,577)   (7)%   12.54%   (58)bp
200   139,519    2,811    2    13.53    41 
100   143,018    6,310    5    13.74    62 
50   140,161    3,453    3    13.45    33 
0   136,708              13.12      
(50)   130,280    (6,427)   (5)   13.54    (58)
(100)   127,012    (9,695)   (7)   12.23    (89)

 

 

The Office of the Comptroller of the Currency uses certain assumptions in assessing the interest rate risk of savings associations. 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.

 

31
 

  

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, 2012, 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, 2012 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, 2011.

 

32
 

  

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

 

Period 

(a)

Total number of Shares (or Units) Purchased 

 

(b)

Average Price Paid per Share

(or Unit) 

 

(c)

Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs (1)(2) 

 

(d)

Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs 

             
Month #1
January 1, 2012
through
January 31, 2012
  0  0  0  0
             
Month #2
February 1, 2012
through
February 29, 2012
  0  0  0  0
             
Month #3
March 1, 2012
through
March 31, 2012
  0  0  0  365,000
             
Total             

  

_______________

(1)On March 20, 2012, the Company’s Board of Directors approved the repurchase of up to 365,000 shares of the Company’s common stock.

 

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.0Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
101.0The following materials from the Ocean Shore Holding Co. Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 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.

 

33
 

  

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 10, 2012   /s/ Steven E. Brady
    Steven E. Brady
    President and Chief Executive Officer
       
       
Date:  May 10, 2012   /s/ Donald F. Morgenweck
    Donald F. Morgenweck
    Chief Financial Officer and Senior Vice President

 

34

XNAS:OSHC Ocean Shore Holding Co Quarterly Report 10-Q Filling

Ocean Shore Holding Co XNAS:OSHC Stock - Get Quarterly Report SEC Filing of Ocean Shore Holding Co XNAS:OSHC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:OSHC Ocean Shore Holding Co Quarterly Report 10-Q Filing - 3/31/2012
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