UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934
   
  For the fiscal year ended December 31, 2011
   
OR
   
¨

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

EXCHANGE ACT OF 1934

   
  For the transition period from _________________________ to _____________

 

Commission File Number: 0-53856

 

OCEAN SHORE HOLDING CO.

(Exact name of registrant as specified in its charter)

 

NEW JERSEY

(State or other jurisdiction of

incorporation or organization)

 

80-0282446

(I.R.S. Employer Identification No.)

 

1001 Asbury Avenue, Ocean City, New Jersey

(Address of principal executive offices)

08226

(Zip Code)

 

Registrant’s telephone number, including area code: (609) 399-0012

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock, par value $0.01 per share   The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:     None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ¨   No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ¨   No  x

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

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

  Large Accelerated Filer ¨ Accelerated Filer x
  Non-accelerated Filer ¨ Smaller Reporting Company ¨

 

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

Yes   ¨   No  x

 

The aggregate market value of the common stock held by non-affiliates as of June 30, 2011 was $76,643,843, based on a closing price of $12.08.

 

The number of shares outstanding of the registrant’s common stock as of March 1, 2012 was 7,291,643.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the 2012 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 
 

 

INDEX

 

Part I

 

    Page
     
Item 1. Business 2
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosure 19
     
Part II 
   
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19
Item 6. Selected Financial Data 20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 96
Item 9A. Controls and Procedures 96
Item 9B. Other Information 96
     
Part III 
     
Item 10. Directors, Executive Officers and Corporate Governance 97
Item 11. Executive Compensation 97
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related 97
   Stockholder Matters 98
Item 13. Certain Relationships and Related Transactions, and Director Independence 98
Item 14. Principal Accountant Fees and Services 98
     
Part IV 
     
Item 15. Exhibits and Financial Statement Schedules 98
     
SIGNATURES  

 

 
 

 

This report contains forward-looking statements, which may include expectations for our operations and business and our assumptions for those expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Some of these factors are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For a discussion of other factors, refer to the “Risk Factors” section in this report.

 

PART I

 

Item 1. BUSINESS

 

General

 

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

 

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

 

Our Web site address is www.ochome.com. We make available on our Web site, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Information on our Web site should not be considered a part of this Form 10-K.

 

Market Area

 

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

 

The economy of Atlantic County is dominated by the service sector, of which the gaming industry in nearby Atlantic City is the primary employer. The national economic downturn that began in 2007 has negatively impacted the gaming industry. Several large construction projects were put on hold and the gaming industry has experienced a significant reduction in employment. The outlook brightened in 2010, as one large project secured the necessary financing to complete construction and two significant properties were sold to stronger operators. While Ocean City Home Bank is not engaged in lending to the casino industry, the employment or businesses of many of Ocean City Home Bank’s customers directly or indirectly benefit from the industry. Although we have not experienced a significant impact from the downturn in the gaming industry, evidence of the general economic downturn is reflected in the increased level of classified assets, nonperforming loans and charge-offs in our loan portfolio.

 

The economy of Cape May County is dominated by the tourism industry, as the county’s shore area has been a summer vacation destination for over 100 years. Many visitors maintain second homes in the area which are used seasonally, and there is an active rental market as well as hotels and motels serving other visitors to the area.

 

Competition

 

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the many financial institutions operating in our market area. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies that have entered the mortgage market, such as insurance companies, securities companies and specialty finance companies.

 

2
 

 

Several large banks operate in our market area, including Bank of America, PNC Bank, Wachovia (now owned by Wells Fargo & Company), and TD Bank (formerly Commerce Bank). These institutions are significantly larger than us and, therefore, have significantly greater resources. According to data provided by the Federal Deposit Insurance Corporation, as of June 30, 2011, we had a deposit market share of 10.3% in Atlantic County (after giving effect to the acquisition of Select Bank), which represented the 4th largest deposit market share, respectively, out of 16 banks with offices in the county. In Cape May County, at that same date we had a deposit market share of 9.3%, which represented the 6th largest market share out of 14 banks with offices in the county.

 

We expect competition to remain intense in the future as a result of continuing legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.

 

Lending Activities

 

One- to Four-Family Residential Loans . Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes in our market area. We offer fixed-rate and adjustable-rate mortgage loans with terms up to 40 years. Interest rates and payments on our adjustable-rate mortgage loans generally adjust periodically after an initial fixed period that ranges from one to 10 years.

 

Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

 

In order to attract borrowers, we have developed products and policies to provide flexibility in times of changing interest rates. For example, some of our adjustable-rate loans permit the borrower to convert the loan to a fixed-rate loan. In addition, for a fixed fee plus a percentage of the loan amount, we will allow the borrower to modify a loan’s interest rate, term or program to equal the current rate for the desired loan product. We also offer loans that require the payment of interest only for a period of years.

 

While one- to four-family residential real estate loans are normally originated with up to 40-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers will prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

 

Because of our location on the South Jersey shore, many of the properties securing our residential mortgages are second homes or rental properties. At December 31, 2011, 38.6% of our one- to four-family mortgage loans were secured by second homes and 13.6% were secured by rental properties. If the property is a second home, our underwriting emphasizes the borrower’s ability to repay the loan out of current income. If the property is a rental property, we focus on the anticipated income from the property. Interest rates on loans secured by rental properties are typically 1/2% higher than comparable loans secured by primary or secondary residences. Although the industry generally considers mortgage loans secured by rental properties or second homes to have a higher risk of default than mortgage loans secured by the borrower’s primary residence, we generally have not experienced credit problems on these types of loans.

 

We generally do not make conventional loans with loan-to-value ratios exceeding 95% and generally make loans with a loan-to-value ratio in excess of 80% only when secured by first and/or second liens on owner-occupied one- to four-family residences or private mortgage insurance. When the residence securing the loan is not the borrower’s primary residence, loan-to-value ratios are limited to 80% when secured by a first lien or 90% when secured by a first and second lien or private mortgage insurance. We require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance for loans on property located in a flood zone, before closing the loan.

 

3
 

 

In an effort to provide financing for low and moderate income and first-time buyers, we offer special home buyers programs. We offer adjustable-rate residential mortgage loans through these programs to qualified individuals and originate the loans using modified underwriting guidelines, including reduced fees and loan conditions.

 

We have not originated subprime loans (i.e., mortgage loans aimed at borrowers who do not qualify for market interest rates because of problems with their credit history). We briefly offered “alt-A” loans (i.e., mortgage loans aimed at borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income), but have discontinued that practice and have few such loans in our portfolio.

 

Commercial and Multi-Family Real Estate Loans . We offer fixed-rate and adjustable-rate mortgage loans secured by commercial real estate. In the past, we originated loans secured by multi-family properties and we still have a few in our portfolio. Our commercial real estate loans are generally secured by condominiums, small office buildings and owner-occupied commercial properties located in our market area.

 

We originate fixed-rate and adjustable-rate commercial real estate loans for terms up to 20 years. Interest rates and payments on adjustable-rate loans typically adjust every five years after a five-year initial fixed period to a rate typically 3 to 4% above the five-year constant maturity Treasury index. In some instances, there are adjustment period or lifetime interest rate caps. Loans are secured by first mortgages and amounts generally do not exceed 80% of the property’s appraised value.

 

In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. In addition, with respect to commercial real estate rental properties, we will also consider the term of the lease and the nature and financial strength of the tenants. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.25x. Environmental surveys are generally required for commercial real estate loans of $500,000 or more.

 

Construction Loans. We originate loans to individuals and, to a lesser extent, builders to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including condominiums, apartment buildings and owner-occupied properties used for businesses. Our construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 months. At the end of the construction phase, the loan generally converts to a permanent mortgage loan. Loans generally can be made with a maximum loan-to-value ratio of 90% on residential construction and 80% on commercial construction. Before making a commitment to fund a residential construction loan, we require an appraisal of the property by an independent licensed appraiser. We also require an inspection of the property before disbursement of funds during the term of the construction loan.

 

Commercial Loans . We make commercial business loans to a variety of professionals, sole proprietorships and small businesses in our market area. We offer term loans for capital improvements, equipment acquisition and long-term working capital. These loans are secured by business assets other than real estate, such as business equipment and inventory, and are originated with maximum loan-to-value ratios of 80%. We originate lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the business can borrow funds for planned equipment purchases. We also offer time notes, letters of credit and loans guaranteed by the Small Business Administration. Time notes are short-term loans and will only be granted on the basis of a defined source of repayment of principal and interest from a specific foreseeable event.

 

4
 

 

When making commercial business loans, we consider the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the customer operates and the value of the collateral.

Consumer Loans . At December 31, 2011, nearly all of our consumer loans were home equity loans or lines of credit. The small remainder of our consumer loan portfolio consisted of loans secured by passbook or certificate accounts, secured and unsecured personal loans and home improvement loans.

 

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal . In response to the current low interest rate environment, in 2009 we introduced a rate floor of 4½% on new and renewed lines of credit. Home equity loans are fixed-rate loans. We offer home equity loans with a maximum combined loan-to-value ratio at underwriting of 90% and lines of credit with a maximum loan-to-value ratio of 80%. A home equity line of credit may be drawn down by the borrower for an initial period of ten years from the date of the loan agreement. During this period, the borrower has the option of paying, on a monthly basis, either principal and interest or only interest. After the initial draw period, the line of credit is frozen and the amount outstanding must be repaid over the remaining ten years of the loan term.

 

Loan Underwriting Risks.

 

Adjustable-Rate Loans . While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

 

Commercial Real Estate Loans . Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on the successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial real estate loans.

 

Construction Loans . Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value that is insufficient to assure full repayment. If we are forced to foreclose on a building before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

 

Commercial Loans . Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

 

5
 

 

Consumer Loans . Home equity and home improvement loans are generally subject to the same risks as residential mortgage loans. Other consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Loan Originations, Purchases and Sales . Loan originations come from a number of sources. We have a good working relationship with many realtors in our market area and employ three account executives solely for the purpose of soliciting loans. Our Web site accepts on-line applications and branch personnel are trained to take applications. We also employ four commercial loan officers.

 

We generally originate loans for portfolio but from time to time will sell residential mortgage loans in the secondary market. Our decision to sell loans is based on prevailing market interest rate conditions and interest rate risk management. We sold no loans in the years ended December 31, 2011, 2010 and 2009. At December 31, 2011, we had no loans held for sale.

 

In 2007, we established a relationship with a local mortgage broker through which we purchase loans. All loans purchased through this channel are underwritten by us. During 2011, $554 thousand in loans were purchased under this arrangement. At December 31, 2011, purchased loans totaled $8.2 million.

 

Loan Approval Procedures and Authority . Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management. The board of directors has granted loan approval authority to certain officers up to prescribed limits, depending on the officer’s experience and tenure. The Chief Executive Officer or Chief Lending Officer may combine their lending authority with that of one or more other officers. All extensions of credit that exceed $1.0 million in the aggregate require the approval or ratification of the board of directors.

 

Loans to One Borrower . The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by regulation, to 15% of our stated capital and reserves. At December 31, 2011, our regulatory limit on loans to one borrower was $14.3 million. At that date, our largest lending relationship was $3.9 million and included three commercial loans secured by commercial real estate located in Atlantic County, New Jersey, all of which were performing according to their original repayment terms at December 31, 2011.

 

Loan Commitments . We issue commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Commitments, excluding lines and letters of credit, as of December 31, 2011 totaled $20.1 million.

 

Investment Activities

 

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities and mutual funds. We also are required to maintain an investment in Federal Home Loan Bank of New York stock. While we have the authority under applicable law and our investment policies to invest in derivative securities, we had no such investments at December 31, 2011.

 

6
 

 

Our investment objectives are to provide and maintain liquidity, to provide collateral for pledging requirements, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of the investment policy and appointment of the Investment Committee. The Investment Committee consists of the Chief Executive Officer and Chief Financial Officer. The Investment Committee is responsible for implementation of the investment policy and monitoring our investment performance. Individual investment transactions are reviewed and approved by the board of directors on a monthly basis, while portfolio composition and performance are reviewed at least quarterly by the Investment Committee.

 

At December 31, 2011, 30.5% of our investment portfolio consisted of mortgage-backed securities issued primarily by government sponsored enterprises (“GSE”) Fannie Mae, Freddie Mac and Ginnie Mae. None of our mortgage-backed securities had underlying collateral that would be considered subprime (i.e., mortgage loans advanced to borrowers who do not qualify for market interest rates because of problems with their credit history). All mortgage-backed securities owned by us as of December 31, 2011 possessed the highest possible investment credit rating at that date. The remainder of the portfolio consisted primarily of corporate securities, U.S. agency securities and municipal securities.


Deposit Activities and Other Sources of Funds

 

General . Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

 

Deposit Accounts . Substantially all of our depositors are residents of New Jersey. Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including noninterest-bearing demand accounts (such as money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our current strategy is to offer competitive rates on certificates of deposit and stress our high level of service and technology. At December 31, 2011, we did not have any brokered deposits.

 

In addition to accounts for individuals, we also offer a variety of deposit accounts designed for the businesses operating in our market area. Our business banking deposit products include commercial checking accounts, a sweep account, and special accounts for realtors, attorneys and non-profit organizations. The promotion of commercial deposit accounts is an important part of our effort to increase our core deposits and reduce our funding costs. At December 31, 2011, commercial deposits totaled $157.5 million, or 20.9% of total deposits.

 

Since 1996, we have offered deposit services to municipalities and local school boards in our market area. At December 31, 2011, we had $118.8 million in deposits from 9 municipalities and 16 school boards, all in the form of checking accounts. We emphasize high levels of service in order to attract and retain these accounts. Municipal deposit accounts differ from business accounts in that we pay interest on those deposits and we pledge collateral (typically investment securities), in accordance with the requirements of New Jersey’s Governmental Unit Deposit Protection Act, with the New Jersey Department of Banking to secure the portion of the deposits that are not covered by federal deposit insurance. Unlike time deposits by municipalities, which often move from bank to bank in search of the highest available rate, checking accounts tend to be stable relationships.

 

Borrowings . We utilize advances from the Federal Home Loan Bank of New York and securities sold under agreements to repurchase to supplement our supply of investable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 30% of a member’s assets using mortgage collateral and an additional 20% using pledged securities for a total maximum indebtedness of 50% of assets. The Federal Home Loan Bank determines specific lines of credit for each member institution.

 

7
 

 

  Personnel

 

As of December 31, 2011 we had 161 full-time employees and 45 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

 

Subsidiaries

 

Ocean Shore Holding’s only subsidiary is Ocean City Home Bank.

 

Ocean City Home Bank’s only active subsidiary is Seashore Financial Services, LLC. Seashore Financial Services receives commissions from referrals for the sale of insurance and investment products.

 

REGULATION AND SUPERVISION

 

General

 

As a savings and loan holding company, Ocean Shore Holding is required by federal law to report to, and otherwise comply with the rules and regulations of, the Federal Reserve Board. Ocean City Home Bank, as an insured federal savings association, is subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the insurer of its deposits.

 

Ocean City Home Bank is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Deposit Insurance Fund managed by the Federal Deposit Insurance Corporation. Ocean City Home Bank must file reports with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation concerning its activities and financial condition and obtain regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings associations. The Office of the Comptroller of the Currency and/or the Federal Deposit Insurance Corporation conduct periodic examinations to test Ocean City Home Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on Ocean Shore Holding, Ocean City Home Bank and their operations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010, makes extensive changes in the regulation and supervision of federal savings institutions like Ocean City Home Bank. Under the Dodd-Frank Act, the Office of Thrift Supervision was eliminated, and responsibility for the supervision and regulation of federal savings banks was transferred to the Office of the Comptroller of the Currency, the agency that regulates national banks. The Office of the Comptroller of the Currency assumed primary responsibility for examining Ocean City Home Bank and implementing and enforcing many of the laws and regulations applicable to federal savings institutions. At the same time, the responsibility for supervising and regulating savings and loan holding companies, such as Ocean Shore Holding, was transferred to the Federal Reserve Board. In addition, the Dodd-Frank Act created a new agency, the Consumer Financial Protection Bureau, as an independent bureau of the Federal Reserve Board, to take over the implementation of federal consumer financial protection and fair lending laws from the depository institution regulators. However, institutions of $10 billion or fewer in assets will continue to be examined for compliance with such laws and regulations by, and subject to the enforcement authority of, their primary federal regulator rather than the Consumer Financial Protection Bureau.

 

8
 

 

Certain regulatory requirements applicable to Ocean City Home Bank and Ocean Shore Holding are referred to below or elsewhere herein. The summary of statutory provisions and regulations applicable to savings associations and their holding companies set forth below or elsewhere in this document does not purport to be a complete description of such statutes and regulations and their effects on Ocean City Home Bank and Ocean Shore Holding and is qualified in its entirety by reference to the actual laws and regulations.

 

Holding Company Regulation

 

Ocean Shore Holding is a unitary savings and loan holding company within the meaning of federal law. As a unitary savings and loan holding company that was in existence prior to May 4, 1999, Ocean Shore Holding is generally not restricted as to the types of business activities in which it may engage, provided that Ocean City Home Bank continues to be a qualified thrift lender. See “Federal Savings Association Regulation - QTL Test.” No company may acquire control of a savings association unless that company engages only in the financial activities permitted for financial holding companies under the law (which includes those permitted for bank holding companies) or for multiple savings and loan holding companies as described below. Upon any non-supervisory acquisition by Ocean Shore Holding of another savings association or savings bank that meets the qualified thrift lender test and is deemed to be a savings association by the Office of the Comptroller of the Currency, Ocean Shore Holding would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies, subject to the prior approval of the Federal Reserve Board, and certain activities authorized by Federal Reserve Board regulation. In addition, Ocean Shore Holding may also engage in activities permitted for financial holding companies under certain conditions, including the filing of an election to be treated as a financial holding company with the Federal Reserve Board.

 

A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings association or savings and loan holding company without prior written approval of the Federal Reserve Board and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. The Federal Reserve Board may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings association in another state if the laws of the state of the target savings association specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

 

Capital Requirements. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. There is a five-year transition period before the capital requirements will apply to savings and loan holding companies. Instruments such as cumulative preferred stock and trust preferred securities will not be includable as Tier 1 capital, except that instruments issued before May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions, which will require holding companies to provide capital and other support to their subsidiary institutions in times of financial distress.

 

Source of Stregnth. The Dodd-Frank Act also extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

 

9
 

 

Acquisition of the Company . Under the Federal Change in Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company or savings association), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings association. A change of control may occur, and prior notice is required, upon the acquisition of 10% or more of Ocean Shore Holding’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in a change of control of Ocean Shore Holding. A change in control definitively occurs upon the acquisition of 25% or more of Ocean Shore Holding’s outstanding voting stock. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

 

Federal Savings Association Regulation

 

Business Activities. The activities of federal savings associations are governed by federal laws and regulations. Those laws and regulations delineate the nature and extent of the business activities in which federal associations may engage. In particular, certain lending authority for federal associations, e.g. , commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

 

Capital Requirements . Federal savings associations must meet three minimum capital standards: a 1.5% tangible capital to total assets ratio; a 4% tier 1 capital to total assets leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system); and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital, less certain specified deductions from total capital such as reciprocal holdings of depository institution capital instruments and equity investments) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet activities, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the Office of the Comptroller of the Currency capital regulation based on the risks believed inherent in the type of asset.


The Office of the Comptroller of the Currency also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At December 31, 2011, Ocean City Home Bank met each of its capital requirements.

 

Prompt Corrective Regulatory Action. The Office of the Comptroller of the Currency is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The Office of the Comptroller of the Currency could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

 

Insurance of Deposit Accounts. Ocean City Home Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned, and adjustments specified by Federal Deposit Insurance Corporation regulations. Assessment rates currently range from seven to 77.5 basis points of the institution’s assessment base, which is calculated as total assets minus tangible equity. The Federal Deposit Insurance Corporation may adjust the scale uniformly, except that no adjustment can deviate more than three basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment.

 

10
 

 

The FDIC required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments, which included an assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 31, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings is recorded for each regular assessment with an offsetting credit to the prepaid asset.

 

Deposit insurance per account owner is currently $250,000. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage until June 30, 2010, subsequently extended to December 31, 2010. Ocean City Home Bank opted to participate in the unlimited noninterest- bearing transaction account coverage. The Dodd-Frank Act extended the unlimited coverage for certain noninterest-bearing transaction accounts until December 31, 2012.

 

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Ocean City Home Bank. Management cannot predict what insurance assessment rates will be in the future.

 

Loans to One Borrower. Federal law provides that savings associations are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

 

QTL Test . Federal law requires savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, but also including education, credit card and small business loans) in at least 9 months out of each 12 month period.

 

A savings association that fails the qualified thrift lender test is subject to certain operating restrictions, including dividend limitations. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action as a violation of law. As of December 31, 2011, Ocean City Home Bank maintained 83.8% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

 

Limitation on Capital Distributions. Federal Reserve Board and Office of the Comptroller of the Currency regulations impose limitations upon all capital distributions by a savings association, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, a notice must be filed with the Federal Reserve Board 30 days prior to declaring a dividend, with a notice to the Office of the Comptroller of the Currency. The Federal Reserve Board may disapprove a dividend notice if the proposed dividend raises safety and soundness concerns, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of the Comptroller of the Currency. In the event Ocean City Home Bank’s capital fell below its regulatory requirements or the Office of the Comptroller of the Currency notified it that it was in need of increased supervision, Ocean City Home Bank’s ability to make capital distributions could be restricted. In addition, the Federal Reserve Board could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Federal Reserve Board determines that such distribution would constitute an unsafe or unsound practice.

 

11
 

 

Transactions with Related Parties. Ocean City Home Bank’s authority to engage in transactions with “affiliates” ( e.g ., any entity that controls or is under common control with Ocean City Home Bank including Ocean Shore Holding and its other subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the association as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association may purchase the securities of any affiliate other than a subsidiary.

 

The Sarbanes Oxley Act of 2002 generally prohibits loans by Ocean Shore Holding to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Ocean City Home Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that Ocean City Home Bank may make to insiders based, in part, on Ocean City Home Bank’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved.

 

Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over savings associations and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

 

Federal Home Loan Bank System

 

Ocean City Home Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Ocean City Home Bank, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. Ocean City Home Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2011 of $6.4 million.

 

The Federal Home Loan Banks have been required to provide funds for the resolution of insolvent thrifts in the late 1980s and contribute funds for affordable housing programs. These and similar requirements, and general economic conditions, could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, Ocean City Home Bank’s net interest income would likely also be reduced.

 

12
 

 

Federal Reserve System

 

The Federal Reserve Board regulations require savings associations to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). For 2011, the regulations provided that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio was assessed on net transaction accounts up to and including $58.8 million; a 10% reserve ratio was applied above $58.8 million. The first $10.7 million of otherwise reservable balances were exempted from the reserve requirements. These amounts are adjusted annually and, for 2012, require a 3% ratio for up to $71.0 million and an exemption of $11.5 million. Ocean City Home Bank complies with the foregoing requirements.

 

13
 

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The Board of Directors annually elects the executive officers of Ocean Shore Holding and Ocean City Home Bank, who serve at the Board’s discretion. Our executive officers are:

 

Name   Position
     
Steven E. Brady   President and Chief Executive Officer of Ocean Shore Holding and Ocean City Home Bank
     
Anthony J. Rizzotte   Executive Vice President of Ocean Shore Holding and Executive Vice President and Chief Lending Officer of Ocean City Home Bank
     
Kim Davidson   Executive Vice President of Ocean City Home Bank and Corporate Secretary of Ocean Shore Holding and Ocean City Home Bank
     
Janet Bossi   Senior Vice President of Loan Administration of Ocean City Home Bank
     
Paul Esposito   Senior Vice President of Operations of Ocean City Home Bank
     
Donald F. Morgenweck   Senior Vice President and Chief Financial Officer of Ocean Shore Holding and Ocean City Home Bank

 

Below is information regarding our executive officers who are not also directors. Each executive officer has held his or her current position for at least the last five years. Ages presented are as of December 31, 2011.

 

Anthony J. Rizzotte has been Executive Vice President and Chief Lending Officer of Ocean City Home Bank and Vice President of Ocean Shore Holding since 1991. Mr. Rizzotte was named Executive Vice President of Ocean Shore Holding in 2004. Age 56.

 

Kim Davidson has been the Executive Vice President of Ocean City Home Bank since 2005, prior to which she served as the Senior Vice President of Business Development of Ocean City Home Bank since 2001. She has also served as the Corporate Secretary of Ocean Shore Holding and Ocean City Home Bank since 2004. Prior to becoming a senior vice president, Ms. Davidson was a vice president of Ocean City Home Bank. Age 51.

 

Janet Bossi has been the Senior Vice President of Loan Administration of Ocean City Home Bank since 2002. Prior to becoming a senior vice president, Ms. Bossi was a vice president of Ocean City Home Bank. Age 45.

 

Paul Esposito has been the Senior Vice President of Operations of Ocean City Home Bank since 1999. Prior to becoming a senior vice president, Mr. Esposito was a vice president of Ocean City Home Bank. Age 62.

 

Donald F. Morgenweck has been Senior Vice President and Chief Financial Officer of Ocean City Home Bank and Vice President of Ocean Shore Holding since March 2001. Mr. Morgenweck was named Senior Vice President and Chief Financial Officer of Ocean Shore Holding in 2004. Prior to joining Ocean City Home Bank, Mr. Morgenweck was a Vice President at Summit Bank. Age 57.

 

14
 

 

ITEM 1A. RISK FACTORS

 

A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

 

Following a national home price peak in mid-2006, falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in early 2007, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. Concerns over the United States’ credit rating (which was downgraded by Standard & Poor’s), the European sovereign debt crisis, and continued high unemployment in the United States, among other economic indicators, have contributed to increased volatility in the capital markets and diminished expectations for the economy.

 

A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

 

Our emphasis on residential mortgage loans exposes us to a risk of loss due to a decline in property values.

 

At December 31, 2011, $547.9 million, or 75.2%, of our loan portfolio consisted of one- to four-family residential mortgage loans, and $67.6 million, or 9.3%, of our loan portfolio consisted of home equity loans. Declines in real estate values could cause some of our mortgage and home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss in the event that we seek to recover on defaulted loans by selling the real estate collateral. Because of our location on the South Jersey shore, many of the properties securing our residential mortgages are second homes or rental properties. At December 31, 2011, 38.6% of our one- to four-family mortgage loans were secured by second homes and 13.6% were secured by rental properties. These loans generally are considered to be more risky than loans secured by the borrower’s permanent residence, since the borrower is typically dependent upon rental income to meet debt service requirements, in the case of a rental property, and when in financial difficulty is more likely to make payments on the loan secured by the borrower’s primary residence before a vacation home.

 

Commercial lending may expose us to increased lending risks.

 

At December 31, 2011, $104.8 million, or 14.4%, of our loan portfolio consisted of commercial and multi-family real estate loans, commercial construction loans and commercial business loans. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

 

We may fail to realize the anticipated benefits of the acquisition of CBHC Financialcorp.

 

The success of our acquisition of CBHC Financialcorp, Inc. (“CBHC”) will depend on, among other things, our ability to realize the anticipated cost savings and to combine the businesses of Select Bank and Ocean City Home Bank in a manner that permits growth opportunities and does not materially disrupt existing customer relationships of Select Bank or result in decreased revenues due to any loss of customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

 

15
 

 

Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings.

 

When we loan money we incur the risk that our borrowers do not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. In addition, our determination as to the amount of our allowance for loan losses is subject to review by Ocean City Home’s primary regulator, the Office of the Comptroller of the Currency, as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the Office of the Comptroller of the Currency after a review of the information available at the time of its examination. Our allowance for loan losses amounted to 0.52% of total loans outstanding and 66.3% of nonperforming loans at December 31, 2011. Our allowance for loan losses at December 31, 2011, may not be sufficient to cover future loan losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

 

If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.

 

We evaluate our securities portfolio for other-than-temporary impairment throughout the year. Each investment that has a fair value less than book value is reviewed on a quarterly basis. An impairment charge is recorded against individual securities if management’s review concludes that the decline in value is other than temporary. As of December 31, 2011, our investment portfolio included four corporate debt securities with a book value of $5.7 million and an estimated fair value of $4.1 million. Changes in the expected cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down the value of these securities. At December 31, 2011, we had an investment of $6.4 million in capital stock of the Federal Home Loan Bank of New York. If the Federal Home Loan Bank of New York is unable to meet minimum regulatory capital requirements or is required to aid the remaining Federal Home Loan Banks, our holding of Federal Home Loan Bank stock may be determined to be other than temporarily impaired and may require a charge to our earnings, which could have a material impact on our financial condition, results of operations and cash flows. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.

 

Higher FDIC deposit insurance premiums and assessments will hurt our earnings.

 

The recent economic recession has caused a high level of bank failures, which has dramatically increased Federal Deposit Insurance Corporation resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the Federal Deposit Insurance Corporation has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the Federal Deposit Insurance Corporation imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $324 thousand. In lieu of imposing an additional special assessment, the Federal Deposit Insurance Corporation required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $2.7 million. Additional increases in the base assessment rate or additional special assessments would negatively impact our earnings.

 

16
 

 

Changes in interest rates could reduce our net interest income and earnings.

 

Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest spread and, as a result, our net interest income and net interest margin. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. This contraction could be more severe following a prolonged period of lower interest rates, as a larger proportion of our fixed rate residential loan portfolio will have been originated at those lower rates and borrowers may be more reluctant or unable to sell their homes in a higher interest rate environment. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.

 

Strong competition within our market area could reduce our profits and slow growth.

 

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. As of June 30, 2011, which is the most recent date for which information is available, we held 10.3% of the deposits in Atlantic County, New Jersey (after giving effect to the acquisition of Select Bank), which represented the 4th largest share of deposits, respectively, out of 16 financial institutions with offices in the county. As of June 30, 2011, we held 9.3% of the deposits in Cape May County, New Jersey, which was the 6th largest share of deposits out of 14 financial institutions with offices in the county. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

 

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision and examination by the Federal Reserve Board, which regulates savings and loan holding companies, the Office of the Comptroller of the Currency, which regulates all national banks and federal savings associations, and by the Federal Deposit Insurance Corporation, as our insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of Ocean City Home Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

 

17
 

 

Recently enacted regulatory reform may have a material impact on our operations.

 

On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision, which previously regulated Ocean City Home Bank, was merged into the Office of the Comptroller of the Currency, which until then only regulated national banks. As a result of the Dodd-Frank Act, savings and loan holding companies, including Ocean City Home, are now regulated by the Board of Governors of the Federal Reserve System. The Dodd-Frank Act also creates a new federal agency to administer consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well, and State Attorneys General will have greater authority to bring a suit against a federally chartered institution, such as Ocean City Home Bank, for violations of certain state and federal consumer protection laws. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company level and invest the proceeds from such borrowings as capital in Ocean City Home Bank that could be leveraged to support additional growth. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.

 

In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies recently have begun to take stronger supervisory actions against financial institutions that have experienced increased loan losses and other weaknesses as a result of the recent economic crisis. The actions include the entering into of written agreements and cease and desist orders that place certain limitations on their operations. Federal bank regulators recently have also been using with more frequency their ability to impose individual minimal capital requirements on banks, which requirements may be higher than those imposed under the Dodd-Frank Act or which would otherwise qualify the bank as being “well capitalized” under the FDIC’s prompt corrective action regulations. If we were to become subject to a supervisory agreement or higher individual capital requirements, such action may have a negative impact on our ability to execute our business plans, as well as our ability to grow, pay dividends or engage in mergers and acquisitions and may result in restrictions in our operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We currently conduct business through our twelve full-service banking offices in Ocean City, Marmora, Linwood, Ventnor, Egg Harbor Township, Absecon, Northfield, Margate City, Mays Landing, Galloway, Hammonton and Egg Harbor City, New Jersey. We own all of our offices, except for those in Absecon, Northfield and Hammonton. The lease for our Absecon office expires in 2014 and has an option for an additional five years. The lease for our Northfield office expires in 2021 and has an option for an additional one year. The lease for our Hammonton office expires in 2021 and has an option for an additional one year. The net book value of the land, buildings, furniture, fixtures and equipment owned by us was $14.1 million at December 31, 2011.

 

18
 

 

ITEM 3. 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 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is listed on the Nasdaq Global Market (“NASDAQ”) under the trading symbol “OSHC.” The following table sets forth the high and low sales prices of the common stock and dividends paid per share for the years ended December 31, 2011 and 2010. See Item 1, “Business—Regulation and Supervision—Limitation on Capital Distributions” and note 2 in the notes to the consolidated financial statements for more information relating to restrictions on dividends.

 

    High     Low     Dividends
Paid Per Share 		 
Year Ended December 31, 2011:                        
Fourth Quarter   $ 10.88     $ 10.05     $ 0.06  
Third Quarter     12.45       10.01       0.06  
Second Quarter     13.00       12.01       0.06  
First Quarter     13.25       11.40       0.06  
                         
Year Ended December 31, 2010:                        
Fourth Quarter   $ 11.98     $ 10.42     $ 0.06  
Third Quarter     11.66       10.15       0.06  
Second Quarter     11.60       10.20       0.06  
First Quarter     11.69       8.90       0.06  

 

As of March 1, 2012, there were approximately 782 holders of record of the Company’s common stock.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchases During the 4th Quarter of 2011

 

The Company did not repurchase any of its common stock during the quarter ended December 31, 2011 and did not have any outstanding repurchase authorizations.

 

19
 

 

ITEM 6. SELECTED FINANCIAL DATA

 

    At or For the Year Ended December 31,  
   

2011

   

2010

   

2009

   

2008

   

2007

 
    (Dollars in thousands, except per share amounts)  
Financial Condition Data:                              
Total assets   $ 994,730     $ 839,857     $ 770,145     $ 678,474     $ 629,523  
Investment securities     52,732       23,721       29,427       37,405       58,916  
Loans receivable, net     727,626       660,340       663,663       594,452       528,058  
Deposits     752,455       603,334       537,422       455,955       415,231  
Borrowings     125,464       125,464       125,464       149,264       143,694  
Total equity     104,680       100,554       97,335       64,387       63,047  
                                         
Operating Data:                                        
Interest and dividend income   $ 38,087     $ 37,716     $ 37,225     $ 35,919     $ 32,619  
Interest expense     12,186       13,829       15,038       17,093       17,481  
Net interest income     25,901       23,887       22,187       18,826       15,138  
Provision for loan losses     473       892       1,251       373       261  
Net interest income after provision
for loan losses 		    25,428       22,995       20,936       18,453       14,877  
Other income     3,538       3,403       3,101       2,768       2,622  
Impairment charge on AFS securities     —       —       (1,077 )     (2,235 )     —  
Other expenses     20,376       17,523       16,134       14,265       13,069  
Income before taxes     8,590       8,875       6,826       4,721       4,430  
Provision for income taxes     3,532       3,431       2,615       1,792       1,639  
Net income   $ 5,058     $ 5,444     $ 4,211     $ 2,929     $ 2,791  
                                         
Per Share Data*:                                        
Earnings per share, basic   $ 0.75     $ 0.80     $ 0.60     $ 0.42     $ 0.39  
Earnings per share, diluted   $ 0.74     $ 0.80     $ 0.59     $ 0.41     $ 0.39  
Dividends per share     0.24       0.24       0.23       0.17       —  
Weighted average shares – basic     6,748,334       6,798,317       7,064,161       7,039,134       7,126,175  
Weighted average shares – diluted     6,831,989       6,798,317       7,112,526       7,117,657       7,234,092  

 

* Earnings per share, dividends per share and average common shares have been adjusted where appropriate to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on December 18, 2009.

 

20
 

 

    At or For the Year Ended December 31,  
    2011     2010     2009     2008     2007  
Performance Ratios:                                        
Return on average assets     0.54 %     0.66 %     0.58 %     0.44 %     0.47 %
Return on average equity     4.90       5.45       6.20       4.55       4.42  
Interest rate spread (1)     3.54       3.30       3.05       2.70       2.40  
Net interest margin (2)     3.51       3.43       3.32       3.07       2.78  
Noninterest expense to average assets     2.18       2.13       2.15       2.15       2.22  
Efficiency ratio (3)     69.21       64.21       63.70       65.90       73.59  
Average interest-earning assets to average interest-bearing liabilities     98.17       106.68       112.40       113.14       111.79  
Average equity to average assets     11.03       12.17       9.39       9.69       10.74  
                                         
Capital Ratios (4):                                        
Tangible capital     9.72       10.39       10.87       9.74       9.97  
Core capital     9.72       10.39       10.87       9.74       9.97  
Total risk-based capital     19.40       20.21       19.22       16.95       17.60  
                                         
Asset Quality Ratios:                                        
Allowance for loan losses as a percent of total loans     0.52       0.60       0.52       0.45       0.44  
Allowance for loan losses as a percent of nonperforming loans     58.0       76.7       188.4       136.0       779.9  
Non-performing loans as a percent of total loans     0.89       0.79       0.28       0.33       0.06  
Non-performing assets as a percent of total assets     0.66       0.63       0.25       0.29       0.05  

_______________

(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Represents net interest income as a percent of average interest-earning assets.
(3) Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities.
(4) Ratios are for Ocean City Home Bank.

  

21
 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “will,” “may,” “could,” “should,” “can” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make about: future results of the Company; expectations for loan losses and the sufficiency of our loan loss allowance to cover future loan losses; the expected outcome and impact of legal, regulatory and legislative developments; and the Company’s plans, objectives and strategies.

 

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:

 

· the effect of political and economic conditions and geopolitical events;

 

· economic conditions that affect the general economy, housing prices, the job market, consumer confidence and spending habits;

 

· the level and volatility of the capital markets and interest rates;

 

· investor sentiment and confidence in the financial markets;

 

· the impact of current, pending and future legislation, regulation and legal actions;

 

· changes in accounting standards, rules and interpretations;

 

· various monetary and fiscal policies and regulations of the U.S. government; and

 

· the other factors described in “Risk Factors” in this report.

 

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

General Overview

 

We conduct community banking activities by accepting deposits and making loans in our market area. Our lending products include residential mortgage loans, commercial loans and mortgages, and home equity and other consumer loans. We also maintain an investment portfolio consisting primarily of mortgage-backed securities to manage our liquidity and interest rate risk. Our loan and investment portfolios are funded with deposits as well as collateralized borrowings from the Federal Home Loan Bank of New York.

 

22
 

 

Income . Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Our net interest income is affected by a variety of factors, including the mix of interest-earning assets in our portfolio and changes in levels of interest rates. The Dodd-Frank Act authorizes depository institutions to pay interest on business demand deposits effective July 31, 2011. Depending upon competitive responses, that change could have an adverse impact on the Bank’s interest expense. Growth in net interest income is dependent upon our ability to prudently manage the balance sheet for growth, combined with how successfully we maintain or increase net interest margin, which is net interest income as a percentage of average interest-earning assets.

 

A secondary source of income is non-interest income, or other income, which is revenue that we receive from providing products and services. The majority of our non-interest income generally comes from service charges (mostly from service charges on deposit accounts). We also earn income on bank-owned life insurance and receive commissions for various services. In some years, we recognize income from the sale of securities and real estate owned.

 

Allowance for Loan Losses . The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio as of the balance sheet date. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

 

Expenses. The noninterest expenses we incur in operating our business consist primarily of expenses for salaries and employee benefits and for occupancy and equipment. We also incur expenses for items such as professional services, advertising, office supplies, insurance, telephone, and postage. Our largest noninterest expense is for salaries and employee benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, ATM and data processing expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Federal Deposit Insurance Corporation assessments are a specified percentage of assessable deposits.

 

Acquisition of CBHC Financialcorp, Inc.

 

On August 1, 2011, the Company acquired all of the outstanding common stock of CBHC, parent company of Select Bank, in a cash-out merger for a total purchase price of $12.5 million. Select Bank has been merged into the Bank, with the Bank as the surviving entity. Based in Egg Harbor City, New Jersey, CBHC operated five banking offices in Atlantic County, New Jersey at the date of acquisition. As a result of the transaction, the Company has expanded its service area in Atlantic County. The Company expects to reduce costs through consolidation of overlapping offices. The results of operations acquired in the CBHC transaction have been included in the Company’s financial results since August 1, 2011.

 

Critical Accounting Policies, Judgments and Estimates

 

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

 

23
 

 

Allowance for Loan Losses . The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are the following: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. A provision for loan losses is charged to operations based on management’s evaluation of the estimated losses that have been incurred in the Company’s loan portfolio. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans.

 

Management monitors its allowance for loan losses monthly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:

 

· Levels of past due, classified and non-accrual loans, troubled debt restructurings and modifications;

 

· Nature and volume of loans;

 

· Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries, and for commercial loans, the level of loans being approved with exceptions to policy;

 

· Experience, ability and depth of management and staff;

 

· National and local economic and business conditions, including various market segments;

 

· Quality of our loan review system and degree of Board oversight;

 

· Concentrations of credit by industry, geography and collateral type, with a specific emphasis on real estate, and changes in levels of such concentrations; and

 

· Effect of external factors, including the deterioration of collateral values, on the level of estimated credit losses in the current portfolio.

 

In determining the allowance for loan losses, management has established both specific and general pooled allowances. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those criticized and classified loans without reserves (specific allowance). The amount of the specific allowance is determined through a loan-by-loan analysis of non-performing loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on qualitative and quantitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, and external factors. If a loan is identified as impaired and is collateral dependant, an appraisal is obtained to provide a base line in determining whether the carrying amount of the loan exceeds the net realizable value. We recognize impairment through a provision estimate or a charge-off is recorded when management determines we will not collect 100% of a loan based on foreclosure of the collateral, less cost to sell the property, or the present value of expected cash flows.

 

24
 

 

As changes in our operating environment occur and as recent loss experience fluctuates, the factors for each category of loan based on type and risk rating will change to reflect current circumstances and the quality of the loan portfolio. Given that the components of the allowance are based partially on historical losses and on risk rating changes in response to recent events, required reserves may trail the emergence of any unforeseen deterioration in credit quality.

 

Other Than Temporary Impairment. We assess whether a decline is other than temporary with respect to a debt security which has a fair value less than the book value by considering whether (1) we have the intent to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery, or (3) we do not expect to recover the entire amortized cost basis of the security. We bifurcate the impact on securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors, when the security is not otherwise intended to be sold or is required to be sold. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI, with the amortized cost basis of the debt security. We use the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, then apply a discount rate equal to the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. The fair market value of the security is determined using the same expected cash flows, where market-based observable inputs are not available; the discount rate is a rate we determine from open market and other sources as appropriate for the security. The fair value is based on market prices or market-based observable inputs when available. The difference between the fair market value and the credit loss is recognized in other comprehensive income. Additional information regarding our accounting for investment securities is included in notes 2 and 3 to the notes to consolidated financial statements.

 

Deferred Income Taxes. We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC 740, Income Taxes. FASB ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income as well as judgments about availability of capital gains. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. Further, an inability to employ a qualifying tax strategy to utilize our deferred tax asset arising from capital losses may give rise to an additional valuation allowance. An increase in the valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. FASB ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. When applicable, we recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. Assessment of uncertain tax positions under FASB ASC 740 requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the requirements of FASB ASC 740 .

 

25
 

 

Our adherence to FASB ASC 740 may result in increased volatility in quarterly and annual effective income tax rates, as FASB ASC 740 requires that any change in judgment or change in measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

 

Fair Value Measurement. We account for fair value measurement in accordance with FASB ASC 820, Fair Value Measurements and Disclosures .   FASB ASC 820 establishes a framework for measuring fair value. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, emphasizing that fair value is a market-based measurement and not an entity-specific measurement. FASB ASC 820 clarifies the application of fair value measurement in a market that is not active. FASB ASC 820 also includes additional factors for determining whether there has been a significant decrease in market activity, affirms the objective of fair value when a market is not active, eliminates the presumption that all transactions are not orderly unless proven otherwise, and requires an entity to disclose inputs and valuation techniques, and changes therein, used to measure fair value. FASB ASC 820 addresses the valuation techniques used to measure fair value. These valuation techniques include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves converting future amounts to a single present amount. The measurement is valued based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.

 

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.

 

26
 

 

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

 

We review and validate the valuation techniques and models utilized for measuring financial assets and liabilities at least quarterly.

 

Goodwill and Core Deposit Intangibles. Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the purchase method. Core deposit intangibles are a measure of the value of checking, savings and other-low cost deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized over the estimated useful lives of the existing deposit relationships acquired, but not exceeding 10 years. The Company evaluates the identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.

 

Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. Management performs an annual goodwill impairment test and whenever events occur or circumstances change that indicates the fair value of a reporting unit may be below its carrying value.

 

Balance Sheet Analysis

 

General . Total assets increased $154.9 million, or 18.4 %, to $994.7 million at December 31, 2011 from $839.9 million at December 31, 2010. Total loans, net, increased $67.3 million, or 10.2%, during 2011 to $727.6 million. Investment and mortgage-backed securities increased $29.0 million during the year due to $52.7 million. Cash and cash equivalents increased $44.8 million to $155.7 million. Asset and deposit growth in 2011 was primarily the result of the acquisition of Select Bank and, to a lesser extent, an additional increase in deposits of $26.2 million to $752.5 million. Federal Home Loan Bank advances were unchanged at $110.0 million.

 

Loans. Our primary lending activity is the origination of loans secured by real estate. Total loans, net, represented 73.1% of total assets at December 31, 2011, compared to 78.6% of total assets at December 31, 2010.

 

Loans receivable, net, increased $67.3 million, or 10.2%, in 2011 to $727.6 million. Total loan originations in 2011 totaled $134.6 million. One- to four-family residential loans increased $33.1 million, or 6.4%, to $547.9 million representing 75.2% of total loans. One-to four-family residential loan originations accounted for $81.1 million, or 60.2%, of total loan originations. Commercial real estate mortgages increased $21.8 million, or 39.5%, to $77.1 million representing 10.6% of total loans. Commercial real estate loan originations totaled $7.8 million, or 5.8%, of total loan originations. Construction loans increased $339 thousand, or 2.9%, to $11.8 million representing 1.6% of total loans. Construction loan originations totaled $17.9 million, or 13.3%, of total loan originations. Commercial loans increased $2.0 million, or 9.0%, to $23.9 million representing 3.3% of total loans. Commercial loan originations totaled $15.5 million, or 11.5%, of total originations. Consumer loans, almost all of which are home equity loans, increased $9.7 million, or 16.8%, to $67.6 million representing 9.3% of total loans. Consumer loan originations totaled $12.8 million, or 9.5%, of total loan originations.

 

27
 

 

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated:

 

Table 1: Loan Portfolio Analysis

 

    At December 31,  
    2011     2010     2009     2008     2007  
(Dollars in thousands)   Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
       
Real estate - mortgage:                                                                                
One- to four-family residential   $ 547,906       75.2 %   $ 514,853       77.8 %   $ 521,361       78.6 %   $ 464,731       78.2 %   $ 408,145       77.3 %
Commercial and multi-family     77,073       10.6       55,238       8.4       49,802       7.5       42,612       7.2       33,319       6.3  
Total real estate - mortgage loans     624,979       85.8       570,091       86.2       571,163       86.1       507,343       85.4       441,464       83.6  
                                                                                 
Real estate - construction:                                                                                
Residential     8,057       1.1       7,785       1.2       5,606       0.8       7,858       1.3       5,099       1.0  
Commercial     3,791       0.5       3,724       0.6       2,937       0.4       1,021       0.2       5,143       1.0  
Total real estate - construction loans     11,848       1.6       11,509       1.8       8,543       1.2       8,879       1.5       10,242       1.9  
                                                                                 
Commercial     23,937       3.3       21,963       3.3       22,893       3.4       17,111       2.8       17,324       3.3  
Consumer:                                                                                
Home equity     66,788       9.2       57,119       8.6       60,730       9.2       60,020       10.1       58,084       11.0  
Other     810       0.1       776       0.1       795       0.1       957       0.2       972       0.2  
Total consumer loans     67,598       9.3       57,895       8.7       61,525       9.3       60,977       10.3       59,056       11.2  
                                                                                 
Total loans     728,362       100.0 %     661,458       100.0 %     664,124       100.0 %     594,310       100.0 %     528,086       100.0 %
                                                                                 
Net deferred loan costs (fees)     3,026               2,870               3,015               2,826               2,279          
Allowance for loan losses     (3,762 )             (3,988 )             (3,476 )             (2,684 )             (2,307 )        
Loans, net   $ 727,626             $ 660,340             $ 663,663             $ 594,452             $ 528,058          

28
 

The following table sets forth certain information at December 31, 2011 regarding the dollar amount of loan principal repayments coming due during the periods indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

 

Table 2: Contractual Maturities and Interest Rate Sensitivity

 

(In thousands)   Real Estate-
Mortgage
Loans 		    Real Estate-
Construction Loans 		    Commercial Loans     Consumer Loans     Total
Loans 		 
       
Amounts due in:                                        
One year or less   $ 331     $ 11,345     $ 12,477     $ 295     $ 24,448  
More than one to five years     10,485       503       3,105       5,466       19,559  
More than five years     614,163        ─       8,355       61,837       684,355  
Total   $ 624,979     $ 11,848     $ 23,937     $ 67,598     $ 728,362  
                                         
Interest rate terms on amounts due after one year:                                        
Fixed-rate loans   $ 493,940     $ 7,017     $ 6,747     $ 37,946     $ 545,650  
Adjustable-rate loans     131,039       4,831       17,190       29,652       182,712  
Total   $ 624,979     $ 11,848     $ 23,937     $ 67,598     $ 728,362  

 

Table 3: Loan Origination, Purchase and Sale Activity

 

(In thousands)   2011     2010     2009     2008     2007  
       
Total loans, net, at beginning of period   $ 660,340     $ 663,663     $ 594,452     $ 528,058     $ 433,342  
Loans originated:                                        
Real estate-mortgage     88,369       87,052       119,446       108,797       111,987  
Real estate-construction     17,873       18,033       14,407       14,117       13,145  
Commercial     15,517       13,995       14,411       13,308       8,502  
Consumer     12,847       16,854       23,237       23,860       27,973  
Total loans originated     134,606       135,934       171,501       160,082       161,607  
Loans purchased     554       1,174       38       4,379       12,668  
Loans acquired through acquisition of Select Bank     81,608       —       —       —       —  
Deduct:                                        
Real estate loan principal repayments     109,380       104,365       69,164       62,778       49,109  
Loan sales     —       —       —       —       —  
Other repayments     39,593       35,410       31,175       35,460       31,037  
Total loan repayments     148,973       139,775       100,339       98,238       80,146  
Transfer to real estate owned     191       —       925       —       —  
Loans charged -off     700       —       461       —       —  
Increase (decrease) due to deferred loan fees and allowance for loan losses     382       (656 )     (603 )     171       587  
Net increase in loan portfolio     67,286       (3,323 )     69,211       66,394       94,716  
Total loans, net, at end of period   $ 727,626     $ 660,340     $ 663,663     $ 594,452     $ 528,058  

 

29
 

 

Securities. At December 31, 2011 our securities portfolio represented 5.3% of total assets, compared to 2.8% at December 31, 2010. Investment securities increased $29.0 million to $52.7 million at December 31, 2011 from $23.7 million at December 31, 2010 primarily the result of new purchases of $25.0 million of U. S. agency securities and $4.0 million of municipal securities.

 

The following table sets forth amortized cost and fair value information relating to our investment and mortgage-backed securities portfolios at the dates indicated:

 

Table 4: Investment Securities

 

    At December 31,  
    2011     2010     2009  
(Dollars in thousands)   Amortized
Cost 		    Fair
Value 		    Amortized
Cost 		    Fair
Value 		    Amortized
Cost 		    Fair
Value 		 
       
Securities available for sale:                                                
U.S. Government and agencies   $ 25,660     $ 25,685       $ ─       $ ─     $ 772     $ 774  
Agency mortgage-backed     13,447       14,128       12,609       13,405       17,264       18,027  
Corporate debt     7,700       6,110       8,199       6,403       8,197       5,738  
Municipal     830       832       1,420       1,431       1,419       1,431  
Total debt securities     47,637       46,755       22,228       21,239       27,652       25,970  
Equity securities and mutual funds     3       13       3       14       3       17  
Total securities available for sale     47,640       46,768       22,231       21,253       27,655       25,987  
                                                 
Securities held to maturity:                                                
Agency mortgage-backed     1,944       2,128       2,467       2,639       3,440       3,580  
Municipal     4,020       4,020       —       —       —       —  
Total securities held to maturity     5,964       6,148       2,467       2,639       3,440       3,580  
Total   $ 53,604     $ 52,916     $ 24,698     $ 23,891     $ 31,095     $ 29,567  

 

At December 31, 2011, we had no investments in a single company or entity (other than the U.S. Government or an agency of the U.S. Government) that had an aggregate book value in excess of 10% of our equity.

   

30
 

 

The following table sets forth the stated maturities and weighted average yields of debt securities at December 31, 2011. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2011, mortgage-backed securities with adjustable rates totaled $2.9 million. Weighted average yields are on a tax-equivalent basis.

 

Table 5: Investment Maturities Schedule

 

 

 

 

One Year

or Less

   

More than

One Year to

Five Years

   

More than

Five Years to

Ten Years

   

More than

Ten Years

    Total  
At December 31, 2011 (Dollars in thousands)  

Carrying

Value

    Weighted Average Yield    

Carrying

Value

    Weighted Average Yield    

Carrying

Value

    Weighted Average Yield    

Carrying

Value

    Weighted Average Yield    

Carrying

Value

    Weighted Average Yield  
       
Securities available for sale:                                                                                
U. S. Government and agency     $ ─        ─     $ 33       3.88 %   $ 10,037       2.00 %   $ 15,590       1.32 %   $ 25,660       1.59 %
Mortgage-backed      ─        ─       577       4.38 %     500       2.07 %     12,370       4.56 %     13,447       4.61 %
Corporate debt     ─        ─       1,000       3.84 %     ─       ─       6,700       6.05 %     7,700       5.77 %
Municipal      ─        ─        ─        ─        ─        ─       830       4.90 %     830       4.90 %
Total securities available for sale      $ ─        ─     $ 1,610       4.03 %   $ 10,537       2.02 %   $ 35,490       3.43 %   $ 47,637       3.18 %
                                                                                 
Securities held to maturity:                                                                                
Mortgage-backed     $ ─        ─     $ 1       9.50 %   $ 42       5.95 %   $ 1,902       5.36 %   $ 1,945       5.38 %
Municipal     4,020       1.21 %      ─        ─        ─        ─        ─        ─       4,020       1.21 %
Total held to maturity debt securities   $ 4,020       1.21 %   $ 1       9.50 %   $ 42       5.95 %   $ 1,902       5.36 %   $ 5,965       2.57 %
                                                                                 
 Total   $ 4,020       1.21 %   $ 1,611       4.03 %   $ 10,579       2.21 %   $ 37,392       3.52 %   $ 53,602       3.11 %

 

31
 

 

Deposits . Our primary source of funds are retail deposit accounts held primarily by individuals and businesses within our market area. We also actively solicit deposits from municipalities in our market area. Municipal deposit accounts differ from business accounts in that we pay interest on those deposits and we pledge collateral (typically investment securities) with the New Jersey Department of Banking to secure the portion of the deposits that are not covered by federal deposit insurance. At December 31, 2011 and 2010, there were approximately $118.8 million and $108.6 million of such deposits.

 

Our deposit base is comprised of demand deposits, savings accounts and time deposits. Deposits increased $149.1 million, or 24.7%, in 2011, primarily as a result of the acquisition of Select Bank. The change in deposits consisted of increases in demand deposits of $88.4 million, savings accounts of $27.9 million and time deposits of $32.9 million.

 

We aggressively market checking and savings accounts, as these tend to provide longer-term customer relationships and a lower cost of funding compared to time deposits. Due to our marketing efforts and sales efforts, we have been able to attract core deposits of 67.6% of total deposits at December 31, 2011, compared to 65.1% in 2010.

 

Table 6: Deposits

 

    At December 31,  
(Dollars in thousands)   2011     2010     2009  
    Amount     Percent     Amount     Percent     Amount     Percent  
       
Noninterest-bearing demand deposits   $ 75,551       10.0 %   $ 62,071       10.3 %   $ 53,254       9.9 %
Interest-bearing demand deposits     302,721       40.3       227,832       37.8       196,168       36.5  
Savings accounts     130,324       17.3       102,467       17.0       73,977       13.8  
Time deposits     243,859       32.4       210,964       34.9       214,023       39.8  
                                                 
 Total   $ 752,455       100.0 %   $ 603,334       100.0 %   $ 537,422       100.0 %

 

Table 7: Time Deposit Maturities of $100,000 or More

  

At December 31, 2011 (In thousands)   Certificates
of Deposit 		 
Maturity Period        
Three months or less   $ 15,923  
Over three through six months     11,090  
Over six through twelve months     26,230  
Over twelve months     37,033  
Total   $ 90,276  

 

32
 

 

Borrowings . We utilize borrowings from a variety of sources to supplement our supply of funds for loans and investments and to meet deposit withdrawal requirements.

 

Table 8: Borrowings

 

    Year Ended December 31,  
(Dollars in thousands)   2011     2010     2009  
       
Maximum amount outstanding at any month end during the period:                        
FHLB advances   $ 110,000     $ 110,000     $ 142,900  
Securities sold under agreements to repurchase     —       —       —  
Subordinated debt     15,464       15,464       15,464  
                         
Average amounts outstanding during the period:                        
FHLB advances   $ 110,000     $ 110,000     $ 121,842  
Securities sold under agreements to repurchase     —       —       —  
Subordinated debt     15,464       15,464       15,464  
                         
Weighted average interest rate during the period:                        
FHLB advances     4.23 %     4.23 %     3.87 %
Securities sold under agreements to repurchase     —       —       —  
Subordinated debt     8.67       8.67       8.67  
                         
Balance outstanding at end of period:                        
FHLB advances   $ 110,000     $ 110,000     $ 110,000  
Securities sold under agreements to repurchase     —       —       —  
Subordinated debt     15,464       15,464       15,464  
                         
Weighted average interest rate at end of period:                        
FHLB advances     4.23 %     4.23 %     4.23 %
Securities sold under agreements to repurchase     —       —       —  
Subordinated debt     8.67       8.67       8.67  

 

Federal Home Loan Bank advances were unchanged at $110.0 million at December 31, 2011 from December 31, 2010. These advances mature starting in 2014 through 2017.

 

Securities sold under agreements to repurchase was unchanged during 2011. At December 31, 2011, the Company had no securities sold under agreements to repurchase.

 

Subordinated debt reflects the junior subordinated deferrable interest debentures issued by us in 1998 to a business trust formed by us that issued $15.0 million of preferred securities in a private placement.

 

33
 

 

Results of Operations for the Years Ended December 31, 2011, 2010 and 2009

 

Table 9: Overview of 2011, 2010 and 2009

 

(Dollars in thousands)   2011     2010     2009     % Change
2011/2010 		    % Change 2010/2009  
       
                               
Net income   $ 5,058     $ 5,444     $ 4,211       (7.1 )%     29.3 %
Return on average assets     0.54 %     0.66 %     0.58 %     (18.2 )     13.8  
Return on average equity     4.90 %     5.45 %     6.20 %     (10.1 )     (12.1 )
Average equity to average assets     11.03 %     12.17 %     9.39 %     (9.4 )     29.6  

 

 

2011 vs. 2010. Net income decreased $386 thousand, or 7.1%, in 2011 to $5.1 million. The decrease was due primarily to expenses of $586 thousand (net of tax) related to the acquisition of CBHC Financialcorp, Inc and its subsidiary Select Bank. Other expenses excluding acquisition costs increased $2.0 million and were offset by increases in net interest income of $2.0 million and other income of $135 thousand and a decrease in the provision for loan losses of $419 thousand.

  

2010 vs. 2009 . Net income increased $1.2 million, or 29.3%, in 2010 to $5.4 million. The increase in net interest income over the prior year was the result of an increase in net interest income of $1.7 million, a reduction of $359 thousand in the provision for loan losses and an increase in non-interest income of $1.4 million due primarily to a decrease in other than temporary impairment charges of investment securities of $1.1 million in 2010 over 2009. Offsetting these increases, other expenses increased $1.4 million and income taxes increased $817 thousand, primarily from increased taxable income.

 

Net Interest Income.

 

2011 vs. 2010 . Net interest income increased $2.0 million, or 8.4%, to $25.9 million for 2011 from $23.9 million in 2010. The increase in net interest income for 2011 was primarily attributable to a lower cost of deposits and an increase in interest earning assets.

 

Total interest and dividend income increased $371 thousand, or 1.0%, to $38.0 million for 2011, as growth in interest income was enhanced by an increase in the average balance of loans and investments, which was partially offset by a decrease in the yield on earnings assets. Interest income on loans increased $7 thousand as the average balance of the portfolio grew $24.6 million, or 3.7%, but was offset by the average yield decrease of 19 basis points to 5.18%. The decrease in the average yield was the result of lower rates on new loans originated. Increased balances offset by a lower yield in the investment portfolio accounted for the 20.0% increase of $365 thousand in interest income on investment securities in 2011. The average balance of the investment portfolio increased $17.3 million, or 65.1%, in 2011, while the average yield decreased 188 basis points to 4.98% as a result of lower rates earned on new investments in the portfolio.

 

Total interest expense decreased $1.6 million, or 11.9%, to $12.2 million for 2011 as interest paid on deposits declined while interest pain on borrowings was unchanged. The average balance of interest-bearing deposits increased $99.2 million, or 18.8%, in 2011 due to increases of $58.6 million in the average balance of interest-bearing checking, $29.3 million in the average balance of savings accounts and $11.4 million in the average balance of certificates of deposit. The increase in the average balance of deposits during 2011 was due primarily to deposits acquired from Select Bank which added approximately $55 million to the average balance of deposits in 2011. The average interest rate paid on deposits decreased 50 basis points as a result of the prevailing lower interest rate environment during 2011. Interest paid on borrowings was unchanged in 2011.

 

34
 

 

2010 vs. 2009 . Net interest income increased $1.7 million, or 7.7%, to $23.9 million for 2010 from $22.2 million in 2009. The increase in net interest income for 2010 was primarily attributable to interest earned on a higher volume of interest-earning loans and a lower cost of deposits and interest paid on borrowings, offset by a decrease in interest income on investments.

 

Total interest and dividend income increased $491 thousand, or 1.3%, to $37.7 million for 2010, as growth in interest income was enhanced by an increase in the average balance of loans, which was partially offset by a decrease in the yield on earnings assets. Interest income on loans increased $775 thousand, or 2.2%, in 2010 as the average balance of the portfolio grew $34.0 million, or 5.4%, offset by the average yield decrease of 16 basis points to 5.37%. The decrease in the average yield was the result of lower rates on new loans originated. Declining balances offset by a higher yield in the investment portfolio accounted for the 13.5% decrease of $284 thousand in interest income on investment securities in 2010. The average balance of the investment portfolio decreased $5.9 million, or 18.0%, in 2010, while the average yield increased 36 basis points to 6.86% as a result of higher rates earned on the remainder of the portfolio.

 

Total interest expense decreased $1.2 million, or 8.0%, to $13.8 million for 2010 as interest paid declined $1.2 million on deposits and $54 thousand on borrowings. The average balance of interest-bearing deposits increased $70.1 million, or 15.4%, in 2010 due to increases of $43.0 million in the average balance of interest-bearing checking, $24.7 million in the average balance of savings accounts and $2.5 million in the average balance of certificates of deposit. The increase in the average balance of interest-bearing checking accounts during 2010 was due primarily to increases in municipal interest-bearing checking of $20.5 million, consumer checking of $11.5 million and commercial sweep accounts of $10.6 million. The average interest rate paid on deposits decreased 48 basis points as a result of the prevailing lower interest rate environment during 2010. Interest paid on borrowings decreased in 2010 as a decrease in the average balance of borrowings of $11.8 million, which was offset by a higher average interest rate paid of 38 basis points. The decrease in borrowed money resulted from increased deposits.

 

Table 10: Net Interest Income – Changes Due to Rate and Volume

 

    2011 Compared to 2010     2010 Compared to 2009  
    Increase (Decrease)
Due to 		          Increase (Decrease)
Due to 		       
(In thousands)   Volume     Rate     Net     Volume     Rate     Net  
                                     
Interest and dividend income:                                                
Loans receivable   $ 187     $ (180 )   $ 7     $ 1,748     $ (973 )   $ 775  
Investment securities     629       (265 )     364       (410 )     126       (284 )
Total interest-earning assets     816       (445 )     371       1,338       (847 )     491  
                                                 
Interest expense:                                                
Deposits     2,072       (3,715 )     (1,643 )     1,945       (3,100 )     (1,155 )
FHLB advances     —       —       —       (490 )     436       (54 )
Subordinated debt     —       —       —       —       —       —  
Total interest-bearing liabilities     2,072       (3,715 )     (1,643 )     1,455       (2,664 )     (1,209 )
Net change in interest income   $ (1,256 )   $ 3,270     $ 2,014     $ (117 )   $ 1,817     $ 1,700  

 

Provision for Loan Losses.

 

2011 vs. 2010. Provision for loan losses decreased $419 thousand to $473 thousand in 2011 as compared to $892 thousand in 2010. The decrease in the provision for loan losses for 2011 resulted from decreases in specific reserves required on non-performing loans in 2011 compared to 2010. Loan loss provisions in 2011 were 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, level of charge-offs and the current economic conditions.

 

35
 

 

2010 vs. 2009. Provision for loan losses decreased $359 thousand to $892 thousand in 2010 as compared to $1.3 million in 2009. The decrease in the provision for loan losses for 2010 resulted from decreases in specific reserves required on non-performing loans in 2010 compared to 2009. Loan loss provisions in 2010 were 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, level of charge-offs and the current economic conditions.

 

Other Income. The following table shows the components of other income and the percentage changes from year to year.

 

Table 11: Other Income Summary

 

(Dollars in thousands)   2011     2010     2009     % Change
2011/2010 		    % Change
2010/2009 		 
                               
Service charges   $ 1,648     $ 1,700     $ 1,757       (3.1 )%     (3.2 )%
Cash surrender value of life insurance     522       553       435       (5.6 )     27.1  
Gain (loss) on sale of AFS securities     10       ─       6       N/M        N/M  
Impairment charge on AFS securities     ─       ─       (1,077 )     N/M        N/M  
Other     1,358       1,150       903       18.1       27.4  
Total   $ 3,538     $ 3,403     $ 2,024       4.0 %     68.1 %

 

2011 vs. 2010. Total other income increased $135 thousand, or 4.0%, in 2011 from 2010 due primarily to an increase of $208 thousand in fees collected on debit card commissions offset by decreases of $52 thousand in service charges collected on deposit accounts and $31 thousand in income on the cash surrender value of bank-owned life insurance.

 

2010 vs. 2009. Total other income increased $1.4 million, or 68.1%, in 2010 from 2009 due primarily to the absence of other than temporary impairment charges of investment securities, compared to $1.1 million in 2009, and increases of $117 thousand in income on the cash surrender value of bank-owned life insurance and $247 thousand in fees collected on deposit accounts and debit card commissions.

 

Other Expense. The following table shows the components of other expense and the percentage changes from year to year.

 

36
 

 

Table 12: Other Expense Summary

 

(Dollars in thousands)   2011     2010     2009     % Change
2011/2010 		    % Change
2010/2009 		 
       
Salaries and employee benefits   $ 11,201     $ 9,805     $ 8,800       14.2 %     11.4 %
Occupancy and equipment     4,620       3,952       3,690       16.9       7.1  
FDIC deposit insurance     717       670       784       7.0       (14.5 )
Advertising     497       433       455       14.8       (4.8 )
Professional services     1,298       807       696       60.8       15.9  
Supplies     267       226       240       18.1       5.8  
Telephone     123       101       103       21.8       (1.9 )
Postage     190       171       151       11.1       13.2  
Charitable contributions     146       137       144       6.6       4.9  
Insurance     161       146       139       10.3       5.0  
Real estate owned expenses     1       5       (17 )     (80.0 )     N/M  
All other     1,155       1,070       949       7.9       12.8  
Total   $ 20,376     $ 17,523     $ 16,134       16.3 %     8.6 %

  

2011 vs. 2010. Total other expenses increased $2.9 million, or 16.3%, to $20.4 million in 2011 compared to $17.5 million in 2010. Costs associated with the acquisition of CBHC Financialcorp and its subsidiary Select Bank accounted for $826 thousand in expenses in 2011. Costs resulting from the addition of the ongoing operations of Select Bank increased salaries and benefits $272 thousand, occupancy and equipment $180 thousand and all other expenses $64 thousand. The remaining expense increases were the result of normal increases in year over year operations.

 

2010 vs. 2009. Total other expenses increased $1.4 million, or 8.6%, to $17.5 million in 2010 compared to $16.1 million in 2009. Increased personnel and occupancy costs associated with the opening of a new branch office in November of 2009 accounted for $431 thousand in increased other expenses. In addition, excluding the costs associated with the new branch, salaries and employee benefits increased $778 thousand primarily due to increases in salary and employee benefits and a $334 thousand decrease in qualified deferred personnel costs associated with closed loans. FDIC insurance cost decreased $121 thousand on higher premiums in 2010 offset by a onetime special assessment of $324 thousand in June of 2009. Occupancy, equipment and data processing expenses increased $119 thousand. Professional services and other operating expenses accounted for the remaining $182 thousand increase due to normal activity.

 

Income Taxes.

 

2011 vs. 2010. Income tax expense was $3.5 million for 2011 compared to $3.4 million for 2010. The effective tax rate for 2011 was 41.1% compared to 38.7% for 2010. The increase in income tax expense for the year ended 2011 compared to 2010 was primarily the result of lower taxable income offset by merger expenses that are not tax deductable.

 

2010 vs. 2009. Income tax expense was $3.4 million for 2010 compared to $2.6 million for 2009. The effective tax rate for 2010 was 38.7% compared to 38.3% for 2009. The increase in income tax expense was primarily due to an increase in taxable income for the year ended 2010 compared to 2009.

 

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

 

37
 

 

Table 13: Average Balance Tables

 

    Year Ended December 31,  
    2011     2010     2009  
(Dollars in Thousands)   Average Balance     Interest and Dividends     Yield/ Cost     Average Balance     Interest and Dividends     Yield/ Cost     Average Balance     Interest and Dividends     Yield/ Cost    
Assets:                                                                        
Interest-earning assets:                                                                        
Loans   $ 693,496     $ 35,897       5.18 %   $ 668,910     $ 35,890       5.37 %   $ 634,862     $ 35,115       5.53 %
Investment securities     43,943       2,190       4.98       26,623       1,826       6.86       32,473       2,110       6.50  
Total interest-earning assets     737,439       38,087       5.16       695,533       37,716       5.42       667,335       37,225       5.58  
                                                                         
Noninterest-earning assets     197,815                       125,265                       55,930                  
Total assets   $ 935,254                     $ 820,798                     $ 723,265                  
                                                                         
Liabilities and equity:                                                                        
Interest-bearing liabilities:                                                                        
Interest-bearing demand deposits   $ 283,921       1,598       0.56 %   $ 225,365       2,389       1.06 %   $ 182,388       2,253       1.24 %
Savings accounts     116,498       759       0.65       87,220       904       1.04       62,539       701       1.12  
Certificates of deposit     225,313       3,775       1.68       213,945       4,482       2.09       211,471       5,976       2.83  
Total interest-bearing deposits     625,732       6,132       0.98       526,530       7,775       1.48       456,398       8,930       1.96  
                                                                         
FHLB advances     110,000       4,713       4.29       110,000       4,713       4.29       121,842       4,767       3.91  
Subordinated debt     15,464       1,341       8.67       15,464       1,341       8.67       15,464       1,341       8.67  
Total borrowings     125,464       6,054       4.83       125,464       6,054       4.83       137,306       6,108       4.45  
Total interest-bearing liabilities     751,196       12,186       1.62       651,994       13,829       2.12       593,704       15,038       2.53  
                                                                         
Noninterest-bearing demand accounts     69,980                       59,825                       53,993                  
Other     10,893                       9,127                       7,663                  
Total liabilities     832,069                       720,946                       655,360                  
                                                                         
Retained earnings     103,185                       99,852                       67,905                  
Total liabilities and   retained earnings   $ 935,254                     $ 820,798                     $ 723,265                  
                                                                         
Net interest income           $ 25,901                     $ 23,887                     $ 22,187          
Interest rate spread                     3.54 %                     3.30 %                     3.05 %
Net interest margin                     3.51 %                     3.43 %                     3.22 %
Average interest-earning  assets to average interest-  bearing liabilities     98.17 %                     106.68 %                     112.40 %                

 

Risk Management

 

Overview . Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

 

38
 

 

Credit Risk Management . Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Our strategy also emphasizes the origination of one- to four-family mortgage loans, which typically have lower default rates than other types of loans and are secured by collateral that generally holds its value better than other types of collateral.

 

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We make initial contact with the borrower when the loan becomes 15 days past due. If payment is not then received by the 30th day of delinquency, additional letters and phone calls generally are made. Generally, when the loan becomes 60 days past due, we send a letter notifying the borrower that we will commence foreclosure proceedings if the loan is not brought current within 30 days. Generally, when the loan becomes 90 days past due, we commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. We may consider loan workout arrangements with certain borrowers under certain circumstances.

 

Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and all foreclosed and repossessed property that we own.

 

Analysis of Nonperforming and Classified Assets . We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. When a loan becomes 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.

 

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan, plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.

 

Nonperforming assets totaled $6.6 million, or 0.66%, of total assets, at December 31, 2011, compared to $5.3 million, or 0.63%, total assets at December 31, 2010. Non-performing assets consisted of twenty-two residential mortgage loans totaling $4.7 million, two commercial mortgage loans totaling $392 thousand, three commercial loans totaling $318 thousand, five consumer equity loans totaling $198 thousand and one real estate owned property totaling $98 thousand. Specific reserves recorded for these loans at December 31, 2011 were $386 thousand.

 

39
 

 

Table 14: Nonperforming Assets

 

    At December 31,  
(Dollars in thousands)   2011     2010     2009     2008     2007  
Nonaccrual loans:                                        
Real estate—mortgage loans   $ 4,768     $ 4,282     $ 1,593     $ 1,861     $ 295  
Construction     392       729       139       —       —  
Commercial     318       134       22       —       —  
Consumer     198       77       91       112       1  
Total     5,676       5,222       1,845       1,973       296  
Troubled debt restructurings –nonaccrual     805       —       —       —       —  
Total nonaccrual loans     6,481       5,222       1,845       1,973       296  
Real estate owned     98       98       98       —       —  
                                         
Total nonperforming assets   $ 6,579     $ 5,320     $ 1,943     $ 1,973     $ 296  
                                         
Total nonperforming loans to total loans     0.89 %     0.79 %     0.28 %     0.33 %     0.06 %
                                         
Total nonperforming loans to total assets     0.65 %     0.62 %     0.24 %     0.29 %     0.05 %
                                         
Total nonperforming assets to total assets     0.66 %     0.63 %     0.25 %     0.29 %     0.05 %

 

Interest income that would have been recorded for the year ended December 31, 2011 had nonaccruing loans been current according to their original terms amounted to $250 thousand.

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

 

Classified assets increased to $16.6 million at December 31, 2011 from $11.9 million at December 31, 2010. The increase in classified assets reflects the addition of $5.0 million in commercial mortgage loans, $947 thousand of commercial loans and $220 thousand in consumer loans offset by a decrease of $1.5 million in residential mortgage loans.

 

40
 

 

Table 15: Classified Assets

 

    At December 31,  
(In thousands)   2011     2010     2009  
       
                   
Special mention assets   $ 5,527     $ 1,125     $ 1,808  
Substandard assets     10,928       10,381       8,869  
Doubtful and loss assets     149       409       40  
Total classified assets   $ 16,604     $ 11,915     $ 10,717  

 

Table 16: Loan Delinquencies (1)

 

    At December 31,  
    2011     2010     2009  
(In thousands)   30-59
Days
Past Due 		    60-89
Days
Past Due 		    30-59
Days
Past Due 		    60-89
Days
Past Due 		    30-59
Days
Past Due 		    60-89
Days
Past Due 		 
Real estate-mortgage loans   $ 666     $ —     $ 1,584     $ —     $ 639     $ —  
Commercial loans     12       —       82       —       149       34  
Consumer loans     219       199       —       —       99       —  
Total   $ 897     $ 199     $ 1,666     $ —     $ 887     $ 34  

                                                    

(1) Excludes loans that are on nonaccrual status.

 

At each of the dates in the above table, delinquent mortgage loans consisted primarily of loans secured by residential real estate.

 

Analysis and Determination of the Allowance for Loan Losses . The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio as of the balance sheet date. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

 

Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for impaired or collateral-dependent loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. See “Critical Accounting Policies, Judgments and Estimates” and note 4 of the notes to the consolidated financial statements for additional information on the determination of the allowance for loan losses.

 

At December 31, 2011, our allowance for loan losses represented 0.51% of total net loans. The allowance for loan losses decreased to $3.7 million at December 31, 2011 from $4.0 million at December 31, 2010 due to the addition to the provision for loan losses of $473 thousand offset by net charge-offs of $699 thousand. The decrease in the provision for loan losses for 2011 was primarily to maintain a reserve level deemed appropriate by management in light of factors such as the level of non-performing loans, lack of growth in the loan portfolio and the current economic conditions. At December 31, 2011, the specific allowance on impaired or collateral-dependent loans was $386 thousand and the general valuation allowance on the remainder of the loan portfolio was $3.3 million.

 

At December 31, 2010, our allowance for loan losses represented 0.60% of total net loans. The allowance for loan losses increased to $4.0 million at December 31, 2010 from $3.5 million at December 31, 2009 due to loan losses provisions in 2010 of $892 thousand offset by chargeoffs of $380 thousand. The increase in the provision for loan losses for 2010 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. At December 31, 2010, the specific allowance on impaired or collateral-dependent loans was $482 thousand and the general valuation allowance on the remainder of the loan portfolio was $3.5 million.

 

41
 

 

Table 17: Allocation of Allowance for Loan Losses

 

    At December 31,  
    2011     2010     2009  
(Dollars in thousands)   Amount     % of Allowance to Total Allowance     % of  Loans in Category to Total Loans     Amount     % of Allowance to Total Allowance     % of  Loans in Category to Total Loans     Amount     % of Allowance to Total Allowance     % of  Loans in Category to Total Loans  
       
Real estate-mortgage loans   $ 2,973       79.0 %     85.8 %   $ 3,013       75.6 %     85.3 %   $ 2,745       79.0 %     86.1 %
Real estate-construction loans     98       2.6       1.6       32       0.8       2.0       49       1.4       1.2  
Commercial     229       6.1       3.3       269       6.7       3.4       276       7.9       3.4  
Consumer     462       12.3       9.3       674       16.9       9.3       406       11.7       9.3  
Total allowance for loan losses   $ 3,762       100.0 %     100.0 %   $ 3,988       100.0 %     100.0 %   $ 3,476       100.0 %     100.0 %

  

    At December 31,  
    2008     2007  
(Dollars in Thousands)   Amount     % of Allowance to Total Allowance     % of  Loans in Category to Total Loans     Amount     % of Allowance to Total Allowance     % of  Loans in Category to Total Loans  
       
Real estate-mortgage loans   $ 1,693       63.1 %     85.3 %   $ 1,387       60.1 %     83.6 %
Real estate-construction loans     39       1.5       1.5       64       2.8       1.9  
Commercial     605       22.5       2.9       528       22.9       3.3  
Consumer     347       12.9       10.3       328       14.2       11.2  
Total allowance for loan losses   $ 2,684       100.0 %     100.0 %   $ 2,307       100.0 %     100.0 %

 

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

 

42
 

 

Table 18: Analysis of Loan Loss Experience

 

    Year Ended December 31,  
(Dollars in thousands)   2011     2010     2009     2008     2007  
Allowance at beginning of period   $ 3,988     $ 3,476     $ 2,684     $ 2,307     $ 2,050  
Provision for loan losses   $ 473     $ 892     $ 1,251     $ 373     $ 261  
Charge-offs:                                        
Real estate-mortgage loans     559       16       420       —       —  
Real estate-construction loans     —       —       —       —       —  
Commercial loans     90       47       —       —       —  
Consumer loans     51       317       40       —       8  
Total charge-offs     700       380       460       —       8  
Recoveries:                                        
Real estate-mortgage loans     —       —       —       —       —  
Real estate-construction loans     —       —       —       —       —  
Commercial loans     —       —       —       —       —  
Consumer loans     1       —       1       4       4  
Total recoveries     1       —       1       4       4  
Net charge-offs (recoveries)     699       380       459       (4 )     4  
Allowance at end of period   $ 3,762     $ 3,988     $ 3,476     $ 2,684     $ 2,307  
Allowance to nonperforming loans     58.0 %     76.4 %     188.4 %     136.0 %     779.9 %
Allowance to total loans outstanding at the end of the period     0.52 %     0.60 %     0.52 %     0.45 %     0.44 %
Net charge-offs to average loans outstanding during the period     0.10 %     0.06 %     0.07 %      N/M        N/M  

 

_______________________

N/M—not measurable as nonperforming loans and charge-offs are not material enough to allow for meaningful calculations .

 

In 2011 we experienced charge-offs of $700 thousand on 16 properties based on current appraisals of non-performing properties. In years prior to 2009, our net charge-offs were low, with most charge-offs relating to consumer loans. We believe that our strict underwriting standards and, prior to 2007, a prolonged period of rising real estate values in our market area has been the primary reason for the absence of charged-off real estate loans.

 

Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. We have adopted an interest rate risk action plan pursuant to which we manage our interest rate risk. Under this plan, we have: periodically sold fixed-rate mortgage loans; extended the maturities of our borrowings; increased commercial lending, which emphasizes the origination of shorter term, prime-based loans; emphasized the generation of core deposits, which provides a more stable, lower cost funding source; and structured our investment portfolio to include more liquid securities. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

 

We have an Asset/Liability Committee, which includes members of both the board of directors and management, to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

 

43
 

 

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.

 

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee on a quarterly basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

 

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

 

The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12- and 24-month periods using interest income simulation. The simulation uses projected repricing of assets and liabilities at December 31, 2011 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

 

Table 19: Net Interest Income Simulation

 

    At December 31, 2011
Percentage Change in Estimated
Net Interest Income Over 		 
    12 Months     24 Months  
200 basis point increase in rates     2.05 %     3.97 %
100 basis point decrease in rates      N/M        N/M  
N/M – Not measurable                

 

Management believes that under the current rate environment, a change of interest rates downward of 100 basis points is not possible as the treasury yield curve is below 100 basis points for maturities of 2 years or less. Therefore, management has deemed a change interest rates downward of 100 basis points not measurable. This limit will be re-evaluated periodically and may be modified as appropriate.

 

The 200 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 (within our internal guidelines) in the 12- and 24-month periods if rates rose by 200 basis points.

 

Net Portfolio Value Analysis. In addition to a net interest income simulation analysis, we use an interest rate sensitivity analysis prepared by the Office of the Comptroller of the Currency to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table, which is based on information that we provide to the Office of the Comptroller of the Currency, presents the change in our net portfolio value at December 31, 2011 that would occur in the event of an immediate change in interest rates based on Office of the Comptroller of the Currency assumptions, with no effect given to any steps that we might take to counteract that change.

 

44
 

 

Table 20: NPV Analysis

 

    Net Portfolio Value
(Dollars in Thousands) 		    Net Portfolio Value as % of
Portfolio Value of Assets 		 

Basis Point (“bp”)

Change in Rates

  $ Amount     $ Change     % Change     NPV Ratio     Change  
300 bp   $ 127,130     $ (9,577 )     (7 )%     12.54 %     (58 )bp
200     139,519       2,811       2       13.53       41  
100     143,018       6,310       5       13.74       62  
50     140,161       3,453       3       13.45       33  
0     136,708                       13.12          
(50)     130,280       (6,427 )     (5 )     12.54       (58 )
(100)     127,012       (9,695 )     (7 )     12.23       (89 )

 

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

 

Liquidity Management . The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, the purchase of investment securities, deposit withdrawals, repayment of borrowings and operating expenses. Our ability to meet our current financial obligations is a function of balance sheet structure, the ability to liquidate assets and the availability of alternative sources of funds. To meet the needs of clients and manage risk, we engage in liquidity planning and management.

 

Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of New York. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and mortgage-backed securities are greatly influenced by general interest rates, economic conditions and competition.

 

45
 

 

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

 

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2011, cash and cash equivalents totaled $155.7 million. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $39.9 million at December 31, 2011. In addition, at December 31, 2011, we had the ability to borrow an additional $262.6 million from the Federal Home Loan Bank of New York, which included available overnight lines of credit of $262.6 million. On that date, we had no overnight advances outstanding.

 

At December 31, 2011, we had $67.0 million in commitments outstanding, which included $9.4 million in undisbursed construction loans, $26.8 million in unused home equity lines of credit and $20.0 million in commercial lines and letters of credit. Certificates of deposit due within one year of December 31, 2011 totaled $155.0 million, or 63.6% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2012. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Table 21: Outstanding Loan Commitments

 

    Amount of Commitment Expiration - Per Period  
At December 31, 2011 (In thousands)   Total     Less than One Year     One to
Three Years 		    Three to
Five Years 		    More Than 5 Years  
       
Commitments to originate loans   $ 10,690     $ 10,690       $ ─       $ ─       $ ─  
Unused portion of unsecured consumer lines of credit     50       ─       ─       ─       50  
Unused portion of home equity lines of credit     26,849       245       856       838       24,910  
Unused portion of commercial lines of credit     18,012       17,107       715       3       187  
Unused portion of commercial letters of credit     1,998       1,998       ─       ─       ─  
Undisbursed portion of construction loans in process     9,429       8,627       802        ─        ─  
Total   $ 67,028     $ 38,667     $ 2,373     $ 841     $ 25,147  

 

Table 22: Contractual Obligations

 

 

          Payments due by period  
At December 31, 2011 (In thousands)   Total     Less than One Year     One to
Three Years 		    Three to
Five Years 		    More Than 5 Years  
                               
                               
Short-term debt obligations     $ ─       $ ─       $ ─       $ ─       $ ─  
Long-term debt obligations     210,701       6,090       27,122       73,588       103,901  
Time deposits     243,859       154,166       79,694       7,690       2,309  
Operating lease obligations (1)     1,346       246       354       318       428  
Total   $ 455,906     $ 160,502     $ 107,170     $ 81,596     $ 106,638  

______________________

(1) Payments are for lease of real property.

 

46
 

 

Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts, Federal Home Loan Bank advances and reverse repurchase agreements. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit and commercial banking relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

 

Table 23: Summary of Investing and Financing Activities

 

  Year Ended December 31,  
(In thousands)   2011     2010     2009  
                   
Investing activities:                        
Loan originations, net of repayments   $ (14,285 )   $ 1,573     $ 70,856  
Securities purchased     55,495       1,474       —  
Loans purchased     554       714       —  
                         
Financing activities:                        
Increase in deposits   $ 26,277     $ 65,912     $ 81,467  
Increase (decrease) in FHLB advances     —       —       (23,800 )
Increase (decrease) in securities sold under agreements to repurchase     —       —       —  

 

The Company is a separate legal entity from Ocean City Home Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, and interest and principal on outstanding debt, if any. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from Ocean City Home Bank. The amount of dividends that Ocean City Home Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Federal Reserve Board and the Office of the Comptroller of the Currency, but with prior notice to the Federal Reserve Board and the Office of the Comptroller of the Currency, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At December 31, 2011, the Company had liquid assets of $5.9 million.

Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Under these requirements the federal bank regulatory agencies have established quantitative measures to ensure that minimum thresholds for Tier 1 Capital, Total Capital and Leverage (Tier 1 Capital divided by average assets) ratios are maintained. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary, actions by regulators that could have a direct material effect on our operations and financial position. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, Ocean City Home Bank must meet specific capital guidelines that involve quantitative measures of assets and certain off-balance sheet items as calculated under regulatory accounting practices. It is our intention to maintain “well-capitalized” risk-based capital levels. Ocean City Home Bank’s capital amounts and classifications are also subject to qualitative judgments by the federal bank regulators about components, risk weightings, and other factors. At December 31, 2011, Ocean City Home Bank exceeded all of its regulatory capital requirements and is considered “well capitalized” under regulatory guidelines.

 

Off-Balance Sheet Arrangements . In the normal course of operations, we engage in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see note 10 of the notes to the consolidated financial statements.

 

47
 

 

For the years ended December 31, 2011 and 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.

 

Impact of Recent Accounting Pronouncements

 

For a discussion of the impact of recent accounting pronouncements, see note 2 of the notes to the consolidated financial statements included in this Form 10-K.

 

Effect of Inflation and Changing Prices

 

The financial statements and related financial data presented in this Form 10-K have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required by this item is incorporated herein by reference to Part II, Item 7, and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations .”

 

48
 

  

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

 

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, utilizing the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2011 is effective.

 

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

49
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Ocean Shore Holding Co. and subsidiaries:

 

We have audited the internal control over financial reporting of Ocean Shore Holding Co. and subsidiaries (the "Company") as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2011 of the Company and our report dated March 15, 2012 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Philadelphia, PA
March 15, 2012

 

50
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Ocean Shore Holding Co. and subsidiaries:

 

We have audited the accompanying consolidated statements of financial condition of Ocean Shore Holding Co. and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ocean Shore Holding Co. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Philadelphia, PA
March 15, 2012

 

51
 

  

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES      

       

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

    December 31,  
ASSETS   2011     2010  
             
Cash and amounts due from depository institutions   $ 6,616,214     $ 5,330,211  
Interest-earning bank balances     149,036,727       105,534,943  
Cash and cash equivalents     155,652,941       110,865,154  
                 
Investment securities held to maturity                
(estimated fair value—  $6,147,579 at December 31, 2011 and $2,638,725 at December 31, 2010)     5,964,393       2,467,418  
Investment securities available for sale                
(amortized cost—  $47,639,832 at December 31, 2011 and $22,230,208 at December 31, 2010)     46,767,668       21,253,675  
Loans—net of allowance for loan losses of $3,762,295 and $3,988,076 at December 31, 2011 and 2010     727,626,278       660,340,007  
Accrued interest receivable:                
Loans     2,550,769       2,350,978  
Investment securities     294,492       151,401  
Federal Home Loan Bank stock—at cost     6,434,800       6,271,600  
Office properties and equipment—net     14,054,679       12,905,526  
Prepaid expenses and other assets     6,033,252       4,665,491  
Real estate owned     97,500       97,500  
Cash surrender value of life insurance     18,812,573       14,890,746  
Deferred tax asset     4,484,212       3,597,612  
Goodwill     5,279,609       -  
Other intangible assets     677,000       -  
                 
TOTAL ASSETS   $ 994,730,166     $ 839,857,108  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
LIABILITIES:                
Non-interest bearing deposits   $ 75,551,232     $ 62,070,772  
Interest bearing deposits     676,903,679       541,263,654  
Advances from Federal Home Loan Bank     110,000,000       110,000,000  
Junior subordinated debentures     15,464,000       15,464,000  
Advances from borrowers for taxes and insurance     3,999,306       3,494,418  
Accrued interest payable     1,146,482       1,146,224  
Other liabilities     6,985,863       5,864,523  
                 
Total liabilities     890,050,562       739,303,591  
                 
COMMITMENTS AND CONTINGENCIES (Note 10)                
                 
STOCKHOLDERS' EQUITY:                
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued     -       -  
Common stock, $.01 par value, 25,000,000 shares authorized, 7,307,590 issued and 7,291,643 outstanding shares at December 31, 2011 and 7,307,590 issued and 7,296,780 outstanding shares at December 31, 2010     73,076       73,076  
Additional paid in capital     64,408,624       64,013,608  
Retained earnings - partially restricted     45,147,396       41,736,830  
Treasury stock - at cost: 15,947 at December 31, 2011 and 10,810 at December 31, 2010     (174,232 )     (115,208 )
Common stock acquired by employee benefit plans     (3,665,478 )     (4,007,478 )
Deferred compensation plans trust     (538,982 )     (516,142 )
Accumulated other comprehensive loss     (570,800 )     (631,169 )
                 
Total stockholders' equity     104,679,604       100,553,517  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 994,730,166     $ 839,857,108  

 

See notes to consolidated financial statements

 

52
 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES    

         

CONSOLIDATED STATEMENTS OF INCOME

 

    Years Ended December 31,  
    2011     2010     2009  
                   
INTEREST AND DIVIDEND INCOME:                        
Taxable interest and fees on loans   $ 35,896,702     $ 35,890,060     $ 35,114,968  
Taxable interest on mortgage-backed securities     679,971       837,780       1,203,937  
Non-taxable interest on municipal securities     79,554       73,045       76,134  
Taxable interest and dividends on investments securities     1,431,179       915,137       830,283  
                         
Total interest and dividend income     38,087,406       37,716,022       37,225,322  
                         
INTEREST EXPENSE:                        
Deposits     6,131,735       7,774,870       8,929,773  
Advances from Federal Home Loan Bank, securities sold under agreements to repurchase and other borrowed money     6,054,259       6,054,248       6,108,370  
                         
Total interest expense     12,185,994       13,829,118       15,038,143  
                         
NET INTEREST INCOME     25,901,412       23,886,904       22,187,179  
                         
PROVISION FOR LOAN LOSSES     473,235       891,791       1,251,223  
                         
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     25,428,177       22,995,113       20,935,956  
                         
OTHER INCOME:                        
Service charges     1,647,741       1,700,150       1,756,930  
Increase in cash surrender value of life insurance     521,827       552,956       435,477  
Gain on sale of securities     10,014       5       6,133  
Impairment charge on AFS securities     -       -       (1,077,400 )
Other     1,358,596       1,150,243       902,905  
                         
Total other income     3,538,178       3,403,354       2,024,045  
                         
OTHER EXPENSES:                        
Salaries and employee benefits     11,201,078       9,805,344       8,800,064  
Occupancy and equipment     4,620,115       3,951,711       3,690,207  
Federal insurance premiums     716,645       669,619       783,972  
Advertising     497,429       432,746       455,448  
Professional services     1,298,464       806,557       695,572  
Real estate owned activity     1,001       5,209       (17,025 )
Charitable contributions     146,421       136,926       143,987  
Other operating expenses     1,895,424       1,714,724       1,581,753  
                         
Total other expenses     20,376,577       17,522,836       16,133,978  
                         
INCOME BEFORE INCOME TAXES     8,589,778       8,875,631       6,826,023  
                         
INCOME TAXES:                        
Current     3,718,868       3,933,022       3,979,948  
Deferred     (187,474 )     (501,627 )     (1,365,326 )
                         
Total income taxes     3,531,394       3,431,395       2,614,622  
                         
NET INCOME   $ 5,058,384     $ 5,444,236     $ 4,211,401  
                         
Earnings per share basic   $ 0.75     $ 0.80     $ 0.60  
Earnings per share diluted   $ 0.74     $ 0.80     $ 0.59  

 

See notes to consolidated financial statements.

 

53
 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES                      

                       

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY                      

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

              

                            Common Stock     Deferred     Accumulated        
          Additional                 Acquired for     Compensation     Other        
    Common     Paid-In     Retained     Treasury     Employee     Plans     Comprehensive     Total  
    Stock     Capital     Earnings     Stock     Benefit Plans     Trust     Income (Loss)     Equity  
BALANCE— January 1, 2009   $ 87,627     $ 38,516,037     $ 35,517,684     $ (5,332,015 )   $ (2,289,990 )   $ (485,037 )   $ (1,627,447 )   $ 64,386,859  
                                                                 
Comprehensive income:                                                                
Net income     -       -       4,211,401       -       -       -       -       4,211,401  
Other comprehensive income—                                                                
Reclassification adjustment for OTTI impairment (net of tax of $117,579)     -       -       -       -       -       -       345,820       345,820  
Unrealized holding gain arising during the period (net of tax of $105,415)     -       -       -       -       -       -       212,503       212,503  
Comprehensive income:                                                             4,769,724  
Purchase of treasury stock     -       -       -       (97,022 )     -       -       -       (97,022 )
Unallocated ESOP shares commited to employees     -       -       -       -       229,000       -       -       229,000  
Excess of fair value above cost of ESOP shares committed to be released     -       (59,676 )     -       -       -       -       -       (59,676 )
Restricted stock shares     -       397,425       -       -       -       -       -       397,425  
Stock options     -       105,412       -       -       -       -       -       105,412  
Purchase of shares by deferred compensation plans trust     -       -       -       -       -       (10,704 )     -       (10,704 )
Current year dividends declared     -       -       (711,880 )     -       -       -       -       (711,880 )
Unallocated ESOP dividends applied to ESOP loan payment     -       -       45,837       -       -       -       -       45,837  
Dividend received from disolution of MHC     -       19,162       -       -       -       -       -       19,162  
Proceeds from sales of common stock, net     -       30,521,254       -       -       -       -       -       30,521,254  
Exchange of shares due to 2nd step stock offering     (14,546 )     14,546       -       -       -       -       -       -  
Purchase of shares for ESOP     -       -       -       -       (2,260,888 )     -       -       (2,260,888 )
Retirement of treasury stock     -       (4,300,452 )     (1,128,585 )     5,429,037       -       -       -       -  
                                                                 
BALANCE— December 31, 2009   $ 73,081     $ 65,213,708     $ 37,934,457     $ (0 )   $ (4,321,878 )   $ (495,741 )   $ (1,069,124 )   $ 97,334,503  
                                                                 
Comprehensive income:                                                                
Net income     -       -       5,444,236       -       -       -       -       5,444,236  
Other comprehensive income—                                                                
Unrealized holding gain arising during the period (net of tax of $253,347)     -       -       -       -       -       -       437,954       437,954  
Comprehensive income:                                                             5,882,190  
Purchase of treasury stock     -       -       -       (115,208 )     -       -       -       (115,208 )
Unallocated ESOP shares commited to employees     -       -       -       -       314,400       -       -       314,400  
Excess of fair value above cost of ESOP shares committed to be released     -       50,622       -       -       -       -       -       50,622  
Restricted stock shares     -       307,600       -       -       -       -       -       307,600  
Stock options     -       91,730       -       -       -       -       -       91,730  
Purchase of restricted stock shares     -       (1,634,059 )     -       -       -       -       -       (1,634,059 )
Purchase of shares by deferred compensation plans trust     -       -       -       -       -       (20,401 )     -       (20,401 )
Current year dividends declared     -       -       (1,753,190 )     -       -       -       -       (1,753,190 )
Unallocated ESOP dividends applied to ESOP loan payment     -       -       111,328       -       -       -       -       111,328  
Proceeds from sales of common stock, net     -       (15,998 )     -       -       -       -       -       (15,998 )
Exchange of shares due to 2nd step stock offering     (5 )     5       -       -       -       -       -       -  
                                                                 
BALANCE— December 31, 2010   $ 73,076     $ 64,013,608     $ 41,736,830     $ (115,208 )   $ (4,007,478 )   $ (516,142 )   $ (631,169 )   $ 100,553,517  
                                                                 
Comprehensive income:                                                                
Net income     -       -       5,058,384       -       -       -       -       5,058,384  
Other comprehensive income—                                                                
Unrealized holding gain arising during the period (net of tax of $44,001)     -       -       -       -       -       -       60,369       60,369  
Comprehensive income:                                                             5,118,753  
Purchase of treasury stock     -       -       -       (59,024 )     -       -       -       (59,024 )
Unallocated ESOP shares commited to employees     -       -       -       -       342,000       -       -       342,000  
Excess of fair value above cost of ESOP shares committed to be released     -       55,149       -       -       -       -       -       55,149  
Restricted stock shares     -       201,584       -       -       -       -       -       201,584  
Stock options     -       138,283       -       -       -       -       -       138,283  
Purchase of shares by deferred compensation plans trust     -       -       -       -       -       (22,840 )     -       (22,840 )
Current year dividends declared     -       -       (1,750,919 )     -       -       -       -       (1,750,919 )
Unallocated ESOP dividends applied to ESOP loan payment     -       -       103,101       -       -       -       -       103,101  
                                                                 
BALANCE— December 31, 2011   $ 73,076     $ 64,408,624     $ 45,147,396     $ (174,232 )   $ (3,665,478 )   $ (538,982 )   $ (570,800 )   $ 104,679,604  

 

See notes to consolidated financial statements.      

 

54
 

 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES                

CONSOLIDATED STATEMENTS OF CASH FLOWS          

 

    Years Ended December 31,  
    2011     2010     2009  
OPERATING ACTIVITIES:                        
Net income   $ 5,058,384     $ 5,444,236     $ 4,211,401  
Adjustments to reconcile net income to net cash                        
provided by operating activities:                        
Depreciation and amortization     892,746       1,156,727       862,627  
Provision for loan losses     473,235       891,791       1,251,223  
Deferred income taxes     (187,474 )     (501,627 )     (1,365,326 )
Stock based compensation expense     737,016       764,352       672,161  
Impairment charge on AFS securities     -       -       1,077,400  
Gain on call of AFS securities     (10,014 )     -       (6,133 )
Gain on sale of AFS securities     -       (5 )     -  
Gain on sale of real estate owned     -       -       (55,325 )
Cash surrender value of life insurance     (521,827 )     (552,956 )     (435,477 )
Changes in assets and liabilities which provided (used) cash:                        
Accrued interest receivable     12,320       123,022       (132,522 )
Prepaid expenses and other assets     (379,206 )     791,963       (1,944,817 )
Accrued interest payable     (47,095 )     812       (5,009 )
Other liabilities     892,055       491,754       803,656  
Net cash provided by operating activities     6,920,140       8,610,069       4,933,859  
                         
INVESTING ACTIVITIES:                        
Principal collected on:                        
Mortgage-backed securities available for sale     3,732,726       4,639,188       6,333,529  
Mortgage-backed securities held to maturity     521,271       963,377       659,782  
Collateralized mortgage obligations     31,491       -       -  
Agency securities available for sale     -       -       286,802  
Loans originated, net of repayments     14,317,127       3,460,918       (71,212,636 )
Purchases of:                        
Loans receivable     (554,000 )     (1,174,273 )     -  
Investment securities held to maturity     (4,900,000 )     (1,474,102 )     (659,727 )
Investment securities available for sale     (50,595,000 )     -       -  
Federal Home Loan Bank stock     -       (123,600 )     (10,032,400 )
Office properties and equipment     (949,200 )     (382,570 )     (2,734,907 )
Life insurance contracts     (3,400,000 )     (1,500,000 )     (1,542,598 )
Proceeds from sales of:                        
Federal Home Loan Bank stock     20,900       -       10,979,500  
Investment securities available for sale     713,680       771,533       500,000  
Real estate owned     206,421       -       883,107  
Proceeds from maturities and calls of:                        
Investment securities held to maturity     1,000,000       1,474,102       672,307  
Investment securities available for sale     26,105,000       -       -  
Mortgage-backed securities available for sale     130,464       -       -  
Cash acquired, net of cash paid in acquisition     27,053,885       -       -  
Net cash used in (provided by) investing activities     13,434,765       6,654,573       (65,867,241 )

55
 

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES                

CONSOLIDATED STATEMENTS OF CASH FLOWS       (Continued)      

      

    Years Ended December 31,  
    2011     2010     2009  
FINANCING ACTIVITIES:                        
Increase in deposits   $ 26,277,162     $ 65,912,331     $ 81,467,090  
Advances from Federal Home Loan Bank, net     -       -       (23,800,000 )
Dividends paid     (1,750,919 )     (1,753,190 )     (711,880 )
Purchase of shares by deferred compensation plans trust     (22,840 )     (1,654,460 )     (10,704 )
Purchase of treasury stock     (59,024 )     (115,208 )     (97,022 )
Purchase of ESOP shares     -       -       (2,260,888 )
Unallocated ESOP dividends applied to ESOP loan     103,101       111,328       45,837  
(Decrease) increase in advances from borrowers for taxes and insurance     (114,598 )     87,999       258,084  
Proceeds from issuance of common stock     -       (15,998 )     30,521,254  
Dividend received from dissolution of MHC     -       -       19,162  
                         
Net cash provided by financing activities     24,432,882       62,572,802       85,430,933  
                         
INCREASE IN CASH AND CASH EQUIVALENTS     44,787,787       77,837,444       24,497,551  
                         
CASH AND CASH EQUIVALENTS—Beginning of period     110,865,154       33,027,710       8,530,159  
                         
CASH AND CASH EQUIVALENTS—End of period   $ 155,652,941     $ 110,865,154     $ 33,027,710  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW                        
INFORMATION—Cash paid during the period for:                        
Interest   $ 12,231,735     $ 13,828,306     $ 15,043,152  
                         
Income taxes   $ 3,449,574     $ 4,178,080     $ 3,798,784  
                         
SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS                        
Transfers of loans to real estate owned   $ 206,421     $ -     $ 925,281  

 

See notes to consolidated financial statements          

 

56
 

       

OCEAN SHORE HOLDING CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2011, 2010 AND 2009

 

1. NATURE OF OPERATIONS AND THE REORGANIZATION

 

Ocean Shore Holding Co. (“Company”) is the holding company for Ocean City Home Bank (“Bank”), a federally chartered savings bank. The Company is a unitary savings and loan holding company and conducts its operations primarily through the Bank. The Bank has one active subsidiary, Seashore Financial Services, LLC, which receives commissions from the sale of insurance products.

 

On December 18, 2009, the Company completed the “second step” conversion of Ocean City Home Bank from the mutual holding company to the stock holding company form of organization (the “Conversion”) pursuant to a Plan of Conversion and Reorganization (the “Plan”). Upon completion of the Conversion, Ocean Shore Holding became the holding company for the Bank and owns all of the issued and outstanding shares of the Bank’s common stock. In connection with the Conversion, 4,186,250 shares of common stock, par value $0.01 per share, of Ocean Shore Holding Co. (the “Common Stock”) were sold in subscription, community and syndicated community offerings to certain depositors and borrowers of the Bank and other investors for $8.00 per share, or $33.49 million in the aggregate (collectively, the “Offerings”). In addition and in accordance with the Plan, approximately 3,121,868 shares of Common Stock (without taking into consideration cash issued in lieu of fractional shares) were issued in exchange for the outstanding shares of common stock of Ocean Shore Holding Co., the former mid-tier holding company for the Bank, held by persons other than OC Financial MHC. 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. All share and per share amounts have been adjusted in prior periods to reflect the effect of the conversion.

 

The Bank’s market area consists of Atlantic and Cape May counties, New Jersey. Through a ten-branch network, the Bank operates as a retail banking concern in the communities of Ocean City and Marmora within Cape May County, and Linwood, Absecon, Ventnor, Margate, Mays Landing, Egg Harbor Township and Galloway Township within Atlantic County. The Bank is engaged in the business of attracting time and demand deposits from the general public, small businesses and municipalities, and investing such deposits primarily in residential mortgage loans, consumer loans and small commercial loans.

 

The Bank is subject to regulatory supervision and examination by the Office of the Comptroller of the Currency (the “OCC”), its primary regulator, and the Federal Deposit Insurance Corporation (the “FDIC”) which insures its deposits. The Bank is a member of and owns capital stock in the Federal Home Loan Bank (the “FHLB”) of New York, which is one of the twelve regional banks that comprise the FHLB System.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation —The consolidated financial statements of the Company include the accounts of the Bank and the Bank’s wholly owned subsidiary, Seashore Financial LLC, and are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements —The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. The most significant estimates and assumptions in the Company’s consolidated financial statements relate to the allowance for loan losses, goodwill and intangible impairment, deferred income taxes and the fair value measurements of financial instruments. Actual results could differ from those estimates.

57
 

Treasury Stock —Stock held in treasury by the Company is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity.

The Company held 15,947 shares in treasury stock at a cost of $174,000 at December 31, 2011 and 10,810 shares in at a cost of $115,000 at December 31, 2010. The Company retired its 451,258 shares of treasury stock totaling $5.4 million as a result of the completion of its second-step reorganization on December 18, 2009 and subsequently held no treasury stock on December 31, 2009.

Concentration of Credit Risk —The majority of the Company’s loans are secured by 1 to 4 family real estate or made to businesses in Atlantic or Cape May Counties, New Jersey.

Investment Securities — The Company’s debt securities include both those that are held to maturity and those that are available for sale. The purchase and sale of the Company’s debt securities are recorded as of the trade date. At December 31, 2011 and 2010, the Company had no unsettled purchases or sales of investment securities. The following provides further information on the Company’s accounting for debt securities:

a. Held to Maturity —Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
b. Available for Sale —Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments, are classified as available for sale. These securities are carried at estimated fair value. Fair values are based on quoted prices for identical assets in active markets, quoted prices for similar assets in markets that are either actively or not actively traded, or, in some cases where there is limited activity or less transparency around inputs, internally developed discounted cash flow models. Unrealized gains and losses that are not concluded to be other than temporary, are excluded from earnings and are reported net of tax in other comprehensive income. Upon the sale of securities, any unamortized premium or unaccreted discount is considered in the determination of gain or loss from the sale. Realized gains and losses on the sale or call of investment securities are recorded as of the trade date, reported in the Consolidated Statements of Income and determined using the adjusted cost of the specific security sold or called. Sales of available for sale securities for the twelve months ended December 31, 2011 totaled $713,680. There were no sales of available for sale securities for the twelve months ended December 31, 2010 and 2009.

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets , and FASB ASC 320-10, Investments – Debt and Equity Securities ,   the Company evaluates its debt securities portfolio for other-than-temporary impairment (“OTTI”) throughout the year. Each investment, which has a fair value less than the book value is reviewed on a quarterly basis by management. Management considers at a minimum the following factors that, both individually or in combination, could indicate that the decline is other-than-temporary: (a) the Company has the intent to sell the security; (b) it is more likely than not that it will be required to sell the security before recovery; and (c) the Company does not expect to recover the entire amortized cost basis of the security. Among the factors that are considered in determining intent is a review of capital adequacy, interest rate risk profile and liquidity at the Company. The guidance allows the Company to bifurcate the impact on securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors, when the security is not otherwise intended to be sold or is required to be sold . The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI, with the amortized cost basis of the debt security. The Company uses the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, then applies a discount rate equal to the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. The fair market value of the security is determined using the same expected cash flows, where market-based observable inputs are not available; the discount rate is a rate the Company determines from open market and other sources as appropriate for the security. The fair value is based on market prices or market-based observable inputs are available. The difference between the fair market value and the credit loss is recognized in other comprehensive income. An impairment charge is recorded if the review described above concludes that the decline in value is other-than-temporary. The Company did not record any OTTI for the years ended December 31, 2011 and 2010. The securities portfolio for the year ended December 31, 2009 was deemed to include two other-than-temporary impaired investments. As a result, the Company recorded an OTTI charge of $1.1 million during the year ended December 31, 2009.

58
 

Deferred Loan Fees —The Bank defers all loan origination fees, net of certain direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using the level-yield method. Deferred loan fees are recorded as a component of “Loans – net” in the statement of financial condition.

Unearned Discounts and Premiums —Unearned discounts and premiums on loans, investments and mortgage-backed securities purchased are accreted and amortized, respectively, over the estimated life of the related asset using the interest method.

Office Properties and Equipment - Net —Office properties and equipment are recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the related assets as follows: buildings and improvements, ten to thirty nine years or at the lesser of the life of improvement or the lease; furniture and equipment, three to seven years. The costs of maintenance and repairs are expensed as incurred, and renewals and betterments are capitalized.

Real Estate Owned— Real estate owned is comprised of property acquired through foreclosure, deed in lieu and bank property that is not in use. The property acquired through foreclosure is carried at the lower of the related loan balance or fair value of the property based on an appraisal less estimated cost to dispose. Losses arising from foreclosure transactions are charged against the allowance for loan losses. Bank property is carried at the lower of cost or fair value less estimated cost to dispose. Costs to maintain real estate owned and any subsequent gains or losses are included in the Company’s Consolidated Statements of Operations.

Bank Owned Life Insurance — The Company has purchased life insurance policies on certain key employees. The Bank is the primary beneficiary of insurance policies on the lives of officers and employees of the Bank. These policies are recorded at their cash surrender value and the Bank has recognized any increase in cash surrender value of life insurance, net of insurance costs, in the consolidated statements of income. The cash surrender value of the insurance policies is recorded as an asset in the statements of financial condition. The company accounts for split dollar life insurance in accordance with FASB ASC 715-60, Defined Benefit Plans – Other Post-Retirement . The guidance provides for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement.

Allowance for Loan Losses— The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are the following: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. A provision for loan losses is charged to operations based on management’s evaluation of the estimated losses that have been incurred in the Company’s loan portfolio. It is the policy of management to provide for losses on unidentified loans in its p ortfolio in addition to classified loans.

59
 

Management monitors its allowance for loan losses monthly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio.

In determining the allowance for loan losses, management has established both general pooled and specific allowances. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for performing loans (general pooled allowance). The amount of the specific allowance is determined through a loan-by-loan analysis of non-performing loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on qualitative and quantitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, and external factors. If a loan is identified as impaired and is collateral dependant, an appraisal is obtained to provide a base line in determining whether the carrying amount of the loan exceeds the net realizable value. We recognize impairment through a provision estimate or a charge-off is recorded when management determines we will not collect 100% of a loan based on foreclosure of the collateral, less cost to sell the property, or the present value of expected cash flows. 

As changes in our operating environment occur and as recent loss experience fluctuates, the factors for each category of loan based on type and risk rating will change to reflect current circumstances and the quality of the loan portfolio. Given that the components of the allowance are based partially on historical losses and on risk rating changes in response to recent events, required reserves may trail the emergence of any unforeseen deterioration in credit quality.

Loans are considered past due 16 days or more past the due date. Loans are considered delinquent if 30 days or more past due. Loans over 90 days past due are placed on non-accrual status. Payments received on non-accrual loans are applied to principal, interest and escrow on mortgage loans and to accrued interest followed by principal on all other loans. Loans are returned to accrual status when no payment is over 90 days past due. Unsecured loans are charged off when becoming more than 90 days past due. Secured loans are charged off to the extent the loan amount exceeds the appraised value of the collateral when over 90 days past due and management believes the uncollectability of the loan balance is confirmed.

Interest income on impaired loans other than nonaccrual loans is recognized on an accrual basis. Interest income on nonaccrual loans is recognized only as collected.

Goodwill and Core Deposit Intangibles —Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the purchase method. Core deposit intangibles are a measure of the value of checking, savings and other-low cost deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized over the estimated useful lives of the existing deposit relationships acquired, but not exceeding 10 years. The Company evaluates the identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.

60
 

Goodwill is not amortized on a recurring basis, but rather are subject to periodic impairment testing. Management performs an annual goodwill impairment test and whenever events occur or circumstances change that indicates the fair value of a reporting unit may be below its carrying value.

Loans Held for Sale and Loans Sold —The Bank originates mortgage loans held for investment and for sale. At origination, the mortgage loan is identified as either held for sale or for investment. Mortgage loans held for sale are carried at the lower of cost or forward committed contracts (which approximates market), determined on a net aggregate basis. The Bank had no loans classified as held for sale at December 31, 2011 and 2010.

Income Taxes — The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes. FASB ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income as well as judgments about availability of capital gains. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. Further, an inability to employ a qualifying tax strategy to utilize our deferred tax asset arising from capital losses may give rise to an additional valuation allowance. An increase in the valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. FASB ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. When applicable, we recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated statement of income. Assessment of uncertain tax positions under FASB ASC 740 requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Judgment may be involved in applying the requirements of FASB ASC 740 .

Our adherence to FASB ASC 740 may result in increased volatility in quarterly and annual effective income tax rates, as FASB ASC 740 requires that any change in judgment or change in measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

Interest Rate Risk —The Bank is engaged principally in providing first mortgage loans to borrowers. At December 31, 2011 and 2010, approximately two-thirds of the Bank’s assets consisted of assets that earned interest at fixed interest rates. Those assets were funded with long-term fixed rate liabilities and with short-term liabilities that have interest rates that vary with market rates over time. The shorter duration of the interest-sensitive liabilities indicates that the Bank is exposed to interest rate risk because, in a rising rate environment, liabilities will be repricing faster at higher interest rates, thereby reducing the market value of long-term assets and net interest income.

Earnings Per Share — Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, based upon the treasury stock method using an average market price of common shares sold during the period.

61
 

Other Comprehensive Income (Loss) — The Company classifies items of other comprehensive income (loss) by their nature and displays the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in capital in the equity section of the Consolidated Statements of Financial Condition. Amounts categorized as other comprehensive income (loss) represent net unrealized gains or losses on investment securities available for sale, net of tax. Reclassifications are made to avoid double counting in comprehensive income (loss) items which are displayed as part of net income for the period. These adjustments are reflected in the consolidated statements of changes in equity.

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

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

In June 2010, the shareholders of the Company approved the adoption of the 2010 Equity Based Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan provides for the grant of shares of common stock of the Company to officers, directors and employees of the Company. In order to fund the grant of shares under the 2010 Equity Plan, the Company established the Equity Plan Trust (the “Trust”) which purchased 141,306 shares of the Company’s common stock in the open market for approximately $1.6 million, resulting in an average price of $11.53 per share. The Company made sufficient contributions to the Trust to fund these purchases. No additional purchases are expected to be made by the Trust under this plan. Pursuant to the terms of the 2010 Equity Plan, 99,000 shares acquired by the Trust were granted to certain officers and directors of the Company in August 2010 and 4,950 shares were granted in March of 2011. Non-vested restricted stock award shares granted under the 2010 Equity Plan will vest at the rate of 20% per year over five years. As of December 31, 2011, 18,810 shares have been fully vested, 103,950 shares issued and 4,950 shares were forfeited.

Compensation expense related to the restricted stock shares granted from the Equity Plans is recognized ratably over the five year vesting period in an amount which totals the market price of the Company’s stock at the date of grant. During the years ended December 31, 2011 and 2010, 18,810 and 30,125 shares were earned each year by participants of the Equity Plans, respectively, based on the proportional vesting of the awarded shares. During the years ended December 31, 2011, 2010 and 2009, approximately $202,000, $308,000 and $397,000, respectively, was recognized as compensation expense for the granted shares of the Equity Plans.

The Equity Plans also authorize the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price equal to the fair market value of the common stock on the grant date. Options will generally become vested and exercisable at the rate of 20% per year over five years. A total of 650,804 shares of common stock have been approved for issuance pursuant to the grant of stock options under the Equity Plans of which 53,018 options were awarded on August 17, 2011, 13,600 options were awarded on March 15, 2011, 257,010 options were awarded on August 18, 2010, 34,182 were options were awarded on November 20, 2007, 21,103 options were awarded on November 21, 2006 and 348,203 options were awarded on August 10, 2005. At December 31, 2011, 17,400 options issued in 2010, 3,516 options issued in 2007, 1,319 options issued in 2006 and 54,077 options issued in 2005 have been forfeited.

62
 

Common Stock Acquired for Employee Benefit Plans —Unearned ESOP shares are not considered outstanding for calculating net income per common share and are shown as a reduction of stockholders’ equity and presented as Common Stock Acquired for Employee Benefit Plans. During the period the ESOP shares are committed to be released, the Company recognizes compensation cost equal to the fair value of the ESOP shares. When the shares are released, Common Stock Acquired for Employee Benefit Plans is reduced by the cost of the ESOP shares released and the differential between the fair value and the cost is charged/credited to additional paid-in capital. The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability in the Company’s consolidated financial statements including 282,611 shares added on December 18, 2009 for $2.3 million in connection with the second-step conversion and reorganization of the Company .

Statement of Cash Flows —For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Segment Information —As a community oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community-banking operations, which constitutes the Company’s only operating segment for financial reporting purposes.

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

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). This guidance will affect the presentation of comprehensive income, but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 defers those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. ASU 2011-12 does not impact the requirement of ASU 2011-05 to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The guidance is effective for interim and annual reporting periods beginning after December 15, 2011.

63
 

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

In April 2011, the FASB issued ASU 2011-02 , A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring . This new guidance requires a creditor performing an evaluation of whether a restructuring constitutes a troubled debt restructuring, to separately conclude that both (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. This standard clarifies the guidance on a creditor’s evaluation of whether it has granted a concession as well as the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. The updated accounting guidance also requires entities to disclose additional quantitative activity regarding troubled debt restructurings of finance receivables that occurred during the period, as well as additional information regarding troubled debt restructurings that occurred within the previous twelve months and for which there was a payment default during the current period. The new accounting guidance is effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial statements.

64
 

 

3. INVESTMENT SECURITIES

Investment securities are summarized as follows:

    December 31, 2011  
          Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gain     Loss     Value  
Held to Maturity                                
Debt Securities - Municipal   $ 4,020,000     $ -     $ -     $ 4,020,000  
US treasury and government sponsored                                
entity mortgage-backed securities     1,944,393       183,186       -       2,127,579  
Totals   $ 5,964,393     $ 183,186     $ -     $ 6,147,579  
                                 
Available for Sale                                
Debt securities:                                
Municipal   $ 830,000     $ 2,000     $ -     $ 832,000  
Corporate     7,700,531       35,450       (1,625,673 )     6,110,308  
US treasury and federal agencies     25,660,016       24,720       (148 )     25,684,588  
Equity securities     2,596       11,980       (2,034 )     12,542  
US treasury and government sponsored                                
entity mortgage-backed securities     13,446,689       707,047       (25,506 )     14,128,230  
Totals   $ 47,639,832     $ 781,197     $ (1,653,361 )   $ 46,767,668  

 

    December 31, 2010  
          Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gain     Loss     Value  
Held to Maturity                                
US treasury and government sponsored                                
entity mortgage-backed securities   $ 2,467,418     $ 171,307     $ -     $ 2,638,725  
Totals   $ 2,467,418     $ 171,307     $ -     $ 2,638,725  
                                 
Available for Sale                                
Debt securities:                                
Municipal   $ 1,419,971     $ 11,410     $ -     $ 1,431,381  
Corporate     8,198,927       -       (1,795,691 )     6,403,236  
Equity securities     2,596       13,562       (1,777 )     14,381  
US treasury and government sponsored                                
entity mortgage-backed securities     12,608,714       795,963       -       13,404,677  
Totals   $ 22,230,208     $ 820,935     $ (1,797,468 )   $ 21,253,675  

 

65
 

 

The following table provides the gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010: 

    December 31, 2011  
    Less Than 12 Months     12 Months or Longer     Total  
    Estimated     Gross     Estimated     Gross     Estimated     Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
                                     
Debt securities:                                                
US treasuries   $ 32,797     $ (148 )   $ -     $ -     $ 32,797     $ (148 )
Corporate     -       -       4,076,639       (1,625,673 )     4,076,639       (1,625,673 )
US Treasury and government sponsored                                                
entity mortgage-backed securities     2,685,526       (25,506 )     -       -       2,685,526       (25,506 )
Equity securities     -       -       562       (2,034 )     562       (2,034 )
Totals   $ 2,718,323     $ (25,654 )   $ 4,077,201     $ (1,627,707 )   $ 6,795,524     $ (1,653,361 )

 

                December 31, 2010              
    Less Than 12 Months     12 Months or Longer     Total  
     Estimated     Gross      Estimated     Gross      Estimated     Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
                                     
Debt securities:                                                
Corporate   $ 978,030     $ (52,429 )   $ 5,425,006     $ (1,743,262 )   $ 6,403,036     $ (1,795,691 )
Totals   $ 978,030     $ (52,429 )   $ 5,425,006     $ (1,743,262 )   $ 6,403,036     $ (1,795,691 )

 

Management has reviewed its investment securities as of December 31, 2011 and 2010 and has determined that all declines in fair value below amortized cost are temporary.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company determines whether the unrealized losses are temporary in accordance with FASB ASC 325-40, when applicable, and FASB ASC 320-10 . The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

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

66
 

    2011     2010  
Credit component of OTTI as of January 1,   $ 3,000,000     $ 3,000,000  
                 
Additions for credit related OTTI charges on previously unimpaired securities     -       -  
                 
Reductions for securities sold during the period     -       -  
                 
Reductions for increases in cash flows expected to be collected and recognized over the remaining life of the security     -       -  
                 
Additional increases as a result of impairment charges recognized on investments for which an OTTI was previously recognized     -       -  
                 
Credit component of OTTI as of December 31,   $ 3,000,000     $ 3,000,000  

 

Two pooled trust preferred collateralized debt obligations (“CDOs”) backed by bank trust capital securities have been determined to be other-than-temporarily impaired in 2009 and 2008, due solely to credit related factors. These securities have Fitch credit ratings below investment grade at December 31, 2011. Each of the securities is in the mezzanine levels of credit subordination. The underlying collateral consists of the bank trust capital securities of over 50 institutions. A summary of key assumptions utilized to forecast future expected cash flows on the securities determined to have OTTI were as follows as of December 31, 2011 and 2010:

  December 31, 2011   December 31, 2010
Future loss rate assumption per annum .8% to 1.2%   .8% to 1.2%
Expected cumulative loss percentage 27.8%   27.8%
Cumulative loss percentage to date 37.0% to 33.2%   37.0% to 33.2%
Remaining life 30 years   31 years

 

Corporate Debt Securities – The Company’s investments in corporate debt securities consist of corporate debt securities issued by large financial institutions and single issuer and CDOs backed by bank trust preferred capital securities.

At December 31, 2011, two debt securities and two single issue trust preferred securities had been in a continuous unrealized loss position for 12 months or longer. Those securities had aggregate depreciation of 29.0% from the Company’s amortized cost basis. The decline is primarily attributable to depressed pricing of two private placement single issuer trust preferred securities. There has been limited secondary market trading for these types of securities, as a declining domestic economy and increasing credit losses in the banking industry have led to illiquidity in the market for these types of securities. The unrealized loss on these debt securities relates principally to the increased credit spread and a lack of liquidity currently in the financial markets for these types of investments. These securities were performing in accordance with their contractual terms as of December 31, 2011, and had paid all contractual cash flows since the Company’s initial investment. Management believes these unrealized losses are not other-than-temporary based upon the Company’s analysis that the securities will perform in accordance with their terms and the Company’s intent not to sell or lack of requirement to sell these investments for a period of time sufficient to allow for the anticipated recovery of fair value, which may be maturity. The Company expects recovery of fair value when market conditions have stabilized and that the Company will receive all contractual principal and interest payments related to those investments.

At December 31, 2010, one debt security and four single issue trust preferred securities had been in a continuous unrealized loss position for 12 months or longer. Those securities had aggregate depreciation of 32.1% from the Company’s amortized cost basis. The decline is primarily attributable to depressed pricing of two private placement single issuer trust preferred securities. There has been limited secondary market trading for these types of securities, as a declining domestic economy and increasing credit losses in the banking industry have led to illiquidity in the market for these types of securities. The unrealized loss on these debt securities relates principally to the increased credit spread and a lack of liquidity currently in the financial markets for these types of investments. These securities were performing in accordance with their contractual terms as of December 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 intent not to sell or lack of requirement to sell these investments for a period of time sufficient to allow for the anticipated recovery of fair value, which may be maturity. The Company expects recovery of fair value when market conditions have stabilized and that the Company will receive all contractual principal and interest payments related to those investments.

67
 

United States Treasury and Government Sponsored Enterprise Mortgage-backed Securities - The Company’s investments in United States government sponsored enterprise notes consist of debt obligations of the Federal Home Loan Bank (“FHLB”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Federal National Mortgage Association (“Fannie Mae”). At December 31, 2011 and 2010, the Company had no agency mortgage-backed securities with unrealized losses for 12 months or longer.

The amortized cost and estimated fair value of debt securities available for sale at December 31, 2011 and 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.

    December 31, 2011  
    Held to Maturity     Available for Sale Securities  
          Estimated           Estimated  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
Due within 1 year   $ 4,020,000     $ 4,020,000     $ -     $ -  
Due after 1 year                                
through 5 years     -       -       1,032,945       961,057  
Due after 5 years                                
through 10 years     -       -       10,037,072       10,052,417  
Due after 10 years     -       -       23,120,531       21,613,422  
Total   $ 4,020,000     $ 4,020,000     $ 34,190,548     $ 32,626,896  

    December 31, 2010  
    Available for Sale Securities  
          Estimated  
    Amortized     Fair  
    Cost     Value  
Due within 1 year   $ -     $ -  
Due after 1 year                
through 5 years     1,000,000       908,160  
Due after 5 years                
through 10 years     -       -  
Due after 10 years     8,618,898       6,926,457  
Total   $ 9,618,898     $ 7,834,617  

 

Equity securities had a cost of $2,596 and a fair value of $12,542 as of December 31, 2011 and a cost of $2,596 and fair value of $14,381 as of December 31, 2010. Mortgage-backed securities had a cost of $15,391,082 and a fair value of $16,255,809 as of December 31, 2011 and a cost of $15,076,132 and a fair value of $16,043,402 as of December 31, 2010.

68
 

4. LOANS RECEIVABLE—NET

Loans receivable consist of the following:

    December 31,  
    2011     2010  
             
Real estate - mortgage:                
One-to-four family residential   $ 547,906,420     $ 514,853,007  
Commercial and multi-family     77,072,427       55,237,743  
Total real - estate mortgage     624,978,847       570,090,750  
                 
Real estate - construction:                
Residential     8,057,416       7,785,191  
Commercial     3,790,673       3,723,800  
Total real estate - construction     11,848,089       11,508,991  
                 
Commercial     23,937,050       21,963,288  
                 
Consumer                
Home equity     66,787,820       57,119,018  
Other consumer loans     809,965       775,569  
Total consumer loans     67,597,785       57,894,587  
                 
Total loans     728,361,771       661,457,616  
                 
Net deferred loan cost     3,026,802       2,870,467  
Allowance for loan losses     (3,762,295 )     (3,988,076 )
                 
Net total loans   $ 727,626,278     $ 660,340,007  

 

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

The Bank is servicing loans for the benefit of others totaling approximately $10,874,000 and $3,099,000 at December 31, 2011 and 2010, respectively. Servicing loans for others generally consists of collecting mortgage payments, disbursing payments to investors and occasionally processing foreclosures. Loan servicing income is recorded upon receipt and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees.

The Bank originates and purchases both fixed and adjustable interest rate loans. At December 31, 2011 and 2010, the composition of these loans was approximately $545,650,000 and $514,221,000, respectively, of fixed rate loans and $182,712,000 and $147,237,000, respectively, of adjustable rate loans.

69
 

Changes in the allowance for loan losses are as follows:

    Years Ended December 31,  
    2011     2010     2009  
                   
Balance, beginning of year   $ 3,988,076     $ 3,476,040     $ 2,683,956  
Provision for loan loss     473,235       891,791       1,251,223  
Charge-offs     (700,325 )     (379,755 )     (460,541 )
Recoveries     1,309       -       1,402  
                         
Balance, end of year   $ 3,762,295     $ 3,988,076     $ 3,476,040  

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 $473,000 for the year ended December 31, 2011 as compared to $892,000 for the comparable period in 2010. A contributing factor in the decrease of the loan loss provision for the year ended December 31, 2011 compared to 2010 was less general reserves required of $114,000 in 2011 compared to $323,000 in 2010 due to no loan growth in 2011 offset by additional specific reserves on impaired loans of $587,000 in 2011 compared to $569,000 in 2010.

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 December 31, 2011, 2010 and 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.

Non-performing loans at December 31, 2011 and 2010 consisted of non-accrual loans that amounted to $5,676,819 and $5,222,374, respectively, and non-accrual troubled debt restructurings of $805,095 and $0, respectively. The reserve for delinquent interest on loans totaled $425,384 and $246,558 at December 31, 2011 and 2010, respectively.

Year end non-accrual loans segregated by class of loans were as follows:

    2011     2010  
Real Estate                
1-4 Family Residential   $ 4,768,395     $ 4,282,002  
Commercial and Multi-Family     392,146       729,289  
Real Estate Construction     -       -  
Commercial     318,230       134,238  
Consumer     198,048       76,845  
Non-accrual loans     5,676,819       5,222,374  
Troubled debt restructuring, non-accrual     805,095       -  
Total non-accrual loans   $ 6,481,914     $ 5,222,374  

 

70
 

 

An age analysis of past due loans, segregated by class of loans, as of December 31, 2011 and 2010 is as follows:

    30-69 Days     60-89 Days     Greater Than     Total Past           Total Loan  
    Past Due     Past Due     90 Days     Due     Current     Receivables  
                                     
2011                                                
Real Estate                                                
1-4 Family Residential   $ 665,563     $ -     $ 4,768,395     $ 5,433,958     $ 542,472,462     $ 547,906,420  
Commercial and Multi-Family     12,318       -       392,146       404,464       76,667,963       77,072,427  
Construction     -       -       -       -       11,848,089       11,848,089  
Commercial     -       -       318,230       318,230       23,618,820       23,937,050  
Consumer     218,766       198,995       198,048       615,809       66,981,976       67,597,785  
Total   $ 896,647     $ 198,995     $ 5,676,819     $ 6,772,461     $ 721,589,310     $ 728,361,771  
                                                 
2010                                                
Real Estate                                                
1-4 Family Residential   $ 1,584,054     $ -     $ 4,282,002     $ 5,866,056     $ 508,986,951     $ 514,853,007  
Commercial and Multi-Family     -       -       729,289       729,289       54,508,454       55,237,743  
Construction     -       -               -       11,508,991       11,508,991  
Commercial     -       -       134,238       134,238       21,829,050       21,963,288  
Consumer     81,600       -       76,845       158,445       57,736,142       57,894,587  
Total   $ 1,665,654     $ -     $ 5,222,374     $ 6,888,028     $ 654,569,588     $ 661,457,616  

71
 

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

          Unpaid           Average  
    Recorded     Principal     Related     Recorded  
    Investment     Balance     Allowance     Investment  
2011                                
With no related allowance recorded                                
Real Estate                                
1-4 Family Residential   $ 2,287,176     $ 2,287,176     $ -     $ 190,598  
Commercial and Multi-Family     392,146       392,146       -       130,715  
Commercial     318,230       318,230       -       106,077  
Consumer     183,937       183,937       -       36,787  
With an allowance recorded                                
Real Estate                                
1-4 Family Residential     3,286,313       3,764,871       371,554       328,631  
Commercial and Multi-Family     -       -       -       -  
Commercial     -       -       -       -  
Consumer     14,111       14,111       14,286       14,111  
Total                                
Real Estate                                
1-4 Family Residential   $ 5,573,489     $ 6,052,047     $ 371,554     $ 519,229  
Commercial and Multi-Family     392,146       392,146       -       130,715  
Commercial     318,230       318,230       -       106,077  
Consumer     198,048       198,048       14,286       50,898  
                                 
2010                                
With no related allowance recorded                                
Real Estate                                
1-4 Family Residential   $ 2,997,524     $ 2,997,524     $ -     $ 428,218  
Commercial and Multi-Family     729,289       729,289       -       243,096  
Commercial     98,885       98,885       -       98,885  
Consumer     27,919       27,919       -       27,919  
With an allowance recorded                                
Real Estate                                
1-4 Family Residential     1,284,478       1,284,478       359,301       256,895  
Commercial and Multi-Family     -       -       -       -  
Commercial     35,353       35,353       73,285       35,353  
Consumer     48,926       48,926       49,161       48,926  
Total                                
Real Estate                                
1-4 Family Residential   $ 4,282,002     $ 4,282,002     $ 359,301     $ 685,113  
Commercial and Multi-Family     729,289       729,289       -       243,096  
Commercial     134,238       134,238       73,285       134,238  
Consumer     76,845       76,845       49,161       76,845  

 

Included in impaired loans at December 31, 2011 was one troubled debt restructuring (“TDR”) which had a specific reserve of $161,100. The following table presents an analysis of the Company’s TDR agreement entered into during the year ending December 31, 2011. The Company had no TDRs as of December 31, 2010.

    As of December 31, 2011  
          Outstanding Recorded Investment  
    Number of Contracts     Pre-Modification     Post-Modification  
1-4 Family Residential Real Estate     1     $ 805,095     $ 805,095  

 

72
 

 

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

The following table presents classified loans by class of loans as of December 31, 2011 and 2010.

    Real Estate                          
    1-4 Family     Commercial                                      
    Residential     and Multi-Family     Construction     Commercial     Consumer  
    2011     2010     2011     2010     2011     2010     2011     2010     2011     2010  
Grade:                                                                                
Special Mention   $ 1,779,742     $ 927,945     $ 3,518,440     $ -     $ -     $ -     $ -     $ -     $ 229,156     $ 197,031  
Substandard     6,134,849       8,291,507       2,760,244       1,310,396       -       -       1,494,731       476,895       538,676       302,046  
Doubtful and Loss     148,849       288,977       -       -       -       -       -       70,686       -       48,926  
Total   $ 8,063,440     $ 9,508,429     $ 6,278,684     $ 1,310,396     $ -     $ -     $ 1,494,731     $ 547,581     $ 767,832     $ 548,003  

 

The following table presents the credit risk profile of loans based on payment activity as of December 31, 2011 and 2010.

    Real Estate                          
    1-4 Family     Commercial                                      
    Residential     and Multi-Family     Construction     Commercial     Consumer  
    2011     2010     2011     2010     2011     2010     2011     2010     2011     2010  
Performing   $ 542,332,930     $ 510,571,005     $ 76,680,281     $ 54,508,454     $ 11,848,089     $ 11,508,991     $ 23,618,820     $ 21,829,050     $ 67,399,737     $ 57,817,742  
Non-Performing     5,573,490       4,282,002       392,146       729,289       -       -       318,230       134,238       198,048       76,845  
Total   $ 547,906,420     $ 514,853,007     $ 77,072,427     $ 55,237,743     $ 11,848,089     $ 11,508,991     $ 23,937,050     $ 21,963,288     $ 67,597,785     $ 57,894,587  

 

The following table details activity in the allowance for possible loan losses by portfolio segment for the years ended December 31, 2011 and 2010. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

73
 

   Real Estate                    
  1-4 Family     Commercial
and  		                         
  Residential     Multi-Family     Construction     Commercial     Consumer     Total   
2011                                      
Allowance for credit losses:                                                
Beginning Balance   $ 2,731,325     $ 281,762     $ 32,494     $ 268,411     $ 674,084     $ 3,988,076  
Charge-offs     (558,727 )     -       -       (90,694 )     (50,904 )     (700,325 )
Recoveries     -       -       -       -       1,309       1,309  
Provision for loan losses     340,372       178,225       65,331       51,338       (162,031 )     473,235  
Ending balance   $ 2,512,970     $ 459,987     $ 97,825     $ 229,055     $ 462,458     $ 3,762,295  
                                                 
Ending balance: individually evaluated for impairment   $ 371,554     $ -     $ -     $ -     $ 14,286     $ 385,840  
                                                 
Ending balance: collectively evaluated for impariment   $ 2,141,416     $ 459,987     $ 97,825     $ 229,055     $ 448,172     $ 3,376,455  
                                                 
Loan Receivables:                                                
Ending balance   $ 547,906,420     $ 77,072,427     $ 11,848,089     $ 23,937,050     $ 67,597,785     $ 728,361,771  
                                                 
Ending balance: individually evaluated for impairment   $ 5,573,490     $ 392,146     $ -     $ 318,230     $ 198,048     $ 6,481,914  
                                                 
Ending balance: collectively evaluated for impariment   $ 542,332,930     $ 76,680,281     $ 11,848,089     $ 23,618,820     $ 67,399,737     $ 721,879,857  
                                                 
2010                                                
Allowance for credit losses:                                                
Beginning Balance   $ 2,220,529     $ 524,107     $ 49,680     $ 275,826     $ 405,898     $ 3,476,040  
Charge-offs     (16,316 )     (35,347 )     -       (10,860 )     (317,232 )     (379,755 )
Recoveries     -       -       -       -       -       -  
Provision for loan losses     527,112       (206,998 )     (17,186 )     3,445       585,418       891,791  
Ending balance   $ 2,731,325     $ 281,762     $ 32,494     $ 268,411     $ 674,084     $ 3,988,076  
                                                 
Ending balance: individually evaluated for impairment   $ 359,300     $ -     $ -     $ 73,285     $ 49,510     $ 482,095  
                                                 
Ending balance: collectively evaluated for impariment   $ 2,372,025     $ 281,762     $ 32,494     $ 195,126     $ 624,574     $ 3,505,981  
                                                 
Loan Receivables:                                                
Ending balance   $ 514,853,007     $ 55,237,743     $ 11,508,991     $ 21,963,288     $ 57,894,587     $ 661,457,616  
                                                 
Ending balance: individually evaluated for impairment   $ 4,282,002     $ 729,289     $ -     $ 134,238     $ 76,845     $ 5,222,374  
                                                 
Ending balance: collectively evaluated for impariment   $ 510,571,005     $ 54,508,454     $ 11,508,991     $ 21,829,050     $ 57,817,742     $ 656,235,242  

 

Certain directors and officers of the Company have loans with the Bank. Repayments and other includes loans for which there was a change in employee status which resulted in a change in loan classification. Total loan activity for directors and officers was as follows:

  Years Ended December 31,   
    2011     2010     2009  
                   
Balance, beginning of year   $ 5,286,954     $ 5,128,215     $ 4,991,656  
Additions     858,000       160,750       605,000  
Repayments and other     (713,323 )     (458,681 )     (468,441 )
Balance, end of year   $ 5,431,631     $ 4,830,284     $ 5,128,215  

 

74
 

5. OFFICE PROPERTIES AND EQUIPMENT—NET

Office properties and equipment are summarized by major classification as follows:

  December 31,  
    2011     2010  
Land   $ 3,520,937     $ 3,215,775  
Buildings and improvements     13,460,171       12,717,379  
Furniture and equipment     6,872,155       6,079,969  
                 
Total     23,853,263       22,013,123  
Accumulated depreciation     (9,798,584 )     (9,107,597 )
                 
Net   $ 14,054,679     $ 12,905,526  

 

For the years ended December 31, 2011, 2010 and 2009, depreciation expense amounted to $934,075, $973,765, and $1,007,813, respectively.

6. DEPOSITS

Deposits consist of the following major classifications:

    December 31,  
    2011     2010  
          Weighted           Weighted  
          Average           Average  
    Amount     Interest Rate     Amount     Interest Rate  
                         
                         
NOW and other demand deposit accounts   $ 378,271,640       0.28 %   $ 289,903,528       0.66 %
Passbook savings and club accounts     130,324,314       0.46 %     102,467,025       1.07 %
                                 
Subtotal     508,595,954               392,370,553          
                                 
Certificates with original maturities:                                
Within one year     83,200,428       0.66 %     93,134,491       1.11 %
One to three years     135,954,595       1.76 %     94,347,156       2.17 %
Three years and beyond     24,703,934       3.10 %     23,482,226       3.48 %
                                 
Total certificates     243,858,957               210,963,873          
                                 
Total   $ 752,454,911             $ 603,334,426          

 

The aggregate amount of certificate accounts in denominations of $100,000 or more at December 31, 2011 and 2010 amounted to $90,275,593 and $83,439,728, respectively. Currently, deposit amounts in excess of $250,000 are generally not federally insured.

Municipal demand deposit accounts in denominations of $100,000 or more at December 31, 2011 and 2010 amounted to $118,827,074 and 108,593,238, respectively.

75
 

7. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK

Advances from the FHLB of New York are as follows:

    Interest     December 31,  
Due   Rate     2011     2010  
                   
December 17, 2014     3.765 %   $ 15,000,000     $ 15,000,000  
December 21, 2015     4.540 %     5,000,000       5,000,000  
April 11, 2016     4.795 %     10,000,000       10,000,000  
August 22, 2016     4.361 %     10,000,000       10,000,000  
February 28, 2017     4.070 %     10,000,000       10,000,000  
April 5, 2017     4.580 %     10,000,000       10,000,000  
June 22, 2017     4.609 %     20,000,000       20,000,000  
August 1, 2017     4.320 %     10,000,000       10,000,000  
November 16, 2017     3.875 %     20,000,000       20,000,000  
            $ 110,000,000     $ 110,000,000  

 

The advances are collateralized by FHLB stock and substantially all first mortgage loans. The carrying value of assets pledged to the FHLB of New York was $403,107,521 and $368,748,204 at December 31, 2011 and 2010, respectively.

The following table sets forth information concerning balances and interest rates on our FHLB advances at the dates and for the periods indicated.

    December 31,  
    2011     2010  
             
Weighted average balance during the period   $ 110,000,000     $ 110,000,000  
Maximum month-end balance during the period     110,000,000       110,000,000  
Balance outstanding at the end of the period     110,000,000       110,000,000  
                 
Weighted average interest rate during the period     4.23 %     4.23 %
Weighted average interest rate at the end of the period     4.23 %     4.23 %

 

Unused lines of credit and borrowing capacity available for short-term and long-term borrowings from the FHLB of New York at December 31, 2011 and 2010 were $262,607,521 and $212,748,204, respectively.

76
 

8. INCOME TAXES

The income tax provision consists of the following:

    Years Ended December 31,  
    2011     2010     2009  
Income taxes:                        
Current:                        
Federal   $ 2,756,149     $ 2,898,532     $ 2,929,213  
State     962,719       1,034,490       1,050,735  
Total current tax provision     3,718,868       3,933,022       3,979,948  
                         
Deferred:                        
Federal     (90,382 )     (292,597 )     (1,108,348 )
State     (97,092 )     (209,030 )     (256,978 )
Total deferred tax provision (benefit)     (187,474 )     (501,627 )     (1,365,326 )
                         
Total income tax provision   $ 3,531,394     $ 3,431,395     $ 2,614,622  

 

The Company’s provision for income taxes differs from the amounts determined by applying the statutory federal income tax rate to income before income before taxes as follows:

    Years Ended December 31,  
    2011     2010     2009  
    Amount     Percent     Amount     Percent     Amount     Percent  
                                     
Income tax expense at statutory rate   $ 2,920,524       34.0 %   $ 3,017,720       34.0 %   $ 2,320,848       34.0 %
State income taxes, net of federal benefit     571,320       6.7       544,810       6.1       523,879       7.7  
Changes in taxes resulting from:                                                
Tax exempt income     (201,920 )     (2.4 )     (211,336 )     (2.3 )     (171,772 )     (2.6 )
Non-deductible expenses     241,470       2.8       80,201       0.9       60,466       0.9  
(Decrease) Increase in valuation allowance     -       -       -       -       (118,799 )     (1.7 )
Total   $ 3,531,394       41.1 %   $ 3,431,395       38.7 %   $ 2,614,622       38.3 %

The effective tax rate for 2011 was 41.1% compared to 38.7% for 2010. The increase in the effective tax rate resulted from higher than normal non-deductible expenses associated with the acquisition of CBHC Financialcorp Inc. The effective tax rate for 2010 was 38.7% compared to 38.3% for 2009. The Company recorded a reduction of $119,000 in 2009 of a tax valuation allowance for charitable contributions carryover deduction resulting from higher than projected taxable income allowing for utilization of the remainder of the carryover.

77
 

 

Items that gave rise to significant portions of the deferred tax accounts are as follows:

 

    December 31,  
    2011     2010     2009  
Deferred tax assets:                        
Unrealized loss on available for sale securities   $ 301,364     $ 345,365     $ 598,712  
Allowance for loan losses     1,473,482       1,592,838       1,531,925  
Nonperforming loans     25,782       98,475       36,248  
Deferred compensation     370,663       361,698       311,744  
Employee benefits     1,563,732       1,334,055       1,173,549  
Other than temporary impairment     1,019,932       1,019,932       1,019,932  
Property     18,015       26,010       30,953  
Book/tax difference in assets acquired     879,892       -       -  
Other     50,367       37,059       26,976  
Total deferred tax assets     5,703,229       4,815,432       4,730,039  
Deferred tax liabilities:                        
Deferred loan fees     (1,181,065 )     (1,120,190 )     (1,151,950 )
Servicing     (5,486 )     (7,910 )     (12,453 )
Other     -       -       (3,508 )
IRC Section 475 mark-to-market     (32,466 )     (89,720 )     (212,796 )
Total deferred tax liabilities     (1,219,017 )     (1,217,820 )     (1,380,707 )
Net deferred tax asset   $ 4,484,212     $ 3,597,612     $ 3,349,332  

  

The Bank uses the specific charge-off method for computing reserves for bad debts. The bad debt deduction allowable under this method is available to large banks with assets over $500 million. Generally, this method allows the Bank to deduct an annual addition to the reserve for bad debts equal to its net charge-offs.

Pursuant to ASC-740, the Company is not required to provide deferred taxes on its tax loan loss reserve as of December 31, 1987. The amount of this reserve on which no deferred taxes have been provided is approximately $2.4 million and is included in retained earnings at December 31, 2011 and 2010. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if one of the following occur: (1) the Company’s retained earnings represented by this reserve are used for distributions in liquidation or for any other purpose other than to absorb losses from bad debts; (2) the Company fails to qualify as a Bank, as provided by the Internal Revenue Code; or (3) there is a change in federal tax law.

The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. As of December 31, 2011, the tax years ended December 31, 2008 through 2011 were subject to examination by the Internal Revenue Service, while the tax years ended December 31, 2007 through 2011 were subject to state examination. As of December 31, 2011 the Internal Revenue Service is reviewing the Company’s 2009 tax return.

78
 

9. JUNIOR SUBORDINATED DEBENTURES

In 1998, Ocean Shore Capital Trust I (the “Trust”), a trust created under Delaware law that is wholly owned by the Company, issued $15 million of 8.67% Capital Securities (the “Capital Securities”) with a liquidation amount of $1,000 per Capital Security unit and a scheduled maturity of July 15, 2028. The proceeds from the sale of the Capital Securities were utilized by the Trust to invest in $15.5 million of 8.67% Junior Subordinated Deferrable Interest Debentures (the “Debentures”) of the Company. The Debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Interest on the Capital Securities is cumulative and payable semi-annually in arrears. The Company has the option, subject to required regulatory approval, to prepay the Debentures in whole or in part, at various prepayment prices, plus accrued and unpaid interest thereon to the date of the prepayment.

10. COMMITMENTS AND CONTINGENCIES

Loan Commitments — As of December 31, 2011, the Company had approximately $20,120,828 in outstanding commitments to originate fixed and variable rate loans with market interest rates ranging from 3.75% to 5.00% and approximately $46,908,614 in unused lines of credit with interest rates ranging from 2.75% to 6.50% on outstanding balances. Commitments are issued in accordance with the same policies and underwriting procedures as settled loans.

Lease Commitment — The Company leases certain property and equipment under non-cancellable operating leases. Scheduled minimum lease payments are as follows as of December 31, 2011: 

Year Ending December 31      
2012   $ 245,554  
2013     187,755  
2014     166,769  
2015     171,523  
2016     146,371  
Thereafter     427,520  
Total   $ 1,345,492  

 

Rent expense for all operating leases was approximately $221,868, $121,637and $143,849 for the years ended December 31, 2011, 2010 and 2009, respectively.

Cash Reserve Requirement —The Bank is required to maintain average reserve balances under the Federal Reserve Act and Regulation D issued thereunder. Such reserves totaled approximately $100,000 at December 31, 2011 and 2010.

Restrictions on Funds Transferred —There are various restrictions which limit the ability of a bank subsidiary to transfer funds in the form of cash dividends, loans or advances to the parent company. Under federal law, the approval of the primary regulator is required if dividends declared by the Bank in any year exceed the net profits of that year, as defined, combined with the retained profits for the two preceding years.

Employment Contracts —The Bank has entered into employment contracts with several officers of the Bank whereby such officers would be entitled to a cash payment equal to 2 or 3 years annual compensation, depending on the officer, in the event of a change of control or other specified reasons.

11. EARNINGS PER SHARE

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

79
 

The calculated basic and diluted earnings per share (“EPS”) are as follows:

 

 

    December 31,  
    2011     2010     2009  
                   
Numerator – Net Income   $ 5,058,384     $ 5,444,236     $ 4,211,401  
Denominators:                        
Basic average shares outstanding     6,748,334       6,798,317       7,064,161  
Net effect of dilutive common stock equivalents     83,655       -       48,365  
Diluted average shares outstanding     6,831,989       6,798,317       7,112,526  
                         
Earnings per share:                        
Basic   $ 0.75     $ 0.80     $ 0.60  
Diluted   $ 0.74     $ 0.80     $ 0.59  

  

At December 31, 2011, 2010 and 2009 there were 650,804, 587,504 and 373,592 outstanding options that were anti-dilutive, respectively.

12. REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total adjusted assets (as defined), and of risk-based capital (as defined) to risk-weighted assets (as defined). Management believes that, as of December 31, 2011 and 2010 , the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 2011 and 2010, the most recent notification from the OCC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum tangible, core and risk-based ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

80
 

The Bank’s actual capital amounts and ratios are also presented in the table.

                            Required To Be  
                Required     Considered Well  
                For Capital     Capitalized Under Prompt  
    Actual     Adequacy Purposes     Corrective Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
                                     
As of December 31, 2011:                                                
Tangible capital   $ 95,227,000       9.72 %   $ 14,698,000       1.50 %     N/A       N/A  
Core capital     95,227,000       9.72       39,196,000       4.00     $ 58,794,000       6.00 %
Tier 1 risk-based capital     95,227,000       19.40        N/A       N/A       30,476,000       6.00  
Total risk-based capital     98,540,000       18.75       40,635,000       8.00       50,794,000       10.00  
                                                 
As of December 31, 2010:                                                
Tangible capital   $ 86,261,000       10.39 %   $ 12,451,000       1.50 %     N/A       N/A  
Core capital     86,261,000       10.39       33,203,000       4.00     $ 49,804,500       6.00 %
Tier 1 risk-based capital     86,261,000       19.41        N/A       N/A       26,659,500       6.00  
Total risk-based capital     89,779,000       20.21       35,546,000       8.00       44,432,500       10.00  

Capital levels at December 31, 2011 and 2010 for the Bank represents only the capital maintained at the Bank level, which is less than the capital of the Company.

Federal banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total dividends that may be paid at any date is generally limited to the earnings of the Bank for the year to date plus retained earnings for the prior two years, net of any prior capital distributions. In addition, dividends paid by the Bank to the Company would be prohibited if the distribution would cause the Bank’s capital to be reduced below the applicable minimum capital requirements. For the period ended December 31, 2011 the Bank paid $3,200,000 in dividends to the Company. For the period ended December 31, 2010 the Bank paid $1,500,000 in dividends to the Company.

13. BENEFIT PLANS

401(k) Plan

The Company maintains an approved 401(k) Plan. All employees age 18 and over are eligible to participate in the plan at the beginning of the quarter after hire date. The employees may contribute up to 100% of their compensation, subject to IRS limitations, to the plan with the Company matching one-half of the first eight percent contributed. Full vesting in the plan is prorated equally over a five-year period from the date of employment. The Company’s contributions to the 401(k) Plan for the years ended December 31, 2011, 2010 and 2009 were $182,560, $186,351 and $177,729, respectively, and were included as a component of “Salaries and employee benefits” expense.

Deferred Compensation Plans

The Bank maintains a deferred compensation plan whereby certain officers will be provided supplemental retirement benefits for a period of fifteen or twenty years following normal retirement. The benefits under the plan are fully vested for all officers. The Company makes annual contributions, based upon an accrued liability schedule, to a trust for each respective officer organized by the Company to administer the plan so that the amounts required will be provided at the normal retirement dates and thereafter. Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 2013 and 2031. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of employment, or death. The contributions to the plan for the years ended December 31, 2011, 2010 and 2009 were $479,000, $441,000 and $362,000, respectively, and were included as a component of “Salaries and employee benefits” expense in the statement of income. The accrued liability included as a component of “Other liabilities” in the statement of financial condition was $2,852,600, $2,373,500 and $1,932,100 for the years ended December 31, 2011, 2010 and 2009, respectively.

The Bank maintains a directors’ deferred compensation plan whereby directors may defer into a retirement account a portion of their monthly director fees for a specified period to provide a specified amount of income for a period of five to ten years following normal retirement. The Company also accrues the interest cost on the deferred fee obligation so that the amounts required will be provided at the normal retirement dates and thereafter. Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 2011 and 2029. Payments of $97,653 were made from the plan in 2011. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of service, or death. At December 31, 2011 and 2010, the accrued deferred compensation liability amounted to approximately $928,049 and $905,603, respectively, and is included as a component of “Other Liabilities” in the statement of financial condition. The contributions to the plan for the years ended December 31, 2011, 2010 and 2009 were $83,849, $116,513 and $135,799, respectively, and were included as a component of “Salaries and employee benefits” expense.

81
 

The Bank is the owner and primary beneficiary of insurance policies on the lives of participating officers and directors. Such policies were purchased to informally fund the benefit obligations and to allow the Company to honor its contractual obligations in the event of pre-retirement death of a covered officer or director. Certain of the insurance policies owned by the Bank are policies under which the employee’s designated beneficiary is entitled to part of the policy benefits upon the death of the employee. The aggregate cash surrender value of all policies owned by the Company amounted to $18,812,572 and $14,890,745 at December 31, 2011 and 2010.

During 2004, a Deferred Compensation Stock Plan was established creating a rabbi trust to fund benefit plans for certain officers and directors to acquire shares through deferred compensation plans. During the years ended December 31, 2011 and 2010, 1,370 and 1,122 shares of the Company’s stock were purchased for $16,007 and $12,208, respectively, at various market prices.

Employee Stock Ownership Plan

In December 2004, the Company established an Employee Stock Ownership Plan ("ESOP") covering all eligible employees as defined by the ESOP. The ESOP is a tax-qualified plan designed to invest primarily in the Company’s common stock that provides employees with the opportunity to receive a funded retirement benefit based primarily on the value of the Company’s common stock.

To purchase the Company’s common stock in December 2004, the ESOP borrowed $3.4 million from the Company to purchase 343,499 shares of the Company’s common stock in the initial public offering. The ESOP loan is being repaid principally from the Bank's contributions to the ESOP over a period of up to 15 years. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. The number of shares released annually is based upon the ratio that the current principal and interest payment bears to the current and all remaining scheduled future principal and interest payments.

To purchase the Company’s common stock in December 2009, the ESOP borrowed $2.3 million from the Company to purchase 282,611 shares of the Company’s common stock in its second step offering. The ESOP loan is being repaid principally from the Bank's contributions to the ESOP over a period of up to 20 years. Dividends declared on common stock held by the ESOP and not allocated to the account of a participant can be used to repay the loan. The number of shares released annually is based upon the ratio that the current principal and interest payment bears to the current and all remaining scheduled future principal and interest payments.

All shares that have not been released for allocation to participants are held in a suspense account by the ESOP for future allocation as the loan is repaid. Unallocated common stock purchased by the ESOP is recorded as a reduction of stockholders' equity at cost. During the years ended December 31, 2011, 2010 and 2009, the Company recorded an expense related to this plan of approximately $397,149, $366,309 and $169,000, respectively.

82
 

Stock Option Plan

A summary of the status of the Company’s stock options under the Equity Plans as of December 31, 2011, 2010 and 2009 and changes during the periods ended December 31, 2011, 2010 and 2009 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:

    Year Ended     Year Ended     Year Ended  
    December 31, 2011     December 31, 2010     December 31, 2009  
    Number of shares     Weighted average exercise price     Number of shares     Weighted average exercise price     Number of shares     Weighted average exercise price  
Outstanding at the                                                
beginning of the period     587,504     $ 13.10       373,592     $ 13.10       373,592     $ 13.10  
Granted     66,618       11.64       257,010       10.21       -       -  
Exercised     -       -       -       -       -       -  
Forfeited     (3,318 )     10.65       (43,098 )     12.03       -       -  
Outstanding at the end of the period     650,804     $ 11.90       587,504     $ 11.92       373,592     $ 13.10  
                                                 
Exercisable at the end of the period     386,365     $ 12.79       329,354     $ 13.16       281,244     $ 13.17  
                                                 
Stock options vested or                                                
expected to vest (1)     586,624     $ 11.90                                  

 

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

The weighted average grant date fair value of options granted for the years ended December 31, 2011 and 2010 was $2.77 per share. The Company did not grant any options during the years ended December 31, 2009. No options were exercised during 2011, 2010 or 2009. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2011, 2010 and 2009 was $0.

The following table summarizes all stock options outstanding under the Equity Plan as of December 31, 2011: 

    Options Outstanding  
Date Issued   Number of Shares     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life  
                (in years)  
August 10, 2005     294,127     $ 13.19       3.6  
November 21, 2006     19,784       14.78       4.9  
November 20, 2007     30,665       11.32       5.9  
August 18, 2010     239,610       10.21       8.6  
March 15, 2011     13,600       12.06       9.2  
August 17, 2011     53,018       11.53       9.6  
Total     650,804     $ 11.90       6.2  

 

At December 31, 2011, there was $689,408 of total unrecognized compensation cost related to options granted under the stock option plans. That cost is expected to be recognized over a weighted average period of 3.6 years.

The compensation expense recognized for the period ended December 31 2011 and 2010 was $138,283 and $91,730, respectively.

83
 

Summary of Non-vested Stock Award activity:

    Year Ended     Year Ended     Year Ended  
    December 31, 2011     December 31, 2010     December 31, 2009  
    Number of shares     Weighted average exercise price     Number of shares     Weighted average exercise price     Number of shares     Weighted average exercise price  
                                     
Outstanding at the beginning of the period     99,000     $ 10.21       30,125     $ 13.19       60,250     $ 13.19  
Issued     4,950       12.06       99,000       10.21       -       -  
Vested     18,810       10.21       30,125       13.19       30,125       13.19  
Forfeited     4,950       10.21       -       -       -       -  
Outstanding at the end of the period     80,190     $ 10.32       99,000     $ 10.21       30,125     $ 13.19  

  

As of December 31, 2011, there was $845,083 of total unrecognized compensation costs related to nonvested stock awards. That cost is expected to be recognized over a weighted average period of 3.6 years.

The compensation expense recognized for the period ended December 31, 2011 and 2010 was $201,584 and $307,599, respectively.

14. FAIR VALUE MEASUREMENT

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

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

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

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

 

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

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

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

84
 

Those assets as of December 31, 2011 measured at fair value on a recurring basis are as follows:

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

  

Those assets as of December 31, 2010 measured at fair value on a recurring basis are as follows:

    Category Used for Fair Value Measurement  
    Level 1     Level 2     Level 3  
Assets:                        
Securities available for sale:                        
U.S. Government agencies and mortgage-backed securities     -     $ 13,404,677       -  
State and municipal obligations     -       1,431,381       -  
Corporate securities     -       6,403,036     $ 200  
Equity securities   $ 14,381       -       -  
Totals   $ 14,381     $ 21,239,094     $ 200  

  

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

85
 

The following provides details of the fair value measurement activity for Level 3 for the year ended December 31, 2011: 

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

 

(1) Amount includes an impairment charge on Available For Sale securities reflected in Consolidated Statement of Income
(2) Transfer into level 3 are assumed to occur at the end of the quarter in which they take place.

 

The following provides details of the fair value measurement activity for Level 3 for the year-ended December 31, 2010:

    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
    Trust Preferred     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 calls, net     -       -  
Transfers into Level 3 (2)     -       -  
Balance, December 31, 2010   $ 200     $ 200  

 

(1) Amount includes an impairment charge on Available For Sale securities reflected in Consolidated Statement of Income
(2) Transfer into level 3 are assumed to occur at the end of the quarter in which they take place.

 

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 not 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.

86
 

Impaired Loans

    Category Used for Fair Value Measurement  
    Total     Level 1     Level 2     Level 3     Total (Losses) Gains  
December 31, 2011                                        
Assets:                                        
Impaired loans   $ 2,914,585     $ ─     $ 2,914,585     $ ─     $ (505,097 )
                                         
Dcember 31, 2010                                        
Assets:                                        
Impaired loans   $ 921,995     $ ─     $ 369,017     $ 552,978     $ (482,095 )
Real estate owned     97,500       ─       97,500       ─       ─  

  

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; such valuation inputs result in a fair value measurement that is categorized as Level 2 on a nonrecurring basis. In some cases, adjustments are made to the appraised values for various factors including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement.

Loans remeasured at fair value December 31, 2011 and 2010 totaled $2,914,585 and $921,995, respectively. Such loans were carried at the value of $3,419,682 and $1,211,560 immediately prior to remeasurement, resulting in recognition of impairment through earnings in the amount of $505,097 and $482,095 for the year ended December 31, 2011 and 2010, respectively.

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. The fair value of foreclosed real estate is generally based on estimated market prices from independently prepared appraisals or negotiated sales prices with potential buyers; such valuation inputs result in a fair value measurement that is categorized as Level 2 on a nonrecurring basis. At December 31, 2010, the Company deemed one loan uncollectible and took possession of the underlying collateral. The collateral underlying the loan had a fair value of $97,500 resulting in no required adjustment for the year ended December 31, 2010.

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.

87
 

    December 31, 2011     December 31, 2010  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
                         
Assets:                                
Cash and cash equivalents   $ 155,652,941     $ 155,652,941     $ 110,865,154     $ 110,865,154  
Investment securities:                                
Held to maturity     5,964,393       6,147,579       2,467,418       2,683,725  
Available for sale     46,767,668       46,767,668       21,253,675       21,253,675  
Loans receivable, net     727,626,278       742,868,929       660,340,007       672,130,581  
Federal Home Loan Bank stock     6,434,800       6,434,800       6,271,600       6,271,600  
                                 
Liabilities:                                
NOW and other demand                                
deposit accounts     378,271,640       386,987,640       289,903,528       297,533,528  
Passbook savings and club accounts     130,324,313       137,074,313       102,467,025       107,987,025  
Certificates     243,858,957       242,343,751       210,963,873       210,964,376  
Advances from Federal Home Loan Bank     110,000,000       131,036,958       110,000,000       121,188,927  
Junior subordinated debenture     15,464,000       10,824,800       15,464,000       9,278,400  

 

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.

Federal Home Loan Bank (FHLB) Stock— Although FHLB stock is an equity interest in an FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. While certain conditions are noted that required management to evaluate the stock for impairment, it is currently probable that the Company will realize its cost basis. Management concluded that no impairment existed as of December 31, 2011 and 2010. The estimated fair value approximates the carrying amount.

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

88
 

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

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

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

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2011 and 2010. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since December 31, 2011 and 2010, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

15. MERGER WITH CBHC FINANCIALCORP, INC.

On August 1, 2011, the Company acquired CBHC Financialcorp, Inc. (“CBHC”) and its wholly-owned subsidiary, Select Bank, a federally chartered savings bank located in Egg Harbor City, New Jersey with $131 million in assets. The total cost of the transaction was $12.5 million. Following the acquisition of CBHC, Select Bank was merged into Ocean City Home Bank.

The CBHC transaction has been accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information such as updated appraisals and pending tax liens on commercial real estate loans relative to closing date fair value becomes available. Assets acquired totaled $131.0 million, including $81.6 million in loans, $5.6 in investment securities, $39.5 million in cash and cash equivalents and $0.7 million of intangibles. Liabilities assumed totaled $123.8 million, including $122.9 million of deposits.

Goodwill of $5.3 million is calculated as the purchase premium after adjusting for the fair value of net assets acquired and consists largely of the synergies and economies of scale expected from combining the operations of the Company and CBHC.

89
 

The following table summarizes the consideration paid for CBHC and the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date:

Consideration paid:        
Cash   $ 12,458,900  
Total purchase price   $ 12,458,900  
         
Identifiable assets:        
Cash and cash equivalents   $ 39,512,785  
Investment securities     5,641,017  
Loans     81,607,823  
Office properties and equipment     1,134,027  
Core deposit intangible     667,000  
Other assets     2,392,009  
Total identifiable assets   $ 130,954,661  
         
Liabilities:        
Deposits   $ 122,879,324  
Other liabilities     896,046  
Total liabilities   $ 123,775,370  
         
Net identifiable assets acquired   $ 7,179,291  
Goodwill     5,279,609  
Net assets acquired   $ 12,458,900  

 

In many cases, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the fair valuation of acquired loans. The acquired loan portfolios were segregated into categories for valuation purposes primarily based on loan type and payment status (performing or nonperforming). The estimated fair values were computed by discounting the expected cash flows from the respective portfolios. Management estimated the cash flows expected to be collected at the acquisition date by using valuation models that incorporated estimates of current key assumptions, such as prepayment speeds, default rates, and loss severity rates. Prepayment assumptions were developed by reference to recent or historical prepayment speeds observed for loans with similar underlying characteristics. Prepayment assumptions were influenced by many factors including, but not limited to, forward interest rates, loan and collateral types, payment status, and current loan-to-value ratios. Default and loss severity rates were developed by reference to recent or historical default and loss rates observed for loans with similar underlying characteristics. Default and loss severity assumptions were influenced by many factors including, but not limited to, underwriting processes and documentation, vintages, collateral types, collateral locations, estimated collateral values, loan-to-value ratios, and debt-to-income ratios.

The expected cash flows from the acquired loan portfolios were discounted at estimated market rates. The market rates were estimated using a buildup approach which included assumptions with respect to funding cost and funding mix, estimated servicing cost, liquidity premium, and additional spreads, if warranted, to compensate for the uncertainty inherent in the acquired loans. The methods used to estimate the fair values of the covered loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable are accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” Such loans were initially recorded at fair value (as determined by the present value of expected future cash flows) with no carry-over valuation allowance (i.e., the allowance for loan losses) of CBHC’s previously established allowance for loan losses. Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The difference between the undiscounted cash flows expected at acquisition and the investment in the covered loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses.

90
 

The following is a summary of the loans acquired in the CBHC acquisition:

    Acquired Credit Impaired Loans     Acquired Non-Credit Impaired Loans     Total Acquired Loans  
Contractually required principal and interest at acquisition   $ 7,485,790     $ 76,525,993     $ 84,011,783  
Contractual cash flows not expected to be collected     (2,380,691 )     (1,455,269 )     (3,835,960 )
Expected cash flows at acquisition     5,105,099       75,070,724       80,175,823  
Interest component of expected cash flows     91,459       1,340,541       1,432,000  
Fair value of acquired loans   $ 5,196,558     $ 76,411,265     $ 81,607,823  

  

The core deposit intangible is being amortized over its estimated useful life of approximately 15 years, using an accelerated method. Goodwill, which is not amortized for book purposes, is not deductible for tax purposes.

The fair value of checking, savings and money market deposit accounts acquired from CBHC were assumed to approximate the carrying value as the accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued as the present value of the certificates’ expected contracted payments discounted at market rates for similar certificates.

Direct costs related to the CBHC acquisition were expensed as incurred. During the three and twelve months ended December 31, 2011, the Company incurred $90 thousand and $826 thousand, respectively, of acquisition-related expenses. Such expenses were for professional services, fees associated with the conversion of systems and integration of operations, costs related to office consolidations, marketing and promotion expenses, retention and severance compensation costs, and other costs.

The operating results of the Company for the period ended December 31, 2011 include the operating results of the acquired assets and assumed liabilities for the 153 days from the acquisition date of August 1, 2011. The operation of CBHC provided $1.4 million in revenue, net of interest expense, and $579 thousand in net income for the period from the acquisition and is included in the consolidated financial statements. CBHC’s results of operations prior to the acquisition are not included in the Company’s consolidated statement of income.

91
 

The following table presents certain pro forma information as if CBHC had been acquired on January 1, 2010. This information combines the historical results of CBHC into the unaudited Company’s consolidated statement of income, with adjustments to reflect certain fair valuation adjustments and acquisition-related activity. The Company expects to achieve operating cost savings and other business synergies as a result of the acquisition that are not reflected in the pro forma amounts. These pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

    Unaudited
Pro Forma Years Ended 		 
    December 31,  
    2011     2010  
Total revenues (a)   $ 31,908,124     $ 32,140,251  
Net income   $ 5,116,365     $ 6,680,895  

 

(a) Represents net interest income plus other income.

16. REAL ESTATE OWNED

Summary of Real Estate Owned Activity: 

    2011     2010  
    Residential Property     Total     Residential Property     Total  
Balance, January 1,   $ 97,500     $ 97,500     $ 97,500     $ 97,500  
Transfers into Real Estate Owned     206,421       206,421       -       -  
Sales of Real Estate Owned     (206,421 )     (206,421 )     -       -  
Balance, December 31,   $ 97,500     $ 97,500     $ 97,500     $ 97,500  

  

17. RELATED PARTY TRANSACTION

The Company obtains legal services from McCrosson and Stanton, a legal firm located in Ocean City, NJ. Dorothy F. McCrosson, a Director at the Company since January 2011, is Managing Partner at McCrosson and Stanton. Legal fees paid to McCrosson and Stanton were $136,000, $114,000 and $117,000 during the years ended December 31, 2011, 2010 and 2009, respectively.

92
 

18. PARENT ONLY FINANCIAL INFORMATION

The following are the condensed financial statements for Ocean Shore Holding Co. (Parent company):

CONDENSED STATEMENTS OF FINANCIAL CONDITION - PARENT ONLY
    December 31,  
    2011     2010  
Assets:                
Cash and cash equivilents   $ 5,924,465     $ 1,309,544  
Investment securities     5,254,248       7,102,002  
Investment in subsidiary     102,142,936       87,040,174  
Other assets     7,110,297       20,894,990  
Total assets   $ 120,431,946     $ 116,346,710  
                 
Liabilities:                
Securities sold under agreements to repurchase   $ -     $ -  
Junior subordinated debenture     15,464,000       15,464,000  
Other liabilities     288,342       329,193  
Total liabilities     15,752,342       15,793,193  
Stockholders' equity     104,679,604       100,533,517  
Total liabilities and stockholders' equity   $ 120,431,946     $ 116,326,710  

 

CONDENSED STATEMENTS OF INCOME - PARENT ONLY            
    Years Ended December 31,  
    2011     2010     2009  
                   
Interest income   $ 659,126     $ 897,594     $ 775,412  
Interest expense     1,340,729       1,340,729       1,340,729  
Net interest loss     (681,603 )     (443,135 )     (565,317 )
Impairment charges on AFS securities     -       -       1,077,400  
Other expenses     158,543       170,283       159,562  
Loss before income tax benefit and                        
equity in undistributed earnings in subsidiary     (840,146 )     (613,418 )     (1,802,279 )
Income tax     (285,649 )     (208,562 )     (612,775 )
Loss before equity in undistributed earnings in subsidiary     (554,497 )     (404,856 )     (1,189,504 )
Equity in undistributed earnings of subsidiary     5,612,881       5,849,092       5,400,905  
Net income   $ 5,058,384     $ 5,444,236     $ 4,211,401  

 

93
 

CONDENSED STATEMENTS OF CASH FLOWS - PARENT ONLY

 

    Years Ended December 31,  
    2011     2010     2009  
OPERATING ACTIVITIES:                        
Net income   $ 5,058,384     $ 5,444,236     $ 4,211,401  
Equity in undistributed earnings in subsidiary     (5,612,881 )     (5,849,092 )     (5,400,905 )
Impairment charges on AFS securities     -       -       1,077,400  
Net amortization of investment premiums/discounts     4,774       8,075       12,246  
Dividends from subsidiary     3,200,000       -       -  
Changes in assets and liabilities which provided (used) cash:                        
Accrued interest receivable     26,114       5,403       10,643  
Prepaid expenses and other assets     13,474,312       (1,636,715 )     (12,160,100 )
Other liabilities     (39,449 )     648,163       (259,496 )
Intercompany payables     (1,402 )     1,402       (3,032,813 )
                         
Net cash (provided by) used in operating activities     16,109,852       (1,378,528 )     (15,541,624 )
                         
INVESTING ACTIVITIES:                        
Principal repayment of mortgage backed securities held to maturity     426,240       562,154       537,431  
Principal repayment of mortgage backed securities available for sale     877,761       1,115,629       1,524,575  
ESOP loan to Ocean City Home Bank     -       -       (2,260,888 )
Principal payments on ESOP loan     297,520       281,706       192,015  
Proceeds from call of investment secruities available for sale     500,000       -       -  
Net cash (used in) provided by investing activities     2,101,521       1,959,489       (6,867 )
                         
FINANCING ACTIVITIES:                        
Stock retirement     (59,024 )     (115,208 )     (97,022 )
Proceeds from issuance of common stock     -       (15,998 )     30,521,254  
Capital contribution to subsidiary     -       7,999       (15,260,627 )
Dividends received     -       1,500,000       1,219,162  
Dividends paid     (1,750,919 )     (1,753,190 )     (711,880 )
Cash used for acquisition, net of cash acquired     (11,786,509 )     -       -  
Net cash provided by (used in) financing activities     (13,596,452 )     (376,397 )     15,670,887  
Net increase in cash & cash equivalents     4,614,921       204,564       122,396  
Cash and cash equivalents - beginning     1,309,544       1,104,980       982,584  
Cash and cash equivalents - ending   $ 5,924,465     $ 1,309,544     $ 1,104,980  

94
 

 

 

19. QUARTERLY FINANCIAL DATA (unaudited)

    Quarter Ended   
    March 31,     June 30,     September 30,     December 31,  
    2011     2011     2011     2011  
    (Dollars in thousands)  
Total interest income   $ 9,038     $ 9,168     $ 9,998     $ 9,883  
Total interest expense     3,063       3,005       3,221       2,896  
                                 
Net interest income     5,975       6,163       6,777       6,987  
Provision for loan losses     75       128       141       129  
Net interest income after provision for loan losses     5,900       6,035       6,636       6,858  
                                 
Other income     802       862       935       939  
Other expense     4,656       4,810       5,521       5,389  
                                 
Income before income taxes     2,046       2,087       2,050       2,408  
Income taxes     841       929       835       927  
Net income   $ 1,205     $ 1,158     $ 1,215     $ 1,481  
                                 
Earnings per share basic (1)   $ 0.18     $ 0.17     $ 0.18     $ 0.22  
Earnings per share diluted (1)   $ 0.18     $ 0.17     $ 0.18     $ 0.22  

 

    Quarter Ended  
    March 31,     June 30,     September 30,     December 31,  
    2010     2010     2010     2010  
    (Dollars in thousands)  
Total interest income   $ 9,505     $ 9,494     $ 9,447     $ 9,270  
Total interest expense     3,524       3,441       3,506       3,357  
                                 
Net interest income     5,981       6,053       5,941       5,913  
Provision for loan losses     152       540       125       76  
Net interest income after provision for loan losses     5,829       5,513       5,816       5,837  
                                 
Other income     807       886       836       874  
Other expense     4,452       4,375       4,319       4,377  
Income before income taxes     2,184       2,024       2,333       2,334  
Income taxes     848       785       892       906  
                                 
Net income   $ 1,336     $ 1,239     $ 1,441     $ 1,428  
                                 
Earnings per share basic (1)   $ 0.20     $ 0.18     $ 0.21     $ 0.21  
Earnings per share diluted (1)   $ 0.20     $ 0.18     $ 0.21     $ 0.21  

 

(1) Earnings per share are computed independently for each period presented. Consequently, the sum of the quarters may not equal the total earnings per share for the year

  

95
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

(a) Disclosure Controls and Procedures

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

 

(b) Internal Controls over Financial Reporting

 

Management’s annual report on internal control over financial reporting is located on page 49 of this Form 10-K.

 

Report of Independent Registered Public Accounting Firm is located on page 50 of this Form 10-K.

 

(c) Changes to Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

96
 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information relating to the directors and officers of Ocean Shore Holding, information regarding compliance with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee financial expert is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2012 Annual Meeting of Stockholders and to Part I, Item 1, “Business — Executive Officers of the Registrant” to this Annual Report on Form 10-K.

 

Ocean Shore Holding has adopted a code of ethics that applies to its principal executive officer, the principal financial officer and principal accounting officer. See Exhibit 14.0 to this Annual Report on Form 10-K.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information regarding executive compensation is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2012 Annual Meeting of Stockholders.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

 

(a) Security Ownership of Certain Beneficial Owners

 

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in Ocean Shore Holding’s Proxy Statement for the 2012 Annual Meeting of Stockholders.

 

(b) Security Ownership of Management

 

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in Ocean Shore Holding’s Proxy Statement for the 2012 Annual Meeting of Stockholders.

 

 

(c) Changes in Control

 

Management of Ocean Shore Holding knows of no arrangements, including any pledge by any person or securities of Ocean Shore Holding, the operation of which may at a subsequent date result in a change in control of the registrant.

 

(d) Equity Compensation Plan Information

 

The following table sets forth information as of December 31, 2011 about Company common stock that may be issued upon the exercise of options under the Ocean Shore Holding Co. 2005 Equity Incentive Plan. The plan was approved by the Company’s stockholders.

 

97
 

 

Plan Category  

Number of securities

to be issued upon

the exercise of

outstanding options,

warrants and rights

 

Weighted-average

exercise price of

outstanding options,

warrants and rights

 

Number of securities

remaining available

for future issuance under equity compensation plans (excluding securities reflected in the first column)

             

Equity compensation plans approved by security holders

   650,804   $11.90   80,008
             

Equity compensation plans not approved by security holders

   —   —   —
             
Total   650,804   $11.90   80,008

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2012 Annual Meeting of Stockholders.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information relating to the principal accountant fees and expenses is incorporated herein by reference to Ocean Shore Holding’s Proxy Statement for the 2012 Annual Meeting of Stockholders.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(1) The financial statements required in response to this item are incorporated by reference from Item 8 of this report.

 

(2) All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

 

(3) Exhibits

 

Exhibit No.                                   Description Incorporated by Reference to:
3.1 Certificate of Incorporation of Ocean Shore Holding Co. Exhibit 3.1 to Registration Statement on Form S-1 (File No. 333-153454), as amended, initially filed on September 12, 2008.
3.2 Bylaws of Ocean Shore Holding Co. Exhibit 3.2 to Registration Statement on Form S-1 (File No. 333-153454), as amended, initially filed on September 12, 2008.

 

98
 

 

Exhibit No.                                   Description Incorporated by Reference to:
4.1 No long-term debt instrument issued by Ocean Shore Holding Co. exceeds 10% of consolidated assets or is registered. In accordance with paragraph 4(iii) of Item 601(b) of Regulation S-K, Ocean Shore Holding Co. will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request  

10.1*

 

Amended and Restated Employment Agreement by and between Ocean Shore Holding Co., Ocean City Home Bank and Steven E. Brady Exhibit 10.1 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.2* Amended and Restated Salary Continuation Agreement by and between Ocean City Home Bank and Steven E. Brady Exhibit 10.0 to Form 10-Q for the quarter ended June 30, 2008, SEC File No 000-51000.
10.3* Salary Continuation Agreement by and between Ocean City Home Bank and Kim M. Davidson and all amendments thereto Exhibit 10.1 to Form 8-K filed on April 22, 2010, SEC File No. 000-53856.
10.4* Salary Continuation Agreement by and between Ocean City Home Bank and Anthony J. Rizzotte and all amendments thereto Exhibit 10.9 to Registration Statement on Form S-1 (File No. 333-118597), as amended, initially filed on August 27, 2004.
10.5* Split Dollar Life Insurance Agreement by and between Ocean City Home Bank and Steven E. Brady Exhibit 10.10 to Registration Statement on Form S-1 (File No. 333-118597), as amended, initially filed on August 27, 2004.
10.6* Split Dollar Life Insurance Agreement by and between Ocean City Home Bank and Kim M. Davidson Exhibit 10.2 to Form 8-K filed on April 22, 2010, SEC File No. 000-53856.
10.7* Split Dollar Life Insurance Agreement by and between Ocean City Home Bank and Anthony J. Rizzotte Exhibit 10.11 to Registration Statement on Form S-1 (File No. 333-118597), as amended, initially filed on August 27, 2004.
10.8* Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Anthony J. Rizzotte Exhibit 10.6 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.9* Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Donald Morgenweck Exhibit 10.7 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.10* Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Kim M. Davidson Exhibit 10.8 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.11* Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Janet Bossi) Exhibit 10.9 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.12* Amended and Restated Change in Control Agreement by and between Ocean City Home Bank and Paul Esposito Exhibit 10.10 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.

 

99
 

 

Exhibit No.                                   Description Incorporated by Reference to:
10.13* Amended and Restated Ocean City Home Bank Directors’ Deferred Compensation Plan Exhibit 10.11 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.14* Ocean City Home Bank Director and Executive Life Insurance Plan Exhibit 10.12 to Registration Statement on Form S-1 (File No. 333-118597), as amended, initially filed on August 27, 2004.
10.15* Amended and Restated Ocean City Home Bank Supplemental Executive Retirement Plan Exhibit 10.13 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.16 Amended and Restated Ocean City Home Bank Change in Control Severance Compensation Plan Exhibit 10.14 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.17* Ocean City Home Bank Stock-Based Deferred Compensation Plan, as amended Exhibit 10.15 to Form 10-K for the year ended December 31, 2008, SEC File No. 000-51000.
10.18* Ocean Shore Holding Co. 2005 Equity Incentive Plan Appendix A to definitive Proxy Statement filed on June 7, 2005, SEC File No. 000-51000.
10.19* Ocean Shore Holding Co. 2010 Equity Incentive Plan Appendix A to definitive Proxy Statement filed on May 19, 2010, SEC File No. 000-51000.
10.20* Form of Restricted Stock Award Agreement, Form of Non-Statutory Stock Option Award Agreement, and Form of Incentive Stock Option Award Agreement for the Ocean Shore Holding Co. 2005 Equity Incentive Plan Exhibit 10 to Registration Statement on Form S-8 (File No. 333-121595) filed on August 15, 2005.
10.21* Form of Incentive Stock Option Award Agreement Exhibit 99.2 to Registration Statement on Form S-8 (File No. 333-168525) filed on August 4, 2010.
10.22* Form of Non-Statutory Stock Option Award Agreement Exhibit 99.3 to Registration Statement on Form S-8 (File No. 333-168525) filed on August 4, 2010).
10.23* Form of Restricted Stock Award Agreement Exhibit 99.4 to Registration Statement on Form S-8 (File No. 333-168525) filed on August 4, 2010.
14

Code of Ethics and Business Conduct

 

 
21 Subsidiaries Exhibit 21.0 to Form 10-K for the year ended December 31, 2009, SEC File No. 000-53856.
23 Consent of Deloitte & Touche LLP  
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer  

 

100
 

 

Exhibit No.                                   Description Incorporated by Reference to:
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer  
32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer  
101.0** The following materials from the Ocean Shore Holding Co. Annual Report on Form 10-K for the year ended December 31, 2011 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows and (iv) the notes to the Consolidated Statements, tagged as blocks of text.  

________

* Management contract or compensatory plan, contract or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

   

101
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  OCEAN SHORE HOLDING CO.  
       
       
Date: March 15, 2012 By: /s/ Steven E. Brady  
    Steven E. Brady
    President and Chief Executive Officer  

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Name   Title   Date
         
         
/s/ Steven E. Brady   President, Chief Executive Officer   March 15, 2012
Steven E. Brady   (principal executive officer)    
         
         
/s/ Donald F. Morgenweck   Senior Vice President and Chief   March 15, 2012
Donald F. Morgenweck   Financial Officer    
    (principal accounting and financial officer)    
       
         
/s/ Frederick G. Dalzell   Director   March 15, 2012
Frederick G. Dalzell, M.D.        
         
         
/s/ Christopher J. Ford   Director   March 15, 2012
Christopher J. Ford        
         
         
/s/ Dorothy F. McCrosson   Director   March 15, 2012
Dorothy F. McCrosson, Esq.        
         
         
/s/ Robert A. Previti   Director   March 15, 2012
Robert A. Previti, Ed.D.        
         
         
/s/ John L. Van Duyne, Jr.   Director   March 15, 2012
John L. Van Duyne, Jr.        
         
         
/Samuel R. Young   Director   March 15, 2012
Samuel R. Young        

 

102

 

 

Ocean Shore Holding Co. (NASDAQ:OSHC)
Historical Stock Chart
From Jun 2024 to Jul 2024 Click Here for more Ocean Shore Holding Co. Charts.
Ocean Shore Holding Co. (NASDAQ:OSHC)
Historical Stock Chart
From Jul 2023 to Jul 2024 Click Here for more Ocean Shore Holding Co. Charts.