Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-53856
OCEAN SHORE HOLDING CO.
(Exact name of registrant as specified in its charter)
New Jersey | 80-0282446 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1001 Asbury Avenue, Ocean City, New Jersey | 08226 | |
(Address of principal executive offices) | (Zip Code) |
(609) 399-0012
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 | ¨ | |||
Non-accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date:
At May 1, 2010, the registrant had 7,307,590 shares of $0.01 par value common stock outstanding.
Table of Contents
FORM 10-Q
INDEX
Page | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. | ||||
1 | ||||
2 | ||||
3 | ||||
Notes to Unaudited Condensed Consolidated Financial Statements | 4 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
Item 3. | 28 | |||
Item 4. | 28 | |||
PART II. OTHER INFORMATION | ||||
Item 1. | 29 | |||
Item 1A. | 29 | |||
Item 2. | 29 | |||
Item 3 | 30 | |||
Item 4. | 30 | |||
Item 5. | 30 | |||
Item 6. | 30 | |||
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements |
OCEAN SHORE HOLDING CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2010 | December 31, 2009 | |||||||
ASSETS | ||||||||
Cash and amounts due from depository institutions | $ | 5,424,207 | $ | 5,741,369 | ||||
Interest-earning bank balances | 36,648,349 | 27,286,341 | ||||||
Cash and cash equivalents | 42,072,556 | 33,027,710 | ||||||
Investment securities held to maturity | ||||||||
(estimated fair value—$3,481,917 at March 31, 2010; $3,579,611 at December 31, 2009) | 3,326,317 | 3,440,275 | ||||||
Investment securities available for sale | ||||||||
(amortized cost— $25,664,062 at March 31, 2010; $27,654,602 at December 31, 2009) | 24,249,818 | 25,986,767 | ||||||
Loans—net of allowance for loan losses of $3,601,495 at March 31, 2010 and $3,476,040 at December 31, 2009 | 666,323,028 | 663,662,808 | ||||||
Accrued interest receivable: | ||||||||
Loans | 2,565,992 | 2,377,498 | ||||||
Investment securities | 52,827 | 247,903 | ||||||
Federal Home Loan Bank stock—at cost | 6,148,000 | 6,148,000 | ||||||
Office properties and equipment—net | 13,363,353 | 13,512,159 | ||||||
Prepaid expenses and other assets | 5,425,518 | 5,457,455 | ||||||
Real estate owned | 97,500 | 97,500 | ||||||
Cash surrender value of life insurance | 14,472,573 | 12,837,789 | ||||||
Deferred tax asset | 3,109,366 | 3,349,332 | ||||||
TOTAL ASSETS | $ | 781,206,848 | $ | 770,145,196 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES: | ||||||||
Non-interest bearing deposits | $ | 56,124,053 | $ | 53,254,259 | ||||
Interest bearing deposits | 490,864,427 | 484,167,835 | ||||||
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 | 3,678,847 | 3,406,419 | ||||||
Accrued interest payable | 797,683 | 1,145,412 | ||||||
Other liabilities | 5,715,629 | 5,372,769 | ||||||
Total liabilities | 682,644,639 | 672,810,693 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued | — | — | ||||||
Common stock, $.01 par value, 25,000,000 shares authorized, 7,307,590 shares issued and outstanding at March 31, 2010; 7,308,118 shares issued and outstanding at December 31, 2009 | 73,076 | 73,081 | ||||||
Additional paid-in capital | 65,320,109 | 65,213,708 | ||||||
Retained earnings - partially restricted | 38,832,325 | 37,934,456 | ||||||
Common stock acquired by employee benefits plans | (4,243,278 | ) | (4,321,878 | ) | ||||
Deferred compensation plans trust | (508,156 | ) | (495,741 | ) | ||||
Accumulated other comprehensive loss | (911,867 | ) | (1,069,123 | ) | ||||
Total stockholders’ equity | 98,562,209 | 97,334,503 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 781,206,848 | $ | 770,145,196 | ||||
See notes to unaudited condensed consolidated financial statements.
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OCEAN SHORE HOLDING CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, | |||||||
2010 | 2009 | ||||||
INTEREST AND DIVIDEND INCOME: | |||||||
Taxable interest and fees on loans | $ | 9,030,606 | $ | 8,461,675 | |||
Taxable interest on mortgage-backed securities | 233,992 | 339,518 | |||||
Non-taxable interest on municipal securities | 17,340 | 23,146 | |||||
Taxable interest and dividends on other investment securities | 222,750 | 167,261 | |||||
Total interest and dividend income | 9,504,688 | 8,991,600 | |||||
INTEREST EXPENSE: | |||||||
Deposits | 2,026,334 | 2,312,376 | |||||
Advances from Federal Home Loan Bank, securities sold under agreements to repurchase and other borrowed money | 1,497,420 | 1,528,139 | |||||
Total interest expense | 3,523,754 | 3,840,515 | |||||
NET INTEREST INCOME | 5,980,934 | 5,151,085 | |||||
PROVISION FOR LOAN LOSSES | 151,661 | 152,200 | |||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 5,829,273 | 4,998,885 | |||||
OTHER INCOME: | |||||||
Service charges | 435,953 | 407,041 | |||||
Cash surrender value of life insurance | 134,784 | 103,790 | |||||
Gain on call of AFS security | 5 | 6,133 | |||||
Impairment charge on AFS securities | — | (485,600 | ) | ||||
Other | 236,526 | 169,487 | |||||
Total other income | 807,268 | 200,851 | |||||
OTHER EXPENSE: | |||||||
Salaries and employee benefits | 2,496,428 | 2,140,792 | |||||
Occupancy and equipment | 977,250 | 867,233 | |||||
Federal insurance premiums | 167,912 | 71,293 | |||||
Advertising | 115,975 | 96,871 | |||||
Professional services | 177,655 | 154,869 | |||||
Real estate owned activity | 948 | 7,330 | |||||
Charitable contributions | 34,500 | 30,000 | |||||
Other operating expenses | 482,087 | 372,397 | |||||
Total other expenses | 4,452,755 | 3,740,785 | |||||
INCOME BEFORE INCOME TAXES | 2,183,786 | 1,458,951 | |||||
INCOME TAX EXPENSE | 847,462 | 546,166 | |||||
NET INCOME | $ | 1,336,324 | $ | 912,785 | |||
Earnings per share basic: | $ | 0.20 | $ | 0.13 | * | ||
Earnings per share diluted: | $ | 0.20 | $ | 0.13 | * |
* | Earnings per share for the prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on December 18, 2009 |
See notes to unaudited condensed consolidated financial statements.
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OCEAN SHORE HOLDING CO. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 1,336,324 | $ | 912,785 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 281,754 | 231,725 | ||||||
Provision for loan losses | 151,661 | 152,200 | ||||||
Impairment charge on AFS securities | — | 485,600 | ||||||
Stock based compensation expense | 200,994 | 170,751 | ||||||
Gain on call of AFS securities | (5 | ) | (6,133 | ) | ||||
Gain on sale real estate owned | — | (6,550 | ) | |||||
Cash surrender value of life insurance | (134,784 | ) | (103,790 | ) | ||||
Changes in assets and liabilities which provided (used) cash: | ||||||||
Accrued interest receivable | 6,580 | 59,478 | ||||||
Prepaid expenses and other assets | 175,568 | (580,772 | ) | |||||
Accrued interest payable | (347,729 | ) | (357,778 | ) | ||||
Other liabilities | 342,861 | 586,897 | ||||||
Net cash provided by operating activities | 2,013,224 | 1,544,413 | ||||||
INVESTING ACTIVITIES: | ||||||||
Principal collected on: | ||||||||
Mortgage-backed securities available for sale | 1,213,468 | 1,569,924 | ||||||
Mortgage-backed securities held to maturity | 113,695 | 175,517 | ||||||
Investment securities available for sale | — | 45,419 | ||||||
Loans originated, net of repayments | (2,826,687 | ) | (24,131,387 | ) | ||||
Purchases of: | ||||||||
Federal Home Loan Bank stock | — | (4,701,200 | ) | |||||
Office properties and equipment | (112,333 | ) | (77,724 | ) | ||||
Life insurance contracts | (1,500,000 | ) | — | |||||
Proceeds from sales of Federal Home Loan Bank stock | — | 4,732,700 | ||||||
Proceeds from sale of real estate owned | — | 391,926 | ||||||
Proceeds from maturities/ calls of: | ||||||||
Investment securities available for sale | 771,533 | 500,000 | ||||||
Net cash (used in) investing activities | (2,340,324 | ) | (21,494,825 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Increase in deposits | 9,566,385 | 21,507,905 | ||||||
(Decrease) in advances from the Federal Home Loan Bank | — | (700,000 | ) | |||||
Dividends paid | (438,455 | ) | (178,119 | ) | ||||
Purchase of shares by deferred compensation plans trust | (12,415 | ) | (2,820 | ) | ||||
Costs associated with issuance of common stock | (15,998 | ) | — | |||||
Increase in advances from borrowers for taxes and insurance | 272,429 | 278,831 | ||||||
Net cash provided by financing activities | 9,371,946 | 20,905,797 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 9,044,846 | 955,385 | ||||||
CASH AND CASH EQUIVALENTS—Beginning of period | 33,027,710 | 8,530,159 | ||||||
CASH AND CASH EQUIVALENTS—End of period | $ | 42,072,556 | $ | 9,485,544 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW | ||||||||
INFORMATION—Cash paid during the period for: | ||||||||
Interest | $ | 3,871,484 | $ | 4,198,293 | ||||
Income Taxes | $ | 600,000 | $ | 135,000 | ||||
See notes to unaudited condensed consolidated financial statements.
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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 (the “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, 2009. The results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010 or any other period.
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 February 2010, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) 2010-09,Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This guidance removes the requirement for a SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. FASB ASU 2010-09 is intended to remove potential conflicts with the SEC’s literature and all of its amendments are effective upon issuance, except for the use of the issued date for conduit debt obligors, which will be effective for interim or annual periods ending after June 15, 2010. The Company adopted the new guidance, and it did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In January 2010, the FASB issued FASB ASU 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance requires: (1) disclosure of the significant amount transferred in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers; and (2) separate presentation of purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). In addition, FASB ASU 2010-06 clarifies the requirements of the following existing disclosures set forth in FASB ASC 820,Fair Value Measurements and Disclosures: (1) For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances,
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning January 1, 2011, and for interim periods within those fiscal years. The Company adopted the new guidance, and it did not have a material impact on the Company’s financial condition, results of operations or cash flows.
2. INVESTMENT SECURITIES
Investment securities are summarized as follows:
March 31, 2010 | |||||||||||||
Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Estimated Fair Value | ||||||||||
Held to Maturity | |||||||||||||
US treasury and government sponsored entity mortgage-backed securities | $ | 3,326,317 | $ | 155,600 | $ | — | $ | 3,481,917 | |||||
Totals | $ | 3,326,317 | $ | 155,600 | $ | — | $ | 3,481,917 | |||||
Available for Sale | |||||||||||||
Debt securities: | |||||||||||||
Municipal securities | $ | 1,419,265 | $ | 13,211 | $ | — | $ | 1,432,476 | |||||
Corporate | 8,197,725 | — | (2,250,382 | ) | 5,947,343 | ||||||||
Equity securities | 2,596 | 16,298 | — | 18,894 | |||||||||
US treasury and government sponsored entity mortgage-backed securities | 16,044,476 | 807,335 | (706 | ) | 16,851,105 | ||||||||
Totals | $ | 25,664,062 | $ | 836,844 | $ | (2,251,088 | ) | $ | 24,249,818 | ||||
December 31, 2009 | |||||||||||||
Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Estimated Fair Value | ||||||||||
Held to Maturity | |||||||||||||
US treasury and government sponsored entity mortgage-backed securities | $ | 3,440,275 | $ | 139,336 | $ | — | $ | 3,579,611 | |||||
Totals | $ | 3,440,275 | $ | 139,336 | $ | — | $ | 3,579,611 | |||||
Available for Sale | |||||||||||||
Debt securities: | |||||||||||||
U.S. Federal Agencies | $ | 771,507 | $ | 1,954 | $ | — | $ | 773,461 | |||||
Municipal | 1,419,030 | 11,597 | — | 1,430,627 | |||||||||
Corporate | 8,197,324 | — | (2,458,832 | ) | 5,738,492 | ||||||||
Equity securities | 2,596 | 14,348 | — | 16,944 | |||||||||
US treasury and government sponsored entity mortgage-backed securities | 17,264,145 | 764,456 | (1,358 | ) | 18,027,243 | ||||||||
Totals | $ | 27,654,602 | $ | 792,355 | $ | (2,460,190 | ) | $ | 25,986,767 | ||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2010 and December 31, 2009:
March 31, 2010 | |||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||
Gross | Gross | Gross | |||||||||||||||||||
Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | ||||||||||||||||
Debt securities - | |||||||||||||||||||||
Corporate | $ | — | $ | — | $ | 5,947,143 | $ | (2,250,382 | ) | $ | 5,947,143 | $ | (2,250,382 | ) | |||||||
US treasury and government sponsored entity mortgage-backed securities | 247,243 | (706 | ) | — | — | 247,243 | (706 | ) | |||||||||||||
Totals | $ | 247,243 | $ | (706 | ) | $ | 5,947,143 | $ | (2,250,382 | ) | $ | 6,194,386 | $ | (2,251,088 | ) | ||||||
December 31, 2009 | ||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||
Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | |||||||||||||||
Debt securities - | ||||||||||||||||||||
US Federal Agencies | $ | — | $ | — | $ | 358,789 | $ | (1,358 | ) | $ | 358,789 | $ | (1,358 | ) | ||||||
Corporate | — | — | 5,738,292 | (2,458,832 | ) | 5,738,292 | (2,458,832 | ) | ||||||||||||
Totals | $ | — | $ | — | $ | 6,097,081 | $ | (2,460,190 | ) | $ | 6,097,081 | $ | (2,460,190 | ) | ||||||
As of March 31, 2010, management has concluded that the unrealized losses above on its investment securities (which totaled 7 individual securities) are temporary in nature since there currently is no indication that the entire amortized cost basis of these securities will not be recovered, the Company does not intend to sell these investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.
For the quarter ended March 31, 2010, the Company updated its assessment of securities with unrealized losses and whether the losses were temporary in nature. Upon completion of this review, no additional credit losses were incurred related to securities for which the Company had previously recorded an other-than-temporary (“OTTI”) charge.
Below is a roll forward of the anticipated credit losses on securities for which the Company has recorded OTTI charges through earnings and other comprehensive income.
2010 | 2009 | |||||
Credit component of OTTI as of January 1 | $ | 3,000,000 | $ | 1,922,600 | ||
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 | — | 485,600 | ||||
Credit component of OTTI as of March 31 | $ | 3,000,000 | $ | 2,408,200 | ||
Two pooled trust preferred collateralized debt obligations (“CDOs”) backed by bank trust capital securities have been determined to be other-than-temporarily impaired due solely to credit related factors. These securities have Fitch credit ratings below investment grade at March 31, 2010. Each of the securities is in the mezzanine levels of credit subordination. The underlying collateral consists of the
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2010:
March 31, 2010 | March 31, 2009 | |||
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% | 15.3% to 21.8% | ||
Remaining life | 31 years | 32 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/collateralized debt obligations (“CDOs”) backed by bank trust preferred capital securities.
At March 31, 2010, six debt securities had been in a continuous unrealized loss position for 12 months or longer. Those securities had aggregate depreciation of 27.45% from the Company’s amortized cost basis. 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 changes in market interest rates and a lack of liquidity currently in the financial markets. These securities were performing in accordance with their contractual terms as of March 31, 2010, 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 ability and intent to hold 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, 2010, no agency mortgage-backed securities had been in a continuous unrealized loss position for 12 months or longer. These securities represent asset-backed issues that are issued or guaranteed by a U.S. Government sponsored agency or carrying the full faith and credit of the United States through a government agency and are currently rated AAA by at least one bond credit rating agency.
The amortized cost and estimated fair value of debt securities available for sale at March 31, 2010 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, 2010 | ||||||||||||
Held to Maturity | Available for Sale Securities | |||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||
Due within 1 year | $ | — | $ | — | $ | — | $ | — | ||||
Due after 1 year through 5 years | — | — | 1,000,000 | 845,620 | ||||||||
Due after 5 years through 10 years | — | — | — | — | ||||||||
Due after 10 years | — | — | 8,619,990 | 6,534,199 | ||||||||
Total | $ | — | $ | — | $ | 9,616,990 | $ | 7,379,819 | ||||
Equity securities had a cost of $2,586 and a fair value of $18,894 as of March 31, 2010. Mortgage-backed securities had a cost of $19,370,793 and a fair value of $20,333,022.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. LOANS RECEIVABLE — NET
Loans receivable consist of the following:
March 31, 2010 | December 31, 2009 | |||||||
Real estate—mortgage: | ||||||||
One-to-four family residential | $ | 520,732,798 | $ | 521,361,263 | ||||
Commercial and multi-family | 48,338,855 | 49,801,620 | ||||||
Total real estate-mortgage | 569,071,653 | 571,162,883 | ||||||
Real estate—construction: | ||||||||
Residential | 8,830,186 | 5,605,724 | ||||||
Commercial | 4,417,092 | 2,937,089 | ||||||
Total real estate—construction | 13,247,278 | 8,542,813 | ||||||
Commercial | 22,425,854 | 22,893,039 | ||||||
Consumer: | ||||||||
Home equity | 61,308,146 | 60,729,520 | ||||||
Other consumer loans | 871,566 | 795,761 | ||||||
Total consumer loans | 62,179,712 | 61,525,281 | ||||||
Total loans | 666,924,497 | 664,124,016 | ||||||
Net deferred loan cost | 3,000,026 | 3,014,832 | ||||||
Allowance for loan losses | (3,601,495 | ) | (3,476,040 | ) | ||||
Net total loans | $ | 666,323,028 | $ | 663,662,808 | ||||
Changes in the allowance for loan losses are as follows:
Three Months Ended March 31, | |||||||
2010 | 2009 | ||||||
Balance, beginning of period | $ | 3,476,040 | $ | 2,683,956 | |||
Provision for loan loss | 151,661 | 152,200 | |||||
Charge-offs | (26,206 | ) | — | ||||
Recoveries | — | 1,152 | |||||
Balance, end of period | $ | 3,601,495 | $ | 2,837,308 | |||
Non-performing loans:
March 31, 2010 | December 31, 2009 | |||||
Real estate mortgage loans | $ | 2,017,652 | $ | 1,593,000 | ||
Real estate commercial loans | 276,551 | 139,000 | ||||
Commercial loans | 98,885 | 22,000 | ||||
Consumer loans | 86,523 | 91,000 | ||||
Total non-accrual and 90 days or more past due | 2,479,611 | 1,845,000 | ||||
Real estate owned | 97,500 | — | ||||
Total non-performing loans | $ | 2,577,111 | $ | 1,845,000 | ||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $152,000 for the quarter ended March 31, 2010 as compared to $152,000 for the comparable period in 2009.
A loan is considered to be impaired when, based upon current information and events, it is probable that the Bank 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, 2010 and December 31, 2009, 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.
As of March 31, 2010 and December 31, 2009 the recorded investment in loans that are considered to be impaired was as follows:
March 31, 2010 | December 31, 2009 | |||||
Impaired collateral-dependant loans with related allowance | $ | 1,152,000 | $ | 1,158,000 | ||
Impaired collateral-dependant loans with no related allowance | 1,732,000 | 687,000 |
Other data for impaired loans as of March 31, 2010 and December 31, 2009 was as follows:
March 31, 2010 | December 31, 2009 | |||||
Average impaired loans | $ | 180,000 | $ | 192,000 | ||
Interest income recognized on impaired loans | — | — | ||||
Cash basis interest income recognized on impaired loans | — | — |
Non-performing loans at March 31, 2010 and December 31, 2009 consisted of non-accrual loans that amounted to approximately $2,479,611 and $1,844,849 respectively. The reserve for delinquent interest on loans totaled $46,380 and $90,757 at March 31, 2010 and December 31, 2009, respectively.
4. DEPOSITS
Deposits consist of the following major classifications:
March 31, 2010 | December 31, 2009 | |||||||||||
Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | |||||||||
NOW and other demand deposit accounts | $ | 250,538,982 | 0.93 | % | $ | 249,422,646 | 0.94 | % | ||||
Passbook savings and club accounts | 81,588,345 | 1.15 | % | 73,976,828 | 1.14 | % | ||||||
Subtotal | 332,127,327 | 323,399,474 | ||||||||||
Certificates with original maturities: | ||||||||||||
Within one year | 113,866,626 | 1.54 | % | 113,814,174 | 1.69 | % | ||||||
One to three years | 78,601,718 | 2.66 | % | 76,504,418 | 2.85 | % | ||||||
Three years and beyond | 22,392,809 | 3.92 | % | 23,704,028 | 4.05 | % | ||||||
Total certificates | 214,861,153 | 214,022,620 | ||||||||||
Total | $ | 546,988,480 | $ | 537,422,094 | ||||||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The aggregate amount of certificate accounts in denominations of $100,000 or more at March 31, 2010 and December 31, 2009 amounted to $86,794,933 and $86,977,676, respectively.
Municipal demand deposit accounts in denominations of $100,000 or more at March 31, 2010 and December 31, 2009 amounted to $95,743,761 and $93,099,368, 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 ESOP shares. Earnings per share and average common shares outstanding for the prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on December 18, 2009.
The calculated basic and dilutive EPS are as follows:
Three Months Ended March 31, | ||||||
2010 | 2009 | |||||
Numerator—Net Income | $ | 1,336,324 | $ | 912,785 | ||
Denominators: | ||||||
Basic shares outstanding | 6,818,485 | 7,059,645 | ||||
Net effect of dilutive common stock equivalents | 18,103 | 60,250 | ||||
Dilutive shares outstanding | 6,836,588 | 7,119,894 | ||||
Earnings per share: | ||||||
Basic | $ | 0.20 | $ | 0.13 | ||
Dilutive | $ | 0.20 | $ | 0.13 |
At March 31, 2010 and 2009, there were 373,592 and 373,592 outstanding options that were anti-dilutive, respectively.
6. STOCK BASED COMPENSATION
Stock-based compensation is accounted for in accordance with FASB ASC 718, Compensation – Stock Compensation. The Company establishes fair value for its equity awards to determine their cost. The Company recognizes the related expense for employees over the appropriate vesting period, or when applicable, service period, using the straight-line method. 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 using the straight-line method.
The Company’s 2005 Equity-Based Incentive Plan (the “Equity Plan”) authorizes 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 Plan 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 Plan, options expire ten years after the date of
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 Plan as of March 31, 2010 and changes during the three months ended March 31, 2010 are presented below. The number of options and weighted average exercise price for all periods has been adjusted for the exchange ratio as a result of our second step conversion:
Three Months Ended March 31, 2010 | |||||
Number of shares | Weighted average exercise price | ||||
Outstanding at the beginning of the period | 373,592 | $ | 13.10 | ||
Granted | — | — | |||
Exercised | — | — | |||
Forfeited | — | — | |||
Outstanding at the end of the period | 373,592 | $ | 13.10 | ||
Exercisable at the end of the period | 281,244 | $ | 13.17 | ||
Stock options vested or expected to vest (1) | 336,233 | $ | 13.17 | ||
(1) | Includes vested shares and nonvested shares after a forfeiture rate, which is based upon historical data, is applied. |
The following table summarizes all stock options outstanding under the Equity Plan as of March 31, 2010. The number of options and weighted average exercise price for all periods has been adjusted for the exchange ratio as a result of our second step conversion:
Options Outstanding | |||||||
Date Issued | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||
August 10, 2005 | 319,626 | $ | 13.19 | 5.4 years | |||
November 21, 2006 | 19,784 | $ | 14.78 | 6.6 years | |||
November 20, 2007 | 34,182 | $ | 11.32 | 7.6 years | |||
Total | 373,592 | $ | 13.10 | 5.7 years | |||
At March 31, 2010, there was $44,708 of total unrecognized compensation cost related to options granted under the stock option plans. That cost is expected to be recognized over a weighted average period of 1.4 years.
Summary of Non-vested Stock Award Activity:
Three Months Ended March 31, 2010 | |||||
Number of shares | Weighted average grant date fair value | ||||
Outstanding at January 1, 2010 | 30,125 | $ | 13.19 | ||
Issued | — | — | |||
Vested | — | — | |||
Outstanding at March 31, 2010 | 30,125 | $ | 13.19 | ||
As of March 31, 2010, there was $132,474 of total unrecognized compensation costs related to nonvested stock awards. That cost is expected to be recognized over a weighted average period of 0.33 years.
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7. INCOME TAXES
Income taxes increased $301,000 to $847,000 for an effective tax rate of 38.8% for the three months ended March 31, 2010 compared to $546,000 for an effective tax rate of 37.4% for the same period in 2009.
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 earning 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, 2010, no valuation allowance was recorded for any portfolio of the outstanding deferred tax asset.
The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. As of January 1, 2010, the tax years ended December 31, 2006, 2007, 2008 and 2009 were subject to examination by all tax jurisdictions. As of March 31, 2010, no audits were in process by a major tax jurisdiction that, if completed during the next twelve months, would be expected to result in a material change to the Company’s unrecognized tax benefits, as none exist.
8. DECLARATION OF DIVIDEND
During the first quarter of 2010, the Board of Directors of the Company declared a cash dividend of $0.06 per share, which was paid on or about February 26, 2010 to stockholders of record as of the close of business on February 15, 2010.
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 establishes a framework for measuring fair value. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, emphasizing that fair value is a market-based measurement and not an entity-specific measurement. FASB ASC 820 clarifies the application of fair value measurement in a market that is not active. FASB ASC 820 also includes additional factors for determining whether there has been a significant decrease in market activity, affirms the objective of fair value when a market is not active, eliminates the presumption that all transactions are not orderly unless proven otherwise, and requires an entity to disclose inputs and valuation techniques, and changes therein, used to measure fair value. FASB ASC 820 addresses the valuation techniques used to measure fair value. These valuation techniques include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves converting future amounts to a single present amount. The measurement is valued based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FASB ASC 820 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:
• | Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
• | Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
• | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
We measure financial assets and liabilities at fair value in accordance with FASB ASC 820. These measurements involve various valuation techniques and models, which involve inputs that are observable, when available, and include the following significant financial instruments: investment securities available for sale and derivative financial instruments. The following is a summary of valuation techniques utilized by us for our significant financial assets and liabilities which are valued on a recurring basis.
Investment securities available for sale. Where quoted prices for identical securities are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows based on observable market inputs and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Level 3 market value measurements include an internally developed discounted cash flow model combined with using market data points of similar securities with comparable credit ratings in addition to market yield curves with similar maturities in determining the discount rate. In addition, significant estimates and unobservable inputs are required in the determination of Level 3 market value measurements. If actual results differ significantly from the estimates and inputs applied, it could have a material effect on our consolidated financial statements.
In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). We measure impaired loans, FHLB stock and loans transferred into other real estate owned at fair value on a non-recurring basis. We review and validate the valuation techniques and models utilized for measuring financial assets and liabilities at least quarterly.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Those assets at March 31, 2010 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 | $ | — | $ | 16,851,105 | $ | — | |||
State and municipal obligations | — | 1,432,476 | — | ||||||
Corporate securities | — | 5,947,143 | 200 | ||||||
Equity securities | 18,894 | — | — | ||||||
Totals | $ | 18,894 | $ | 24,230,724 | $ | 200 | |||
Those assets at December 31, 2009 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 | $ | — | $ | 18,800,704 | $ | — | |||
State and municipal obligations | — | 1,430,627 | — | ||||||
Corporate securities | — | 5,738,292 | 200 | ||||||
Equity securities | 16,944 | — | — | ||||||
Totals | $ | 16,944 | $ | 25,969,623 | $ | 200 | |||
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 perform its market value measurement of each of the trust preferred securities based upon 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 Company did not measure any assets or liabilities using a Level 3 measurement prior to September 2008. There were no significant transfers of assets between Level 1 and Level 2 of the fair value hierarchy during the quarter ended March 31, 2010.
The following provides details of the fair value measurement activity for Level 3 for the quarter ended March 31, 2010:
Fair Value Measurement Activity – Level 3 (only)
Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | ||||||
Trust Preferred Securities | Total | |||||
Balance, January 1, 2010 | $ | 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, 2010 | $ | 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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The following provides details of the fair value measurement activity for Level 3 for the quarter-ended March 31, 2009:
Fair Value Measurement Activity – Level 3 (only)
Fair Value Measurement Using Significant Unobservable Inputs (Level 3) | ||||||||
Trust Preferred Securities | Total | |||||||
Balance, January 1, 2009 | $ | 1,014,180 | $ | 1,014,180 | ||||
Total gains (losses), realized/unrealized: | ||||||||
Included in earnings(1) | (485,600 | ) | (485,600 | ) | ||||
Included in accumulated other comprehensive loss | (282,400 | ) | (282,400 | ) | ||||
Purchases, maturities, prepayments and call, net | — | — | ||||||
Transfers into Level 3(2) | — | — | ||||||
Balance, March 31, 2009 | $ | 246,180 | $ | 246,180 | ||||
(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. |
In accordance with the fair value measurement and disclosures topic of the FASB Accounting Standards Codification, management assessed whether the volume and level of activity for certain assets have significantly decreased when compared with normal market conditions. The Company concluded that there has been a significant decrease in the volume and level of activity with respect to certain investments included in the corporate debt securities and classified as level 2 in accordance with the framework for fair value measurements. Fair value for such securities is obtained from third party broker quotes. The Company evaluated these values to determine that the quoted price is based on current information that reflects orderly transactions or a valuation technique that reflects market participant assumptions by benchmarking the valuation results and assumptions used against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances.
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans, FHLB stock and loans or bank properties transferred into other real estate owned at fair value on a non-recurring basis.
Category used for Fair Value Measurement | ||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||
March 31, 2010 | ||||||||||||
Loans (1) | $ | — | $ | 2,884,000 | $ | — | $ | 2,884,000 | ||||
Foreclosed assets (2) | — | 97,500 | — | 97,500 | ||||||||
December 31, 2009 | ||||||||||||
Loans (1) | $ | — | $ | 1,158,000 | $ | — | $ | 1,158,000 | ||||
Foreclosed assets (2) | — | 97,500 | — | 97,500 |
(1) | These balances are measured at fair value on a non-recurring basis using the fair value of the underlying collateral. |
(2) | Represents the fair value of foreclosed real estate that was measured at fair value subsequent to their initial classification as foreclosed assets. |
The following table presents the increase/(decrease) in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the income statement, relating to assets held at period end.
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Three Months ended | |||||||
2010 | 2009 | ||||||
Loans | $ | (6,000 | ) | $ | — | ||
Foreclosed assets | — | 101,000 | |||||
$ | (6,000 | ) | $ | 101,000 | |||
Impaired Loans
The Company considers loans 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. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment. In the current period there were no loans categorized as Level 3. At March 31, 2010, total loans remeasured at fair value were $2,884,000. Such loans were carried at the value of $2,890,000 immediately prior to remeasurement, as such resulting in the recognition of impairment through earnings in the amount of $6,000. Specific reserves were calculated for impaired loans with a carrying amount of $1,152,000. The collateral underlying these loans had a fair value of $886,000, resulting in specific reserves in the allowance for loan losses of $266,000. No specific reserve was calculated for impaired loans with an aggregate carrying amount of $1.7 million at March 31, 2010, as the underlying collateral value was not below the carrying amount.
Federal Home Loan Bank Stock
The Company holds required equity investments in the stock of the Federal Home Loan Bank. Investment in the FHLB stock is evaluated for impairment in accordance FASB ASC 942-325. These investments may be measured based upon a discounted cash flow model reliant on observable and unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 2 or 3, depending on such inputs used. At March 31, 2010, the Company determined that there was no impairment and, therefore, fair value disclosure under the provision of the fair value measurement and disclosures topic is not applicable.
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. The fair value of foreclosed real estate is generally based on estimated market prices from independently prepared current appraisals or negotiated sales prices with potential buyers; such valuation inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement. The losses on foreclosed real estate shown above are write-downs based on either a recent appraisal obtained after foreclosure or an accepted purchase offer by an independent third party received after foreclosure. At March 31, 2010, the Company deemed one loan uncollectible and took possession of the underlying collateral during the first quarter of 2009. The collateral underlying the loan had a fair value of $97,000, with an aggregate carrying value of $198,000, triggering a net charge-off of approximately $101,000. There have been no changes to the fair value of this property as described above.
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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.
March 31, 2010 | December 31, 2009 | |||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 42,072,556 | $ | 42,072,556 | $ | 33,027,710 | $ | 33,027,710 | ||||
Investment securities: | ||||||||||||
Held to maturity | 3,326,317 | 3,481,917 | 3,440,275 | 3,579,611 | ||||||||
Available for sale | 24,249,818 | 24,249,818 | 25,986,767 | 25,986,767 | ||||||||
Loans receivable, net | 666,323,028 | 672,493,262 | 663,662,808 | 669,637,682 | ||||||||
Federal Home Loan Bank stock | 6,148,000 | 6,148,000 | 6,148,000 | 6,148,000 | ||||||||
Liabilities: | ||||||||||||
NOW and other demand deposit accounts | 250,538,982 | 262,282,982 | 249,422,646 | 261,166,646 | ||||||||
Passbook savings and club accounts | 81,588,345 | 89,287,345 | 73,976,828 | 81,675,828 | ||||||||
Certificates | 214,861,153 | 215,233,153 | 214,022,620 | 214,022,087 | ||||||||
Advances from Federal Home Loan Bank | 110,000,000 | 119,051,556 | 110,000,000 | 118,836,690 | ||||||||
Junior subordinated debenture | 15,464,000 | 9,278,400 | 15,464,000 | 7,732,000 |
Cash and Cash Equivalents—For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Investment and Mortgage-Backed Securities—For investment securities, fair values are based on a combination of quoted prices for identical assets in active markets, quoted prices for similar assets in markets that are either actively or not actively traded and pricing models, discounted cash flow methodologies, or similar techniques that may contain unobservable inputs that are supported by little or no market activity and require significant judgment. For investment securities that do not actively trade in the marketplace, (primarily our investment in trust preferred securities of non-publicly traded companies) fair value is obtained from third party broker quotes. The Company evaluates prices from a third party pricing service, third party broker quotes, and from another independent third party valuation source to determine their estimated fair value. These quotes are benchmarked against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances. For securities classified as available for sale the changes in fair value are reflected in the carrying value of the asset and are shown as a separate component of stockholders’ equity.
Loans Receivable-Net—The fair value of loans receivable is estimated based on the present value using discounted cash flows based on estimated market discount rates at which similar loans would be made to borrowers and reflect similar credit ratings and interest rate risk for the same remaining maturities.
FHLB Stock—Although FHLB stock is an equity interest in an FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. While certain conditions are noted that required management to evaluate the stock for impairment, it is currently probable that the Company will realize its cost basis. Management concluded that no impairment existed as of March 31, 2010. The estimated fair value approximates the carrying amount.
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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, 2010 and December 31, 2009. 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, 2010 and December 31, 2009, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
10. REAL ESTATE OWNED
Summary of Real Estate Owned (“REO”):
March 31, 2010 | December 31, 2009 | |||||
Residential properties | $ | 97,500 | $ | 97,500 | ||
Total | $ | 97,500 | $ | 97,500 | ||
The Company had one REO residential property at March 31, 2010 and December 31, 2009 and there were no changes during the quarter ended March 31, 2010.
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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, 2009 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.
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GENERAL
Ocean Shore Holding Co. (“Ocean Shore Holding” or the “Company”) was incorporated on September 2, 2008 as a New Jersey corporation to become the holding company for Ocean City Home Bank (the “Bank”) upon completion of the conversion of Ocean City Home Bank from the mutual holding company form of organization to the stock holding company form. The conversion involved the sale by the Company of 4,186,250 shares of common stock in a public offering to depositors and members of the general public, the exchange of 3,121,868 shares of common stock of the Company for shares of common stock of the former Ocean Shore Holding Co. held by persons other than OC Financial MHC, and the elimination of the former Ocean Shore Holding Co. and OC Financial MHC. The conversion and related stock offering were completed on December 18, 2009. Each share of common stock of Ocean Shore Holding Co. was converted into the right to receive 0.8793 shares of common stock in the conversion. The Company’s assets consist of its investment in Ocean City Home Bank and its liquid investments. The Company is primarily engaged in the business of directing, planning, and coordinating the business activities of the Bank. The Company’s most significant asset is its investment in the Bank. In the future, Ocean Shore Holding may acquire or organize other operating subsidiaries; however, there are no current definitive agreements or understandings to do so.
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, 2010 AND DECEMBER 31, 2009
Total assets of the Company increased by $11.1 million to $781.2 million at March 31, 2010 from $770.1 million at December 31, 2009. Loans receivable, net, increased $2.7 million, investment and mortgage-backed securities decreased $1.9 million and cash and cash equivalents increased by $9.0 million. Asset growth was funded by an increase in deposits of $9.6 million.
Investments
Investments decreased $1.8 million to $27.6 million at March 31, 2010 from $29.4 million at December 31, 2009. The decrease was the result of normal maturity and repayment activity, offset by the improved valuation of AFS securities.
Loans
Loans receivable, net, increased $2.6 million to $666.3 million at March 31, 2010 from $663.7 million at December 31, 2009. Loan originations totaled $24.7 million for the three months ended March 31, 2010 compared to $50.2 million originated in the three months ended March 31, 2009. Real estate mortgage loan originations totaled $11.8 million, real estate construction loan originations totaled $5.2 million, consumer loan originations totaled $4.1 million and commercial loan originations totaled $3.6 million for the first quarter of 2010. Origination activity was offset by $21.9 million of normal loan payments and payoffs.
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The following table summarizes changes in the loan portfolio in the three months ended March 31, 2010.
March 31, 2010 | December 31, 2009 | $ change | % change | ||||||||||||
(Dollars in thousands) | |||||||||||||||
Real estate – mortgage: | |||||||||||||||
One-to-four-family residential | $ | 520,733 | $ | 521,361 | $ | (628 | ) | (0.1 | )% | ||||||
Commercial and multi-family | 48,339 | 49,802 | (1,463 | ) | (2.9 | ) | |||||||||
Total real estate – mortgage | 569,072 | 571,163 | (2,091 | ) | (0.4 | ) | |||||||||
Real estate – construction: | |||||||||||||||
Residential | 8,830 | 5,606 | 3,224 | 57.5 | |||||||||||
Commercial | 4,417 | 2,937 | 1,480 | 50.4 | |||||||||||
Total real estate – construction | 13,247 | 8,543 | 4,704 | 55.1 | |||||||||||
Commercial | 22,426 | 22,893 | (467 | ) | (2.0 | ) | |||||||||
Consumer | |||||||||||||||
Home equity | 61,308 | 60,730 | 578 | 1.0 | |||||||||||
Other consumer loans | 871 | 795 | 76 | 9.6 | |||||||||||
Total consumer loans | 62,179 | 61,525 | 654 | 1.1 | |||||||||||
Total loans | 666,924 | 664,124 | 2,800 | 0.4 | |||||||||||
Net deferred loan cost | 3,000 | 3,015 | (15 | ) | (0.5 | ) | |||||||||
Allowance for loan losses | (3,601 | ) | (3,476 | ) | (125 | ) | 3.6 | ||||||||
Net total loans | $ | 666,323 | $ | 663,663 | $ | 2,660 | 0.4 | % | |||||||
Non-Performing Assets
Non-performing assets totaled $2.6 million at March 31, 2010 compared to $1.9 million at December 31, 2009. The increase from December 31, 2009 was the result of an increase in the number of non-performing loans to 14 at March 31, 2010 from 13 at December 31, 2009. Real estate owned was unchanged at $97,500 at March 31, 2010. Charge-offs totaled $26,000 in the first quarter of 2010 compared to no activity for the same period in 2009.
The allowance for loan losses increased to $3.6 million, or 0.54% of total net loans, from $3.5 million at December 31, 2009, 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, growth in the loan portfolio and the current economic conditions. The loss factors used to calculate the allowance in March 2010 from December 31, 2009 were slightly higher due to increases in delinquencies. At March 31, 2010, the specific allowance on impaired or collateral-dependent loans was $266,000 and the general valuation allowance on the remainder of the loan portfolio was $3.3 million.
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Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Allowance for loan losses: | ||||||||
Allowance at beginning of period | $ | 3,476 | $ | 2,684 | ||||
Provision for loan losses | 152 | 152 | ||||||
Charge-offs | 26 | — | ||||||
Recoveries | — | 1 | ||||||
Net (charge-offs) recoveries | (26 | ) | 1 | |||||
Allowance at end of period | $ | 3,601 | $ | 2,837 | ||||
Allowance for loan losses as a percent of total loans | 0.54 | % | 0.46 | % | ||||
Allowance for loan losses as a percent of non-performing loans | 139.70 | % | 196.30 | % |
March 31, 2010 | December 31, 2009 | |||||||
(In thousands) | ||||||||
Nonaccrual loans: | ||||||||
Real estate mortgage loans | $ | 2,017 | $ | 1,593 | ||||
Real estate commercial loans | 277 | 139 | ||||||
Commercial | 99 | 22 | ||||||
Consumer loans | 87 | 91 | ||||||
Total of non-accrual and 90 days or more past due loans | 2,480 | 1,845 | ||||||
Real estate owned | 98 | 98 | ||||||
Total non-performing assets | $ | 2,578 | $ | 1,943 | ||||
Total non-performing loans to total loans | 0.37 | % | 0.28 | % | ||||
Total non-performing loans to total assets | 0.32 | % | 0.24 | % | ||||
Total non-performing assets and troubled debt restructurings to total assets | 0.33 | % | 0.25 | % |
Deposits
Deposits increased by $9.6 million, or 1.8%, to $547.0 million at March 31, 2010 from $537.4 million at December 31, 2009. Interest-bearing demand deposits decreased $1.8 million, certificates of deposit increased by $838,000, savings accounts increased by $7.6 million and non-interest bearing demand deposits increased $2.9 million. The Company continued its focus of attracting core deposits, which increased $8.7 million, and accounted for 90.6% of the $9.6 million increase in deposits.
The following table summarizes changes in deposits in the three months ended March 31, 2010.
March 31, 2010 | December 31, 2009 | $ change | % change | ||||||||||
(Dollars in thousands) | |||||||||||||
Non-interest-bearing demand deposits | $ | 56,124 | $ | 53,254 | $ | 2,870 | 5.4 | % | |||||
Interest-bearing demand deposits | 194,415 | 196,168 | (1,753 | ) | (0.9 | ) | |||||||
Savings accounts | 81,588 | 73,977 | 7,611 | 10.3 | |||||||||
Time deposits | 214,861 | 214,023 | 838 | 0.4 | |||||||||
Total | $ | 546,988 | $ | 537,422 | $ | 9,566 | 1.8 | % | |||||
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Borrowings
Federal Home Loan Bank advances were unchanged at $110 million at March 31, 2010 from December 31, 2009. Other borrowings were unchanged at $15.5 million at March 31, 2010 compared to December 31, 2009.
Stockholders’ Equity
Stockholders’ equity increased $1.2 million to $98.6 million at March 31, 2010, from $97.3 million at December 31, 2009, primarily as a result of current period earnings of $1.3 million, offset by decreased unrealized loss in marketable securities and dividends paid.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
Net income was $1.3 million for the three months ended March 31, 2010 as compared to $913,000 for the three months ended March 31, 2009. The increase of $423,000, or 46.4%, was due primarily to increased net interest income of $830,000 and other income of $606,000 offset by increased other expenses of $712,000 and income tax expense of $301,000.
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net income (in thousands) | $ | 1,336 | $ | 913 | ||||
Basic and diluted earnings per share | $ | 0.20 | $ | 0.11 | ||||
Return on average assets (annualized) | 0.68 | % | 0.53 | % | ||||
Return on average equity (annualized) | 5.43 | % | 5.57 | % |
Net Interest Income
The following table summarizes changes in interest income and interest expense for the three-month periods ended March 31, 2010 and 2009.
Three Months Ended March 31, | |||||||||||||
2010 | 2009 | $ change | % change | ||||||||||
(Dollars in thousands) | |||||||||||||
INTEREST INCOME: | |||||||||||||
Loans | $ | 9,031 | $ | 8,462 | $ | 569 | 6.7 | % | |||||
Investment securities | 474 | 530 | (56 | ) | (10.6 | ) | |||||||
Total interest income | 9,505 | 8,992 | 513 | 5.7 | |||||||||
INTEREST EXPENSE: | |||||||||||||
Deposits | 2,027 | 2,312 | (285 | ) | (12.3 | ) | |||||||
Borrowings | 1,497 | 1,529 | (32 | ) | (2.1 | ) | |||||||
Total interest expense | 3,524 | 3,841 | (317 | ) | (8.3 | ) | |||||||
Net interest income | $ | 5,981 | $ | 5,151 | $ | 830 | 16.1 | ||||||
Interest income increased by $513,000, or 5.7%, for the quarter ended March 31, 2010 compared to March 31, 2009. The increase resulted from an increase in loan income of $569,000, offset by a decrease in investment income of $56,000. The increased interest income was driven primarily from higher loan balances in 2010 compared to 2009.
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Interest expense decreased by $317,000, or 8.3%, over the same period last year due to a decrease in interest paid on deposits of $285,000 and interest paid on borrowings of $32,000. The decrease in interest expense resulted primarily from increased balances on deposits, offset by a decrease in the rate paid on deposits.
The interest rate spread and net interest margin of the Company were 3.23% and 3.46%, respectively, for the three months ended March 31, 2010, compared to 2.89% and 3.21% for the same period in 2009. The change in the interest rate spread of 34 basis points and margin of 25 basis points resulted from a decrease in the average rate paid on interest-bearing liabilities of 45 basis points offset by a decrease in the rate earned on interest-earning assets of 11 basis points. An increase in the average balance of loans of $58.5 million and an increase in the average rate on investments of 89 basis points was offset by a decrease in the average rate on loans of 15 basis points and a decrease in the average balance of investments of $8.3 million. Additionally, the decrease in the average rate paid on interest-bearing bearing deposits of 58 basis points and average balance on borrowings of $22.5 million was offset by an increase in the average balance of interest-bearing deposits of $78.9 million and the average rate paid on borrowings of 64 basis points.
The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. The yields and costs are annualized for presentation purposes. For purposes of this table, average balances have been calculated using the average daily balances and nonaccrual loans are only included in average balances. Loan fees are included in interest income on loans and are insignificant. Interest income on loans and investment securities has not been calculated on a tax equivalent basis because the impact would be insignificant.
Average Balance Tables
Three Months Ended March 31, 2010 | Three Months Ended March 31, 2009 | |||||||||||||||||||
Average Balance | Interest and Dividends | Yield/ Cost | Average Balance | Interest and Dividends | Yield/ Cost | |||||||||||||||
Assets: | ||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||
Loans | $ | 663,763 | $ | 9,031 | 5.44 | % | $ | 605,251 | $ | 8,462 | 5.59 | % | ||||||||
Investment securities | 28,474 | 474 | 6.66 | % | 36,741 | 530 | 5.77 | % | ||||||||||||
Total interest-earning assets | 692,237 | 9,505 | 5.49 | % | 641,992 | 8,992 | 5.60 | % | ||||||||||||
Noninterest-earning assets | 93,110 | 48,838 | ||||||||||||||||||
Total assets | $ | 785,347 | $ | 690,830 | ||||||||||||||||
Liabilities and equity: | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||
Interest-bearing demand deposits | 206,596 | 605 | 1.17 | % | 157,604 | 494 | 1.25 | % | ||||||||||||
Savings accounts | 76,789 | 217 | 1.13 | % | 56,363 | 154 | 1.09 | % | ||||||||||||
Certificates of deposit | 214,389 | 1,205 | 2.25 | % | 204,890 | 1,664 | 3.25 | % | ||||||||||||
Total interest-bearing deposits | 497,774 | 2,027 | 1.63 | % | 418,857 | 2,312 | 2.21 | % | ||||||||||||
FHLB advances | 110,000 | 1,162 | 4.23 | % | 132,517 | 1,194 | 3.60 | % | ||||||||||||
Subordinated debt | 15,464 | 335 | 8.67 | % | 15,464 | 335 | 8.67 | % | ||||||||||||
Total borrowings | 125,464 | 1,497 | 4.77 | % | 147,981 | 1,529 | 4.13 | % | ||||||||||||
Total interest-bearing liabilities | 623,238 | 3,524 | 2.26 | % | 566,838 | 3,841 | 2.71 | % | ||||||||||||
Noninterest-bearing deposits | 54,833 | |||||||||||||||||||
Noninterest-bearing liabilities | 8,835 | 58,460 | ||||||||||||||||||
Total liabilities | 686,906 | 625,298 | ||||||||||||||||||
Retained earnings | 98,441 | 65,532 | ||||||||||||||||||
Total liabilities and retained earnings | $ | 785,347 | $ | 690,830 | ||||||||||||||||
Net interest income | $ | 5,981 | $ | 5,151 | ||||||||||||||||
Interest rate spread | 3.23 | % | 2.89 | % | ||||||||||||||||
Net interest margin | 3.46 | % | 3.21 | % | ||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 111.07 | % | 113.26 | % |
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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 collectibility of the loan portfolio. The provision for loan losses was $151,700 in the three months ended March 31, 2010 compared to $152,200 in the three months ended March 31, 2009. The provision added during the period was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of non-performing loans, growth in the loan portfolio and the current economic environment.
Other Income
The following table summarizes other income for the three months ended March 31, 2010 and 2009 and the changes between the periods.
Three Months Ended March 31, | % Change | |||||||||
2010 | 2009 | |||||||||
(Dollars in thousands) | ||||||||||
OTHER INCOME: | ||||||||||
Service charges | $ | 436 | $ | 407 | 7.1 | % | ||||
Cash surrender value of life insurance | 135 | 104 | 29.8 | |||||||
Impairment charge on AFS securities | – | (486 | ) | N/M | ||||||
Other | 236 | 176 | 34.1 | |||||||
Total other income | $ | 807 | $ | 201 | 301.5 | % | ||||
N/M – Not measurable
Other income increased $606,000 to $807,000, or 301.5%, for the three-month period ended March 31, 2010 from the same period in 2009. Increases in income resulted from increases in deposit account fees, cash surrender value of life insurance and debit card commissions totaling $120,000 and a decrease in other-than-temporary impairment charges of $486,000 recorded during the first quarter of 2009. The Company did not record any other-than-temporary impairment charges during the first quarter of 2010.
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Other Expense
The following table summarizes other expense for the three months ended March 31, 2010 and 2009 and the changes between periods.
Three Months Ended March 31, | % Change | ||||||||
2010 | 2009 | ||||||||
(Dollars in thousands) | |||||||||
OTHER EXPENSE: | |||||||||
Salaries and employee benefits | $ | 2,496 | $ | 2,141 | 16.6 | % | |||
Occupancy and equipment | 977 | 867 | 12.7 | ||||||
Federal insurance premiums | 168 | 71 | 136.6 | ||||||
Advertising | 116 | 97 | 19.6 | ||||||
Professional services | 178 | 155 | 14.8 | ||||||
Other operating expense | 518 | 410 | 26.3 | ||||||
Total other expense | $ | 4,453 | $ | 3,741 | 19.0 | % | |||
Other expenses increased $712,000, or 19.0%, to $4.5 million for the three-month period ended March 31, 2010 from the same period in 2009. All expense categories increased a total of $137,000 associated with the opening of the Company’s tenth branch. Excluding new branch expenses, occupancy, FDIC insurance, marketing, professional services and other operating expenses increased $285,000 through normal activity. Salaries and benefits increased $290,000, excluding new branch expenses, resulting from $84,000 in normal salary and benefit increases and a decrease of $206,000 in qualified deferred personnel cost credits associated with fewer closed loans during the first quarter of 2010 compared to 2009.
Income Taxes
Income taxes increased $301,000 to $847,000 for an effective tax rate of 38.8% for the three months ended March 31, 2010, compared to $546,000 for an effective tax rate of 37.4% from the same period in 2009. The increase was a result of higher taxable income.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of New York. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2010, cash and cash equivalents totaled $42.1 million. Securities classified as available-for-sale whose market value exceeds our cost, which could provide additional sources of liquidity if sold, totaled $18.1 million at March 31, 2010. In addition, at March 31, 2010, we had the ability to borrow a total of approximately $244.6 million from the Federal Home Loan Bank of New York, which included available overnight lines of credit of $48.5 million. On that date, we had no overnight advances outstanding.
At March 31, 2010, we had $56.4 million in loan commitments outstanding, which included $18.8 million in undisbursed loans, $24.7 million in unused home equity lines of credit and $12.9 million in commercial lines and letters of credit. Certificates of deposit due within one year of March 31, 2010 totaled $158.5 million, or 73.8% 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.
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At March 31, 2010, the Bank exceeded all of its regulatory capital requirements with tangible capital of $84.0 million, or 10.91% of total adjusted assets, which is above the required level of $11.6 million or 1.5%; core capital of $84.0 million, or 10.9% of total adjusted assets, which is above the required level of $30.8 million or 4.0%; and risk-based capital of $87.4 million, or 19.52% of risk-weighted assets, which is above the required level of $35.8 million or 8.0%. The Bank is considered a “well-capitalized” institution under the Office of Thrift Supervision’s 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 Ocean Shore Holding.
At December 31, 2009 Percentage Change in Estimated Net Interest Income Over | ||||||
12 Months | 24 Months | |||||
200 basis point increase in rates | 10.25 | % | 22.99 | % | ||
100 basis point decrease in rates | (1.32 | )% | (2.99 | )% |
Management believes that under the current rate environment, a change of interest rates downward of 200 basis points is a highly remote interest rate scenario. Therefore, management modified the limit and a 100 basis point decrease in interest rates was used. This limit will be re-evaluated periodically and may be modified as appropriate.
The 200 and 100 basis point change in rates in the above table is assumed to occur evenly over the following 12 months. Based on the scenario above, net interest income would be positively affected (within our internal guidelines) in the 12- and 24-month periods if rates rose by 200 basis points. In addition, if rates declined by 100 basis points net interest income would be adversely affected (within our internal guidelines) in both the 12- and 24-month periods.
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 Thrift Supervision 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 50 to 300 basis point increase or a sustained 50 to 100 basis point decrease in market interest
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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 Thrift Supervision, presents the change in our net portfolio value at December 31, 2009 that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision 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 | $ | 63,762 | $ | (47,704 | ) | (43 | )% | 8.62 | % | (527 | )bp | |||||
200 | 82,068 | (29,398 | ) | (26 | ) | 10.77 | (312 | ) | ||||||||
100 | 99,236 | (12,230 | ) | (11 | ) | 12.66 | (123 | ) | ||||||||
50 | 105,968 | (5,498 | ) | (5 | ) | 13.35 | (54 | ) | ||||||||
0 | 111,466 | — | — | 13.89 | — | |||||||||||
(50) | 113,689 | 2,223 | 2 | 14.06 | 17 | |||||||||||
(100) | 114,049 | 2,583 | 2 | 14.05 | 16 |
The Office of Thrift Supervision 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.
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, 2010, 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
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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, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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, 2009.
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, 2010 through January 31, 2010 | None | None | None | 394 | ||||
Month #2 February 1, 2010 through February 28, 2010 | None | None | None | 394 | ||||
Month #3 March 1, 2010 through March 31, 2010 | None | None | None | 394 | ||||
Total | 394 |
(1) | On August 10, 2005, the Company’s Board of Directors approved the formation and funding of a trust that will purchase 151,018 shares of the Company’s common stock in the open market with funds contributed by the Company. As of March 31, 2010, 150,624 shares were purchased. The remaining 394 shares have not been awarded and may be purchased from time to time at the discretion of the independent trustee of the trust and the shares will be used to fund restricted stock awards under the Company’s 2005 Equity Incentive Plan. The above shares have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company which occurred on December 18, 2009. |
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Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. | [RESERVED] |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
3.1 | Certificate of Incorporation of Ocean Shore Holding Co., (incorporated by reference to Exhibit 3.1 to the Ocean Shore Holding Co. Registration Statement on Form S-1 (File No. 333-153454), as amended, initially filed on September 12, 2008). | |
3.2 | Bylaws of Ocean Shore Holding Co., (incorporated by reference to Exhibit 3.2 to the Ocean Shore Holding Co. Registration Statement on Form S-1 (File No. 333-153454), as amended, initially filed on September 12, 2008). | |
4.1 | Specimen Stock Certificate of Ocean Shore Holding Co., (incorporated by reference to Exhibit 4.0 the Ocean Shore Holding Co. Registration Statement on Form S-1 (File No. 333-153454), as amended, initially filed on September 12, 2008). | |
4.2 | No long-term debt instrument issued by Ocean Shore Holding Co. exceeds 10% of consolidated assets or is registered. In accordance with paragraph 4(iii) of Item 601(b) of Regulation S-K, Ocean Shore Holding Co. will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request. | |
14.0 | Code of Ethics and Business Conduct (incorporated by reference to Exhibit 14.0 to the Ocean Shore Holding Co. (File No. 000-51000) Annual Report on Form 10-K for the year ended December 31, 2004). | |
21.0 | List of Subsidiaries (incorporated by reference to Exhibit 21.0 to the Ocean Shore Holding Co. (File No. 000-51000) Annual Report on Form 10-K for the year ended December 31, 2008). | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | |
32.0 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. |
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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, 2010 | /S/ STEVEN E. BRADY | |||||
Steven E. Brady | ||||||
President and Chief Executive Officer | ||||||
Date: May 10, 2010 | /S/ DONALD F. MORGENWECK | |||||
Donald F. Morgenweck | ||||||
Chief Financial Officer and Senior Vice President |
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