10-Q 1 d437856d10q.htm FORM 10-Q FORM 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period ended September 30, 2012

or

 

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

For transition period from              to             

Commission File Number 001-34593

 

 

OBA FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Maryland   27-1898270

(State or Other Jurisdiction

of Incorporation)

 

(I.R.S. Employer

Identification No.)

20300 Seneca Meadows Parkway,

Germantown, Maryland

  20876
(Address of Principal Executive Offices)   (Zip Code)

(301) 916-0742

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

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

4,332,634 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of November 8, 2012.

 

 

 


Table of Contents

OBA FINANCIAL SERVICES, INC. AND SUBSIDIARY

Form 10-Q Quarterly Report

Table of Contents

 

PART I – FINANCIAL INFORMATION   
  Forward-Looking Statements Disclosure      3   

Item 1.

  Financial Statements   
  Consolidated Statements of Condition (Unaudited) as of September 30, 2012 and June 30, 2012      5   
  Consolidated Statements of Income (Unaudited) for the three months ended September 30, 2012 and 2011.      6   
 

Consolidated Statements Comprehensive Income (Unaudited) for the three months ended September 30, 2012 and 2011.

     7   
 

Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended September 30, 2012 and 2011

     8   
  Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 30, 2012 and 2011      9   
  Notes to Consolidated Financial Statements (Unaudited)      10   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      36   

Item 4.

  Controls and Procedures      36   
PART II – OTHER INFORMATION   

Item 1.

  Legal Proceedings      37   

Item 1A.

  Risk Factors      37   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      37   

Item 3.

  Defaults Upon Senior Securities      37   

Item 4.

  Mine Safety Disclosures      37   

Item 5.

  Other Information      37   

Item 6.

  Exhibits      37   

Signatures

     38   

 

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Forward-looking Statements

This report, as well as, other written communications made from time to time by OBA Financial Services, Inc., and its subsidiary, OBA Bank (collectively, the “Company”), and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “potential,” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth determined using accounting principles generally accepted in the United States of America (“U.S. GAAP”);

 

   

estimates of revenue growth in retail banking, lending and other areas, and origination volume in the Company’s consumer, commercial, and other lending businesses;

 

   

statements regarding the asset quality and levels of non-performing assets and impairment charges with respect to the Company’s investment portfolio;

 

   

statements regarding current and future capital management programs, tangible capital generation, and market share;

 

   

estimates of non-interest income levels, including fees from services and product sales, and expense levels;

 

   

statements of the Company’s goals, intentions, and expectations;

 

   

statements regarding the Company’s business plans, prospects, growth, and operating strategies; and

 

   

estimates of the Company’s risks and future costs and benefits.

The Company cautions that a number of important factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to:

 

   

prevailing general economic conditions, either nationally or locally in some or all areas in which the Company conducts business, that are different than expected;

 

   

changes in the securities market, the banking industry, or competition among depository and other financial institutions;

 

   

inflation and changes in interest rates, deposit flows, loan demand, real estate values, consumer spending, savings, and borrowing habits which can materially affect, among other things, consumer banking revenues, origination levels in the Company’s lending businesses and the level of defaults, losses, and prepayments on loans made by the Company, whether held in portfolio or sold in the secondary markets, and the Company’s net interest margin and fair value of financial instruments;

 

   

changes in any applicable law, rule, government regulation, policy, or practice with respect to tax or legal issues affecting financial institutions, including changes in regulatory fees, and capital requirements;

 

   

risks and uncertainties related to the Company’s ability to successfully integrate any assets, liabilities, customers, systems, and management personnel the Company may acquire, if any, into its operations and its ability to realize related revenue synergies and cost savings within the expected time frame;

 

   

the Company’s timely development of new and competitive products or services in a changing environment, and the acceptance of such products or services by the Company’s customers so the Company is able to enter new markets successfully and capitalize on growth opportunities;

 

   

operational issues and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems, on which it is highly dependent;

 

   

changes in accounting principles, policies, guidelines, and practices, as may be adopted by the Company’s regulatory agencies, the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (“SEC”), and the Public Company Accounting Oversight Board (the “PCAOB”), or changes to the Company’s primary regulator;

 

   

litigation liability, including costs, expenses, settlements, and judgments, or the outcome of other matters before regulatory agencies, whether pending or commencing in the future;

 

   

changes in the quality or composition of the investment and loan portfolios;

 

   

changes in the Company’s organization, compensation, and benefit plans;

 

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changes in other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products, and services; and

 

   

the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company’s control.

These forward-looking statements are based on the Company’s current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Readers are cautioned not to place undue reliance on these forward-looking statements which are made as of the date of this report, and except as may be required by applicable law or regulation, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Condition (Unaudited)

 

     September 30,
2012
    June 30,
2012
 

(In thousands, except share data)

    

Assets:

    

Cash and due from banks

   $ 13,917      $ 14,916   

Federal funds sold

     668        16,609   
  

 

 

   

 

 

 

Cash and cash equivalents

     14,585        31,525   

Interest bearing deposits with other banks

     8,651        9,490   

Securities available for sale

     48,264        34,454   

Securities held to maturity (fair value of $2,274 and $2,549)

     2,115        2,396   

Federal Home Loan Bank stock, at cost

     1,562        2,169   

Loans

     298,000        296,241   

Less: allowance for loan losses

     3,140        3,035   
  

 

 

   

 

 

 

Net loans

     294,860        293,206   

Premises and equipment, net

     6,064        6,186   

Bank owned life insurance

     8,972        8,898   

Other assets

     3,682        3,762   
  

 

 

   

 

 

 

Total assets

   $ 388,755      $ 392,086   
  

 

 

   

 

 

 

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 39,464      $ 40,003   

Interest-bearing

     232,221        229,569   
  

 

 

   

 

 

 

Total deposits

     271,685        269,572   

Securities sold under agreements to repurchase

     16,861        16,434   

Federal Home Loan Bank advances

     21,967        26,997   

Advance payments from borrowers for taxes and insurance

     957        1,707   

Other liabilities

     1,568        1,661   
  

 

 

   

 

 

 

Total liabilities

     313,038        316,371   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Preferred stock (par value $.01); authorized 50,000,000 shares; no shares issued or outstanding

     —          —     

Common stock (par value $.01); authorized 100,000,000 shares; issued and outstanding 4,332,634 and 4,387,050 shares at September 30, 2012 and June 30, 2012, respectively

     43        43   

Additional paid-in capital

     38,164        38,695   

Unearned ESOP shares

     (3,194     (3,240

Retained earnings

     39,669        39,409   

Accumulated other comprehensive income

     1,035        808   
  

 

 

   

 

 

 

Total stockholders’ equity

     75,717        75,715   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 388,755      $ 392,086   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Income (Unaudited)

 

     Three Months Ended
September 30,
 
     2012      2011  

(In thousands, except share and per share data)

     

Interest and Dividend Income:

     

Loans receivable, including fees

   $ 3,601       $ 3,768   

Investment securities:

     

Interest—taxable

     270         282   

Dividends

     7         5   

Federal funds sold

     14         29   
  

 

 

    

 

 

 

Total interest and dividend income

     3,892         4,084   
  

 

 

    

 

 

 

Interest Expense:

     

Deposits

     352         756   

Federal Home Loan Bank advances

     238         291   

Securities sold under agreements to repurchase

     47         63   
  

 

 

    

 

 

 

Total interest expense

     637         1,110   
  

 

 

    

 

 

 

Net interest income

     3,255         2,974   

Less provision for loan losses

     112         147   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     3,143         2,827   
  

 

 

    

 

 

 

Non-Interest Income:

     

Customer service fees

     90         91   

Loan servicing fees

     5         9   

Bank owned life insurance income

     73         75   

Net gains

     —           6   

Other non-interest income

     32         30   
  

 

 

    

 

 

 

Total non-interest income

     200         211   
  

 

 

    

 

 

 

Non-Interest Expense:

     

Salaries and employee benefits

     1,770         1,738   

Occupancy and equipment

     388         386   

Data processing

     197         177   

Directors’ fees

     94         80   

FDIC assessments

     69         67   

Other non-interest expense

     403         488   
  

 

 

    

 

 

 

Total non-interest expense

     2,921         2,936   
  

 

 

    

 

 

 

Income before income taxes

     422         102   

Income tax expense

     162         14   
  

 

 

    

 

 

 

Net income

   $ 260       $ 88   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.07       $ 0.02   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.07       $ 0.02   
  

 

 

    

 

 

 

Basic weighted average shares outstanding

     3,825,224         4,193,848   
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     3,881,946         4,193,881   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended September 30, 2012 and 2011

 

     Three Months Ended
September 30,
 
     2012      2011  

(In thousands)

     

Net income

   $ 260       $ 88   

Other comprehensive income:

     

Net unrealized gains on available for sale securities, net of tax of $145 and $91, respectively

     227         142   
  

 

 

    

 

 

 

Other comprehensive income

     227         142   
  

 

 

    

 

 

 

Comprehensive income

   $ 487       $ 230   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)

Three Months Ended September 30, 2012 and 2011

 

     Common
Stock
    Additional
Paid-in
Capital
    Unearned
ESOP
Shares
    Retained
Earnings
     Accumulated
Other
Comprehensive
Income
     Total  

(In thousands)

              

Balances at July 1, 2012

   $ 43      $ 38,695      $ (3,240   $ 39,409       $ 808       $ 75,715   

Net income

           260            260   

Other comprehensive income, net of tax

              227         227   

Purchase and retirement of 54,416 shares of Company stock

     —          (810             (810

Share-based compensation expense

       235                235   

Tax benefit of 49,485 restricted shares vesting

       21                21   

ESOP shares committed to be released (4,629 shares)

       23        46           —           69   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balances, September 30, 2012

   $ 43      $ 38,164      $ (3,194   $ 39,669       $ 1,035       $ 75,717   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balances at July 1, 2011

   $ 46      $ 44,419      $ (3,425   $ 39,141       $ 679       $ 80,860   

Comprehensive income:

              

Net income

           88            88   

Other comprehensive income, net of tax

              142         142   

Purchase and retirement of 250,850 shares of Company stock

     (2     (3,607             (3,609

Share-based compensation expense

       173                173   

ESOP shares committed to be released (4,629 shares)

       21        46              67   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balances, September 30, 2011

   $ 44      $ 41,006      $ (3,379   $ 39,229       $ 821       $ 77,721   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

     Three Months Ended
September 30,
 
(in thousands)    2012     2011  

Operating Activities:

    

Net income

   $ 260      $ 88   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     112        147   

Depreciation and amortization of premises and equipment

     167        164   

Net amortization of securities premiums and discounts

     93        112   

Proceeds from sales of loans held for sale

     —          307   

Originated loans held for sale

     —          (301

Net gains on sales of loans

     —          (6

Amortization of net deferred loan costs

     10        —     

Bank owned life insurance income

     (73     (75

ESOP expense

     69        67   

Share-based compensation expense

     235        173   

Amortization of mortgage servicing rights

     3        3   

Amortization of brokered deposit premiums

     —          3   

Changes in other assets and liabilities, net

     (163     (324
  

 

 

   

 

 

 

Total adjustments

     453        270   
  

 

 

   

 

 

 

Net cash provided by operating activities

     713        358   
  

 

 

   

 

 

 

Investing Activities:

    

Principal collections and maturities of securities available for sale

     2,855        2,072   

Principal collections and maturities of securities held to maturity

     280        202   

Purchases of securities available for sale

     (16,384     —     

Redemption of Federal Home Loan Bank Stock, net

     607        288   

Decrease (increase) in interest bearing deposits with other Banks, net

     839        (1,987

Loan originations less principal collections, net

     (1,776     (118

Purchases of premises and equipment

     (45     (98
  

 

 

   

 

 

 

Net provided by (used in) investing activities

     (13,624     359   
  

 

 

   

 

 

 

Financing Activities:

    

Increase in deposits

     2,113        13,685   

Increase in securities sold under agreements to repurchase

     427        3,108   

Repayment of FHLB advances

     (5,030     (2,530

Net decrease in advance payments from borrowers for taxes and insurance

     (750     (815

Tax benefit from vesting of restricted shares

     21        —     

Purchase and retirement of Company stock

     (810     (3,609
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (4,029     9,839   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (16,940     10,556   

Cash and cash equivalents at beginning of period

     31,525        37,968   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 14,585      $ 48,524   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Interest paid

   $ 680      $ 1,119   

Income taxes refunded, net

     (101     —     

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

OBA Bank (the “Bank”) is a community-oriented banking institution providing a variety of financial services to individuals and small businesses through its offices in Montgomery, Anne Arundel, and Howard Counties, Maryland. Its primary deposits are checking, money market, and time certificate accounts and its primary lending products are commercial mortgage and commercial business loans and residential mortgage loans.

In December 2007, the Bank reorganized into a three-tier mutual holding company structure. As part of the reorganization, the Bank converted from a mutual savings bank into a federally chartered stock savings bank and formed OBA Bancorp, Inc., a federally chartered mid-tier stock holding company, and OBA Bancorp, MHC, a federally chartered mutual holding company. The Bank became a wholly-owned subsidiary of OBA Bancorp, Inc. and OBA Bancorp, Inc. became a wholly-owned subsidiary of OBA Bancorp, MHC.

On January 21, 2010, OBA Bancorp, MHC completed its plan of conversion and reorganization from a mutual holding company to a stock holding company. In accordance with the plan, OBA Bancorp, MHC and OBA Bancorp, Inc. ceased to exist and a newly formed stock holding company, OBA Financial Services, Inc. (of which OBA Bank became a wholly owned subsidiary) sold and issued shares of capital stock to eligible depositors of OBA Bank. OBA Financial Services, Inc.’s common stock trades on the NASDAQ Capital Market under the symbol “OBAF” on January 22, 2010.

In accordance with applicable regulations at the time of the conversion from a mutual holding company to a stock holding company, the Bank substantially restricted retained earnings by establishing a liquidation account. The liquidation account is maintained for the benefit of eligible account holders who keep their accounts at the Bank after conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

Basis of Presentation

The consolidated financial statements include the accounts of OBA Financial Services Inc., and OBA Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and are presented in accordance with instructions for Form 10-Q and Rule 10-01 of the SEC Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation are of a normal and recurring nature and have been included.

Operating results for the three months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013 or any other interim period. The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes filed on Form 10-K for the fiscal year ended June 30, 2012.

In preparing the accompanying consolidated financial statements, the Company has evaluated subsequent events through the financial statement issue date. There were no subsequent events identified by the Company as a result of the evaluation that require recognition or disclosure in the consolidated financial statements.

Use of Estimates

In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Statement of Condition and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly sensitive to change in the near term relates to the determination of the allowance for loan losses, values related to the share-based incentive plans, and other than temporary impairment of investment securities.

 

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Reclassifications

From time to time, certain amounts in the prior period financial statements are reclassified to conform with current period presentation. Such reclassifications, if any, have no impact on consolidated net income or total stockholders’ equity.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that will have a material impact to the consolidated financial statements.

NOTE 2 — COMPREHENSIVE INCOME

U.S. GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the stockholders’ equity section of the Consolidated Statement of Condition, such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows:

 

     Three Months
Ended September 30,
 
     2012      2011  
     (In thousands)  

Unrealized gains on available for sale securities

   $ 372       $ 233   

Tax effect

     145         91   
  

 

 

    

 

 

 

Net of tax amount

   $ 227       $ 142   
  

 

 

    

 

 

 

Accumulated other comprehensive income consists of the following:

 

     September 30,
2012
    June 30,
2012
 
     (In thousands)  

Unrealized gains on available for sale securities

   $ 1,696      $ 1,324   

Tax effect

     (661     (516
  

 

 

   

 

 

 

Total

   $ 1,035      $ 808   
  

 

 

   

 

 

 

 

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NOTE 3 — SECURITIES

The amortized cost and fair value of securities with gross unrealized gains and losses are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
            (In thousands)        

September 30, 2012

          

Securities available for sale:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

   $ 46,452       $ 1,728       $ (20   $ 48,160   

Trust preferred securities

     66         —           (12     54   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities available for sale

     46,518         1,728         (32     48,214   

Equity Securities

     50         —           —          50   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

     46,568         1,728         (32     48,264   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held to maturity:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

     2,115         159         —          2,274   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities held to maturity

     2,115         159         —          2,274   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 48,683       $ 1,887       $ (32   $ 50,538   
  

 

 

    

 

 

    

 

 

   

 

 

 

June 30, 2012

          

Securities available for sale:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

   $ 33,010       $ 1,340       $ —        $ 34,350   

Trust preferred securities

     70         —           (16     54   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities available for sale

     33,080         1,340         (16     34,404   

Equity Securities

     50         —           —          50   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

     33,130         1,340         (16     34,454   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held to maturity:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

     2,396         153         —          2,549   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities held to maturity

     2,396         153         —          2,549   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 35,526       $ 1,493       $ (16   $ 37,003   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

All residential mortgage-backed securities were issued by United States government agencies including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company had no private label residential mortgage-backed securities at September 30, 2012 and June 30, 2012.

 

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The amortized cost and fair value of debt securities by contractual maturity at September 30, 2012 are as follows:

 

     Available for sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Due after ten years

   $ 66       $ 54       $ —         $ —     

Residential mortgage-backed securities

     46,452         48,160         2,115         2,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,518       $ 48,214       $ 2,115       $ 2,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2012 and June 30, 2012, the market value of securities securing dealer and customer repurchase agreements was $16.9 million and $20.8 million, respectively.

Information pertaining to securities with gross unrealized losses at the dates listed aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

     Less than 12 Months      12 Months or More      Total  
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)  

September 30, 2012

                 

Residential mortgage backed securities

   $ 20       $ 5,959       $ —         $ —         $ 20       $ 5,959   

Trust preferred security

     —           —           12         54         12         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20       $ 5,959       $ 12       $ 54       $ 32       $ 6,013   

June 30, 2012

                 

Residential mortgage backed securities

   $ —         $ —         $ —         $ —         $ —         $ —     

Trust preferred security

     —           —           16         54         16         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 16       $ 54       $ 16       $ 54   

At September 30, 2012, all residential mortgage backed securities and their contractual cash flows were guaranteed by U.S. Government Agencies; FNMA, FHLMC, and GNMA. The Company’s sole trust preferred security is a variable rate pool of trust preferred securities issued by insurance companies or their holding companies. These positions and the related unrealized losses are not material to the Company’s consolidated financial position or results of operations. The decline in the fair value of the pooled trust preferred security has been primarily caused by collateral deterioration due to failures and credit concerns across the financial services sector, the widening of credit spreads for asset-backed securities, and general illiquidity and inactivity in the market for these securities. The decline in the residential mortgage backed securities has been primarily caused by the movement in market interest rates. The Company has no intent or requirement to sell these securities.

NOTE 4 — CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

Various Bank policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans, or portions of loans, classified as loss are those considered uncollectible and of such little value that their continuance as an loan is not warranted. Since such loans are written off in full, the Bank will not have any such loans classified as loss at the end of a reporting period. Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as Special Mention.

The Bank maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the statement of condition date. The Bank’s determination as to the classification of loans is subject to review by the Bank’s primary federal regulator, the Office of the Comptroller of the Currency (“OCC”). The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations.

 

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Table of Contents

Management evaluates the allowance for loan losses based upon the combined total of the specific, general, and unallocated components as discussed below. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

Commercial real estate loans generally have greater credit risk compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment expectations on loans secured by income-producing properties typically depend on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

Commercial business loans generally have greater credit risk compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment expectations on commercial business loans typically depend on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

Generally, the Bank underwrites commercial real estate loans at a loan-to-value ratio of 75% or less and residential mortgage loans at a loan-to-value ratio not exceeding 80%. In the event that a loan becomes past due, management will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to estimate property values. The Bank may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrower’s condition. In addition, changes in the appraised value of properties securing loans can result in an increase or decrease in the general allowance for loan losses as an adjustment to the historical loss experience due to qualitative and environmental factors.

The loan portfolio is evaluated on a quarterly basis and the allowance is adjusted accordingly. While the best information available is used to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the OCC will periodically review the allowance for loan losses. The OCC may require the Bank to recognize additions to the allowance based on its analysis of information available at the time of the examination.

 

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Table of Contents

The classes of loans are as follows:

 

     September 30,
2012
    June 30,
2012
 
     (In thousands)  

Commercial business

   $ 40,754      $ 32,183   

Commercial real estate

     132,717        136,036   

Construction

     1,593        1,850   

Residential mortgage

     91,519        93,266   

Home equity loans and lines of credit

     31,346        32,765   
  

 

 

   

 

 

 

Loans

     297,929        296,100   

Net deferred commercial loan fees

     (245     (204

Net deferred home equity costs

     316        345   
  

 

 

   

 

 

 

Loans net of deferred (fees) costs

     298,000        296,241   

Allowance for loan losses

     3,140        3,035   
  

 

 

   

 

 

 

Total loans, net

   $ 294,860      $ 293,206   
  

 

 

   

 

 

 

The following tables present the classes of the loan portfolio summarized by loan rating within the Bank’s internal risk rating system:

 

September 30, 2012:    Pass      Special
Mention
     Substandard      Doubtful      Total  
(In thousands)                                   

Commercial business

   $ 37,664       $ —         $ 3,090       $ —         $ 40,754   

Commercial real estate

     122,852         3,616         6,249         —           132,717   

Construction

     1,593         —           —           —           1,593   

Residential mortgage

     89,457         —           2,062         —           91,519   

Home equity loans and lines of credit

     31,238         75         33         —           31,346   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 282,804       $ 3,691       $ 11,434       $ —         $ 297,929   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
June 30, 2012:    Pass      Special
Mention
     Substandard      Doubtful      Total  
(In thousands)                                   

Commercial business

   $ 28,785       $ —         $ 3,398       $ —         $ 32,183   

Commercial real estate

     129,409         184         6,443         —           136,036   

Construction

     1,850         —           —           —           1,850   

Residential mortgage

     91,320         —           1,946         —           93,266   

Home equity loans and lines of credit

     32,657         75         33         —           32,765   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 284,021       $ 259       $ 11,820       $ —         $ 296,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. Loans are generally placed on non-accrual status if collection of principal or interest, in full, is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed and further income is recognized only when full repayment of the loan is complete or the loan returns to accrual status, at which point income is recognized to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected.

 

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Table of Contents

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due and non-accrual status:

 

September 30, 2012:    31-60 Days
Past Due
     61-90 Days
Past Due
     Over
90 Days
Past Due
     Total
Past Due
     Current      Total
Loans
Receivable
     Total
Non-Accrual
Loans
 
(In thousands)                                                 

Commercial business

   $ —         $ —         $ —         $ —         $ 40,754       $ 40,754       $ —     

Commercial real estate

     —           —           5,080         5,080         127,637         132,717         5,080   

Construction

     —           —              —           1,593         1,593      

Residential mortgage

     179         —           894         1,073         90,446         91,519         891   

Home equity loans and lines of credit

     349         —           —           349         30,997         31,346         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 528       $ —         $ 5,974       $ 6,502       $ 291,427       $ 297,929       $ 6,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
June 30, 2012:    31-60 Days
Past Due
     61-90 Days
Past Due
     Over
90 Days
Past Due
     Total
Past Due
     Current      Total
Loans
Receivable
     Total
Non-Accrual
Loans
 
(In thousands)                                                 

Commercial business

   $ —         $ —         $ —         $ —         $ 32,183       $ 32,183       $ —     

Commercial real estate

     1,520         —           3,560         5,080         130,956         136,036         5,080   

Construction

     —           —           —           —           1,850         1,850         —     

Residential mortgage

     —           —           894         894         92,372         93,266         891   

Home equity loans and lines of credit

     139         —           —           139         32,626         32,765         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,659       $ —         $ 4,454       $ 6,113       $ 289,987       $ 296,100       $ 6,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There are no loans 90 days and over past due that are still accruing at the dates indicated.

The Bank provides for loan losses based upon the consistent application of the documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to the same. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in Management’s judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. The Bank considers residential mortgage loans and home equity loans and lines of credit as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience. Commercial real estate and commercial business loans are reviewed individually. Loans are considered impaired if the probability exists that the Bank will be unable to collect contractually obligated principal and interest cash flows. The allowance for loan losses consists primarily of three components:

 

  (1) specific allowances established for impaired loans (as defined by U.S. GAAP). For a non-collateral dependent loan, the amount of impairment, if any, is estimated as the difference between the estimated present value based on Management’s assumptions regarding future cash flows and discounted at the loans original yield, and the carrying value of the loan. Impaired loans for which the estimated present value of the loan exceeds the carrying value of the loan do not reduce specific allowances;

 

  (2) general allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type. The Bank applies an estimated loss rate to each loan group. The loss rates applied are based upon loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions; and

 

  (3) unallocated allowances established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

Actual loan losses may be significantly more than the allowance for loan losses established, which could have a material negative effect on financial results.

The adjustments to historical loss experience are based on Management’s evaluation of several qualitative and environmental factors, including, but not limited to:

 

   

changes in any concentration of credit (including, but not limited to, concentrations by geography, industry, or collateral type);

 

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Table of Contents
   

changes in the number and amount of non-accrual loans, watch list loans, and past due loans;

 

   

changes in national, state, and local economic trends;

 

   

changes to other external influences including, but not limited to, legal, accounting, peer, and regulatory changes;

 

   

changes in the types of loans in the loan portfolio;

 

   

changes in the experience and ability of personnel and management in the loan origination and loan servicing departments;

 

   

changes in the value of underlying collateral for collateral dependent loans;

 

   

changes in lending strategies; and

 

   

changes in lending policies and procedures.

The following table summarizes activity in the allowance for loan losses:

 

     Three Months Ended
September 30,
 
(In thousands)    2012     2011  

Balance at beginning of period

   $ 3,035      $ 2,246   

Provision for loan losses

     112        147   

Charge-offs

     (8     —     

Recoveries

     1        15   
  

 

 

   

 

 

 

Balance at end of period

   $ 3,140      $ 2,408   
  

 

 

   

 

 

 

 

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Table of Contents

The following tables set forth the activity in and allocation of the allowance for loan losses by loan portfolio class for the periods as listed:

Three Months Ended September 30, 2012

 

     Commercial
business
     Commercial
real estate
    Construction     Residential
mortgage
     Home equity
loans and lines
of credit
    Unallocated     Total  
(In thousands)                                             

Allowance for loan losses:

                

Beginning Balance

   $ 670       $ 955      $ 7      $ 772       $ 390      $ 241      $ 3,035   

Charge-offs

     —           (8     —          —           —          —          (8

Recoveries

     —           1        —          —           —          —          1   

Provisions

     28         208        (1     43         (10     (156     112   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 698       $ 1,156      $ 6      $ 815       $ 380      $ 85      $ 3,140   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2011

  

     Commercial
business
     Commercial
real estate
    Construction     Residential
mortgage
     Home equity
loans and lines
of credit
    Unallocated     Total  
(In thousands)                                             

Allowance for loan losses:

                

Beginning Balance

   $ 383       $ 706      $ 2      $ 528       $ 440      $ 187      $ 2,246   

Charge-offs

     —           —          —          —           —          —          —     

Recoveries

     —           —          —          15         —          —          15   

Provisions

     110         40        —          57         (35     (25     147   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 493       $ 746      $ 2      $ 600       $ 405      $ 162      $ 2,408   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The following tables present the balance in the allowance for loan losses and the recorded in investment in loans by portfolio class and based on impairment method:

 

September 30, 2012:    Commercial
business
     Commercial
real estate
     Construction      Residential
mortgage
     Home equity
loans and lines
of credit
     Unallocated      Total loans  
(In thousands)                                                 

Allowance for Loan Losses:

                    

Ending allowance balance related to loans:

                    

Individually evaluated for impairment

   $ —         $ —         $ —         $ 150       $ —         $ —         $ 150   

Collectively evaluated for impairment

     698         1,156         6         665         380         85         2,990   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 698       $ 1,156       $ 6       $ 815       $ 380       $ 85       $ 3,140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Ending loan balance

                    

Individually evaluated for impairment

   $ 8       $ 6,249       $ —         $ 1,430       $ 33          $ 7,720   

Collectively evaluated for impairment

     40,746         126,468         1,593         90,089         31,313            290,209   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loan balance

   $ 40,754       $ 132,717       $ 1,593       $ 91,519       $ 31,346          $ 297,929   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 
June 30, 2012:    Commercial
business
     Commercial
real estate
     Construction      Residential
mortgage
     Home equity
loans and lines
of credit
     Unallocated      Total loans  
(In thousands)                                                 

Allowance for Loan Losses:

                    

Ending allowance balance related to loans:

                    

Individually evaluated for impairment

   $ —         $ —         $ —         $ 150       $ —         $ —         $ 150   

Collectively evaluated for impairment

     670         955         7         622         390         241         2,885   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 670       $ 955       $ 7       $ 772       $ 390       $ 241       $ 3,035   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Ending loan balance

                    

Individually evaluated for impairment

   $ 9       $ 6,442       $ —         $ 1,434       $ 33          $ 7,918   

Collectively evaluated for impairment

     32,174         129,594         1,850         91,832         32,732            288,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loan balance

   $ 32,183       $ 136,036       $ 1,850       $ 93,266       $ 32,765          $ 296,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

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Table of Contents

The following tables summarize information in regards to impaired loans by portfolio class as of and for the periods ended as listed:

 

     September 30, 2012  
     At September 30, 2012      Three Months Ended  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
(In thousands)                                   

With No Related Allowance Recorded:

              

Commercial business

   $ 8       $ 8       $ —         $ 8       $ —     

Commercial real estate

     6,249         6,339         —           6,255         17   

Residential mortgage

     457         460         —           457         1   

Home equity loans and lines of credit

     33         33         —           33         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no allowance recorded

   $ 6,747       $ 6,840       $ —         $ 6,753       $ 18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an Allowance Recorded:

              

Commercial business

   $ —         $ —         $ —         $ —         $ —     

Commercial real estate

     —           —           —           —           —     

Residential mortgage

     973         973         150         974         9   

Home equity loans and lines of credit

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with allowance recorded

   $ 973       $ 973       $ 150       $ 974       $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Commercial business

   $ 8       $ 8       $ —         $ 8       $ —     

Commercial real estate

     6,249         6,339         —           6,255         17   

Residential mortgage

     1,430         1,433         150         1,431         10   

Home equity loans and lines of credit

     33         33         —           33         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,720       $ 7,813       $ 150       $ 7,727       $ 27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2012  
     At June 30, 2012      For the year ended  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
(In thousands)                                   

With No Related Allowance Recorded:

              

Commercial business loans

   $ 9       $ 9       $ —         $ 4       $ —     

Commercial real estate

     6,442         6,532         —           6,807         380   

Residential mortgages

     458         461         —           229         10   

Home equity loans and lines of credit

     33         33         —           17         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no allowance recorded

   $ 6,942       $ 7,035       $ —         $ 7,057       $ 391   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an Allowance Recorded:

              

Commercial business loans

   $ —         $ —         $ —         $ —         $ —     

Commercial real estate

     —           —           —           —           —     

Residential mortgages

     976         976         150         792         28   

Home equity loans and lines of credit

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with allowance recorded

   $ 976       $ 976       $ 150       $ 792       $ 28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Commercial business loans

   $ 9       $ 9       $ —         $ 4       $ —     

Commercial real estate

     6,442         6,532         —           6,807         380   

Residential mortgages

     1,434         1,437         150         1,021         38   

Home equity loans and lines of credit

     33         33         —           17         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,918       $ 8,011       $ 150       $ 7,849       $ 419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents troubled debt restructurings occurring during the three month period listed below:

 

September 30, 2011

   Number
of
Contracts
     Pre-Modification
Outstanding
Recorded
Investments
     Post-
Modification
Outstanding
Recorded
Investments
 
(In thousands)                     

Troubled debt restructurings:

        

Commercial real estate

     1       $ 3,198       $ 3,198   
  

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

     1       $ 3,198       $ 3,198   
  

 

 

    

 

 

    

 

 

 

The Bank had no troubled debt restructurings during the three months ended September 30, 2012.

Generally, the Bank does not forgive principal or interest on loans or modify the interest rate on loans to rates that are below market rates based on the risks associated with the modified loans. Loans can be modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. These troubled debt restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to financial difficulties of the borrower. During the three months ended September 30, 2012 and 2011, no loans previously classified as troubled debt restructurings subsequently defaulted.

 

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Table of Contents

NOTE 5 — FAIR VALUE MEASUREMENTS AND DISCLOSURES

Management uses its best judgment in estimating the fair value of the Company’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all assets and liabilities, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates and have not been re-evaluated or updated subsequent to those respective dates. As such, the estimated fair values of these assets and liabilities subsequent to the respective reporting dates may be different than the amounts reported at each reporting date. Accounting guidance related to fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

 

Level 1:    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:    Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:    Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between fair value hierarchy levels are recognized as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between fair value hierarchy levels for the three months ended September 30, 2012 or 2011.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at the periods listed are as follows:

 

(In thousands)                            

Description

   September 30,
2012
     (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Residential mortgage-backed securities

   $ 48,160       $ —         $ 48,160       $ —     

Trust preferred securities

     54         —           —           54   

Equity securities

     50         —           50         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available for sale

   $ 48,264       $ —         $ 48,210       $ 54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Description

   June 30,
2012
     (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
     (Level 3)
Significant
Unobservable
Inputs
 
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential mortgage-backed securities

   $ 34,350       $ —         $ 34,350       $ —     

Trust preferred securities

     54         —           —           54   

Equity securities

     50         —           50         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available for sale

   $ 34,454       $ —         $ 34,400       $ 54   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2012:

 

(In thousands)    Three Months
Ended
 

Beginning balance

   $ 54   

Principal repayments

     (4

Unrealized gains included in other comprehensive income

     4   
  

 

 

 

Ending balance

   $ 54   
  

 

 

 

Level 3 securities consist of one immaterial trust preferred security at September 30, 2012.

For assets measured at fair value on a nonrecurring basis at the dates listed, the fair value measurements by level within the fair value hierarchy are as follows:

 

(In thousands)                          

Description

   September 30,
2012
     (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 

Impaired loans

   $ 823       $ —            $ 823   
  

 

 

    

 

 

    

 

  

 

 

 

Real estate owned

   $ 40       $ —            $ 40   
  

 

 

    

 

 

    

 

  

 

 

 

Description

   June 30, 2012      (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 

Impaired loans

   $ 826       $ —            $ 826   
  

 

 

    

 

 

    

 

  

 

 

 

Real estate owned

   $ 40       $ —            $ 40   
  

 

 

    

 

 

    

 

  

 

 

 

The methods and assumptions used to estimate the fair values included in the above tables are included in the disclosures that follow.

 

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Table of Contents

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate fair values at September 30, 2012 and June 30, 2012:

Cash and Cash Equivalents and interest bearing securities with other banks (Carried at Cost)

The carrying amounts of cash and short-term instruments approximate fair value and are classified within level 1 of the fair value hierarchy.

Securities Available for Sale (Carried at Fair Value)

The fair values of securities available for sale, excluding trust preferred securities, are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other things.

The market for pooled trust preferred securities is inactive. A significant widening of the bid/ask spreads in the markets in which these securities trade was followed by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and no new pooled trust preferred securities have been issued since 2007. Since there were limited observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using primarily unobservable Level 3 inputs. Fair value estimates for trust preferred securities were based on discounting expected cash flows using a risk-adjusted discount rate. The Company develops the risk-adjusted discount rate by considering the time value of money (risk-free rate) adjusted for an estimated risk premium for bearing the uncertainty in future cash flows and, given current adverse market conditions, a liquidity adjustment based on an estimate of the premium that a market participant would require assuming an orderly transaction. Management determined that sensitivity to inputs are not significant due to the immaterial nature of trust preferred securities as a level 3 asset.

Securities Held to Maturity (Carried at Amortized Cost)

The fair values of securities held to maturity are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other things.

Federal Home Loan Bank Stock (Carried at Cost)

The carrying amount of Federal Home Loan Bank stock approximates fair value and considers the limited marketability of such securities.

Loans Receivable (Carried at Cost)

The fair values of loans (except impaired loans) are estimated using discounted cash flow analyses which use market rates at the statement of condition date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. Loans are classified within level 3 of the fair value hierarchy.

Impaired Loans (Generally Carried at Fair Value)

Generally, impaired loans are those which the Company has measured impairment based on the fair value of the loan’s collateral. Fair value of real estate collateral is generally determined based upon independent third-party appraisals of the properties, which consider sales prices of similar properties in the proximate vicinity or by discounting expected cash flows from the properties by an appropriate risk adjusted discount rate. Fair value of collateral other than real estate is based on an estimate of the liquidation proceeds. Impaired loans are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of loan balances net of valuation allowances and loan balances on impaired loans in which the loan has been charged-off to its fair value.

 

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Table of Contents

Real Estate Owned (Carried at Lower of Cost or Fair Value less Estimated Selling Costs)

Fair values of foreclosed assets are based on independent third party appraisals of the properties or discounted cash flows based upon the expected sales proceeds from disposition of the assets. These values were generally determined based on the sales prices of similar properties in the proximate vicinity. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The appraisals generally include various level 3 inputs which are not identifiable. Management determined that sensitivity to inputs are not significant due to the immaterial nature of the real estate owned as a level 3 asset.

Mortgage Servicing Rights (Carried at Lower of Cost or Fair Value)

At origination, the Company estimates the fair value of mortgage servicing rights at 1% of the principal balances of loans sold. The Company amortizes that amount over the estimated period of servicing revenues or charges the entire amount to income upon prepayment of the related loan. Due to the immaterial balance of mortgage servicing rights, the Company did not perform any further analysis or estimate their fair values. Therefore, the Company has disclosed that the carrying amounts of mortgage servicing rights approximate fair value. Mortgage servicing rights are classified within level 3 of the fair value hierarchy. Management determined that sensitivity to inputs are not significant due to the immaterial nature of the mortgage servicing rights as a level 3 asset.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Demand deposits are classified within level 1 of the fair value hierarchy. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities. Certificates of deposit are classified within level 2 of the fair value hierarchy.

Federal Home Loan Bank Advances (Carried at Cost)

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms, and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Federal Home Loan Bank Advances are classified within level 2 of the fair value hierarchy.

Securities Sold Under Agreement to Repurchase (Carried at Cost)

The carrying amounts of securities sold under agreements to repurchase approximate fair value for short-term obligations. The fair values for longer term repurchase agreements are based on current market interest rates for similar transactions. Securities sold under agreement to repurchase are classified within level 2 of the fair value hierarchy.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest approximate fair value. Accrued Interest Receivable and Payable are classified within level 1 of the fair value hierarchy.

Off-Balance-Sheet Credit-Related Instruments (Disclosures at Cost)

Fair values for off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.

 

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Table of Contents

Quantitative information about Level 3 Fair Value Measurement is included in the tables below:

 

(In thousands)    Quantitative Information about Level 3 Fair Value  Measurements

September 30, 2012

   Fair Value
Estimate
    

Valuation

Techniques

  

Unobservable

Inputs

   Estimated
Range

Impaired loans

   $ 823       Appraisal of collateral    Appraisal adjustments    0.0% to -25.0%
        

Liquidation

expenses

   -3.0% to -5.0%

Real estate owned

     40      

Appraisal of

property

   Appraisal adjustments    0.0% to -25.0%
        

Liquidation

expenses

   -3.0% to -5.0%
(In thousands)    Quantitative Information about Level 3 Fair Value  Measurements

June 30, 2012

   Fair Value
Estimate
    

Valuation

Techniques

  

Unobservable

Inputs

   Estimated
Range

Impaired loans

   $ 826       Appraisal of collateral    Appraisal adjustments    0.0% to -25.0%
        

Liquidation

expenses

   -3.0% to -5.0%

Real estate owned

     40      

Appraisal of

property

   Appraisal adjustments    0.0% to -25.0%
        

Liquidation

expenses

   -3.0% to -5.0%

 

25


Table of Contents

The estimated fair values of the Company’s financial instruments were as follows:

 

                   Fair Value Hierarchy at
September 30, 2012
 
     September, 2011      Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
     Significant  Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

(In thousands)

   Carrying
Amount
     Fair
Value
          

Financial assets:

              

Cash and cash equivalents

   $ 14,585       $ 14,585       $ 14,585       $ —         $ —     

Interest bearing deposits with other banks

     8,651         8,651         8,651         —           —     

Securities available for sale

     48,264         48,264         —           48,210         54   

Securities held to maturity

     2,115         2,274         —           2,274         —     

Federal Home Loan Bank stock

     1,562         1,562         1,562         —           —     

Loans receivable, net

     294,860         302,502         —           —           302,502   

Accrued interest receivable

     1,169         1,169         1,169         —           —     

Mortgage servicing rights

     75         75         —           —           75   

Financial liabilities:

              

Deposits

     271,685         274,073         214,168         59,905         —     

Securities sold under agreements to repurchase

     16,861         16,934         —           16,934         —     

Federal Home Loan Bank Advances

     21,967         24,728         —           24,728         —     

Accrued interest payable

     111         111         111         —           —     

Off-Balance sheet financial instruments

     —           —           —           —           —     
                    Fair Value Hierarchy at
June 30, 2012
 
      June 30, 2012      Quoted Prices in
Active Markets

For Identical
Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

(In thousands)

   Carrying
Amount
     Fair
Value
          

Financial assets:

              

Cash and cash equivalents

   $ 31,525       $ 31,525       $ 31,525       $ —         $ —     

Interest bearing deposits with other banks

     9,490         9,490         9,490         —           —     

Securities available for sale

     34,454         34,454         —           34,400         54   

Securities held to maturity

     2,396         2,549         —           2,549         —     

Federal Home Loan Bank stock

     2,169         2,169         2,169         —           —     

Loans receivable, net

     293,206         299,307         —           —           299,307   

Accrued interest receivable

     1,039         1,039         1,039         —           —     

Mortgage servicing rights

     78         78         —           —           78   

Financial liabilities:

              

Deposits

     269,572         269,459         208,271         61,188         —     

Securities sold under agreements to repurchase

     16,434         16,543         —           16,543         —     

Federal Home Loan Bank Advances

     26,997         29,758         —           29,758         —     

Accrued interest payable

     154         154         154         —           —     

Off-Balance sheet financial instruments

     —           —           —           —           —     

 

26


Table of Contents

NOTE 6 — GUARANTEES

The Company has not issued any guarantees that would require liability recognition or disclosure other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of September 30, 2012, the Company had $548 thousand of outstanding letters of credit. Management believes the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. Management believes the current amount of the liability as of September 30, 2012 for guarantees under letters of credit issued is not material.

NOTE 7 — EMPLOYEE STOCK OWNERSHIP PLAN

Effective January 1, 2010, the Company adopted an Employee Stock Ownership Plan (“ESOP”) for eligible employees. The ESOP borrowed $3.7 million from the Company and used those funds to acquire 370,300 shares, or 8.0%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20 year term of the loan with funds from the Bank’s contributions to the ESOP and dividends payable on the stock, if any. The interest rate on the ESOP loan adjusts annually and is the prime rate on the first business day of the calendar year, as published in The Wall Street Journal.

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. Total ESOP shares may be reduced as a result of employees leaving the Company; shares that have previously been released to those exiting employees may be removed from the plan and transferred to that employee. As shares are committed to be released from the suspense account, the Bank reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit to stockholders’ equity. Compensation expense recognized for the three months ended September 30, 2012 and 2011 amounted to $69 thousand and $67 thousand, respectively.

Shares held by the ESOP trust at the periods listed were as follows:

 

     September 30,  
     2012      2011  

Allocated shares

     49,316         32,114   

Unallocated shares

     319,384         337,899   
  

 

 

    

 

 

 

Total ESOP shares

     368,700         370,013   
  

 

 

    

 

 

 

Fair value of unallocated shares, in thousands

   $ 4,839       $ 4,900   
  

 

 

    

 

 

 

NOTE 8 — SHARE BASED COMPENSATION

In May 2011, the Company’s stockholders approved the OBA Financial Services, Inc. 2011 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to key officers and outside directors. The cost of the Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards. A portion of the restricted stock award vesting is contingent upon meeting certain company-wide performance goals.

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 648,025. Total share-based compensation expense for the three months ended September 30, 2012 and 2011 was $235 thousand and $173 thousand, respectively.

 

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Table of Contents

Stock Options

The table below presents the stock option activity for the period shown:

 

      Options      Weighted
average
exercise
price
     Remaining
contractual
life (years)
 

Options outstanding at June 30, 2012

    
272,150
  
   $ 14.79      

Granted

     —           —        

Exercised

     —           —        

Forfeited

     —           —        

Expired

     —           —        
  

 

 

    

 

 

    

Options outstanding at September 30, 2012

     272,150       $ 14.79         8.8   
  

 

 

    

 

 

    

As of September 30, 2012, the Company had $748 thousand of unrecognized compensation costs related to stock options. The cost of stock options will be amortized in equal annual installments over the five-year vesting period. There were 54,430 options vested during the three months ended September 30, 2012. Stock option expense for the three months ended September 30, 2012 and 2011 was $50 thousand and $35 thousand, respectively.

Restricted Stock Awards

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.

 

28


Table of Contents

The table below presents the restricted stock award activity for the period shown:

 

     Service-Based
Restricted
stock

awards
     Weighted
average
grant date
fair value
     Performance-Based
Restricted

stock
awards
     Weighted
average
grant date
fair value
     Total
Restricted
stock
awards
     Weighted
average
grant date
fair value
 

Non-vested at June 30, 2012

     136,363       $ 14.77         111,090       $ 14.81         247,453       $ 14.79   

Granted

     —           —           —           —           —           —     

Vested

     27,267         14.77         22,218         14.81         49,485         14.79   

Forfeited

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-vested at September 30, 2012

     109,096       $ 14.77         88,872       $ 14.81         197,968       $ 14.79   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2012, the Company had $2.8 million of unrecognized compensation cost related to restricted stock awards. The cost of the restricted stock awards will be amortized in equal annual installments over the five-year vesting period. The vesting of the performance-based stock awards is contingent upon meeting certain company-wide performance goals. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. Restricted stock expense for the three months ended September 30, 2012 and 2011 was $185 thousand and $138 thousand, respectively.

NOTE 9 — EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period exclusive of unallocated ESOP shares and unvested restricted stock. Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the Treasury Stock method. The table below sets forth the dilutive effect of the stock options and unvested restricted shares.

 

     Three Months Ended
September 30
 
(Dollars in thousands, except share data)    2012      2011  

Net income

   $ 260       $ 88   

Weighted average number of shares used in:

     

Basic earnings per share

     3,825,224         4,193,848   

Diluted common stock equivalents:

     

Restricted stock and stock options

     56,722         33   
  

 

 

    

 

 

 

Diluted earnings per share

     3,881,946         4,193,881   
  

 

 

    

 

 

 

Net income per common share, basic

   $ 0.07       $ 0.02   
  

 

 

    

 

 

 

Net income per common share, diluted

   $ 0.07       $ 0.02   
  

 

 

    

 

 

 

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL REVIEW

The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of OBA Financial Services Inc., and its subsidiary, OBA Bank. The discussion and tabular presentations should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes.

Overview of Income and Expenses

Income

The Company has two primary sources of pre-tax income; net interest income and non-interest income. Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.

Non-interest income is received from providing products and services and from other income. The majority of the non-interest income is earned from service charges on deposit accounts, bank owned life insurance income, and loan servicing fees. The Company also earns income from time to time from the sale of residential mortgage loans and other fees and charges.

The Company recognizes gains or losses as a result of sales of investment securities, foreclosed property, and premises and equipment. In addition, the Company recognizes losses on its investment securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Company’s primary sources of income.

Expenses

The non-interest expenses the Company incurs in operating its business consist primarily of salaries and employee benefits, occupancy and equipment expense, external processing fees, FDIC assessments, Director fees, and other non-interest expenses.

Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees and payroll tax, healthcare, retirement, ESOP, Equity Incentive Plan, and other employee benefit expenses.

Occupancy expenses, which are fixed or variable costs associated with premises and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and cost of utilities.

Equipment expense includes expenses and depreciation charges related to office and banking equipment.

Data processing fees are paid to third party vendors primarily for various data processing services.

Other expenses include expenses for professional services, including, but not limited to, attorney, accountant and consultant fees, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.

Critical Accounting Policies and Estimates

There are no material changes to the critical accounting policies disclosed in OBA Financial Services, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Comparison of Financial Condition at September 30, 2012 and June 30, 2012

Assets. Total assets decreased $3.3 million to $388.8 million at September 30, 2012 from $392.1 million at June 30, 2012. The decrease was primarily due to a decrease in cash and cash equivalents partially offset by increases in loans and securities and a decrease in Federal Home Loan Bank advances.

Cash and Cash Equivalents. At September 30, 2012, cash and cash equivalents decreased by $16.9 million, to $14.6 million from $31.5 million at June 30, 2012 as securities available for sale and loans increased by $13.8 million and $1.8 million, respectively, while Federal Home Loan Bank advances decreased by $5.0 million.

 

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Table of Contents

Loans. At September 30, 2012, total gross loans were $298.0 million, an increase of $1.8 million, as compared to $296.2 million at June 30, 2012. The commercial loan portfolio increased $5.0 million to $175.1 million at September 30, 2012 from $170.1 million at June 30, 2012 as the Company continued its focus on originating commercial loans. This increase was offset by decreases of $1.7 million and $1.4 million in the residential mortgage loan and home equity loan and line of credit portfolios, respectively. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

Allowance for Loan Losses.

The following table summarizes activity in the allowance for loan losses:

 

     Three Months Ended
September 30,
 
(in thousands)    2012     2011  

Balance at beginning of period

   $ 3,035      $ 2,246   

Provision for loan losses

     112        147   

Charge-offs

     (8     —     

Recoveries

     1        15   
  

 

 

   

 

 

 

Balance at end of period

   $ 3,140      $ 2,408   
  

 

 

   

 

 

 

Ratios:

    

Net charge-offs to average loans

     —       (0.02 )% 

Allowance for loan losses to loans

     1.05        0.85   

At September 30, 2012, the allowance for loan losses was $3.1 million compared with $2.4 million at September 30, 2011 and $3.0 million at June 30, 2012. The allowance for loan losses as a percentage of total loans at September 30, 2012 was 1.05% compared to 1.02% at June 30, 2012 and 0.85% at September 30, 2011. Net charge-offs as a percentage of average loans was effectively zero percent for the three months ended September 30, 2012 and the Bank had a net recovery of 0.02% for the three months ended September 30, 2011. The Bank had $7.9 million in impaired loans at September 30, 2012 and June 30, 2012. Total impaired loans are primarily made up of two loan relationships with not-for-profit entities that have collateral values well in excess of the loan values. Based on the value of the collateral, no specific allowances are required for these loans. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

Non-performing Assets. Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless well secured and in the process of collection. Loans can also be placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected. At September 30, 2012 and June 30, 2012, the Company had $6.1 million in total non-performing assets. Primarily, these totals represent commercial real estate and residential mortgage loans. Of the $6.1 million in non-performing assets the Company reported at September 30, 2012, $3.3 million were also troubled debt restructurings.

 

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Table of Contents

The following table summarizes non-performing assets:

 

(dollars in thousands)    September 30,
2012
    June 30,
2012
 

Non-performing assets

    

Non-accrual loans:

    

Commercial real estate

   $ 5,080      $ 5,080   

Residential mortgages

     891        891   

Home equity loans and lines of credit

     75        75   
  

 

 

   

 

 

 

Total non-accrual loans

     6,046        6,046   

Other real estate owned

     40        40   
  

 

 

   

 

 

 

Total non-performing assets

   $ 6,086      $ 6,086   
  

 

 

   

 

 

 

Asset quality ratios:

    

Non-performing loans to total loans

     2.03     2.04

Non-performing assets to total assets

     1.57        1.55   

The non-performing loans to total loans ratio decreased slightly to 2.03% at September 30, 2012 from 2.04% at June 30, 2012 and the non-performing assets to total assets ratio increased two basis points from 1.55% at June 30, 2012 to 1.57% at September 30, 2012. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

Troubled Debt Restructurings. At September 30, 2012 and June 30, 2012, the Bank had $5.9 million and $5.8 million of modified loans, respectively, which were considered troubled debt restructurings. At September 30, 2012, the Bank had $1.0 million in residential mortgage loans that were considered troubled debt restructurings and $4.8 million in commercial real estate loans that were considered troubled debt restructurings. At June 30, 2012, the Bank had $1.1 million in residential mortgage loans that were considered troubled debt restructurings and $4.7 million in commercial real estate loans that were considered troubled debt restructurings. Of the $5.9 million in modified loans considered troubled debt restructurings, $3.3 million were also non-performing loans. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

Securities. At September 30, 2012, the securities portfolio totaled $50.4 million, or 13.0% of total assets, as compared to $36.9 million, or 9.4% of total assets, at June 30, 2012.

Deposits. At September 30, 2012, deposits increased $2.1 million to $271.7 million from $269.6 million at June 30, 2012. Total money market accounts increased $2.7 million and checking accounts increased $530 thousand while certificates of deposit decreased $1.3 million.

Borrowings. At September 30, 2012, total borrowings decreased $4.6 million, or 10.6%, to $38.8 million from $43.4 million at June 30, 2012. Repurchase agreements increased slightly to $16.9 million at September 30, 2012 from $16.4 million at June 30, 2012. At September 30, 2012, Federal Home Loan Bank advances totaled $22.0 million, a decrease of $5.0 million from June 30, 2012.

At September 30, 2012, the Company had access to additional Federal Home Loan Bank advances of up to $46.9 million.

Equity. Equity totaled $75.7 million at September 30, 2012 and June 30, 2012, respectively. At September 30, 2012, the Company had repurchased 80,694 shares of its common stock of the 208,294 shares approved in its second share repurchase program. The Company’s Board of Directors adopted the second stock repurchase program as previously disclosed in the Company’s 8-K filed on March 21, 2012.

 

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Table of Contents

Capital and Liquidity. The Bank intends to maintain a strong capital position that supports its strategic goals while exceeding regulatory standards. At September 30, 2012, the Bank met the definition of a “well-capitalized” institution by exceeding all regulatory minimum capital requirements. The following tables summarize the consolidated and Bank capital ratios:

 

     Ratios at        
      September 30,
2012
    June 30,
2012
    “Well-Capitalized”
Minimums
 

Consolidated Capital Ratios:

      

Total Capital to risk-weighted assets

     28.82     29.06     —     

Tier 1 Capital to risk-weighted assets

     27.66     27.93     —     

Tier 1 Leverage

     19.29     19.17     —     

Bank Capital Ratios:

      

Total Capital to risk-weighted assets

     23.51     23.42     10.00

Tier 1 Capital to risk-weighted assets

     22.35     22.29     6.00

Tier 1 Leverage

     15.59     15.30     5.00

The Company’s primary sources of funds are deposits, borrowed funds, amortization, prepayments, and maturities of loans, investment securities, and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and investments are a relatively predictable source of funds, deposit flows and loan and investment prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Company invests excess funds in short-term interest-earning securities and other assets which provide liquidity to meet lending requirements.

The Company is a member of the Federal Home Loan Bank of Atlanta, whose competitive advance programs provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in liquidity could result in the Company seeking other sources of funds, including, but not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of available-for-sale investment securities, and the sale of loans or other assets.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General. Net income increased $172 thousand to $260 thousand for the three months ended September 30, 2012 from net income of $88 thousand for the three months ended September 30, 2011. The increase in net income was primarily a result of an increase in net interest income of $281 thousand and a decrease in the provision for loan losses of $35 thousand partially offset by an increase in tax expense of $148 thousand.

Net Interest Income. Net interest income increased by $281 thousand, to $3.3 million for the three months ended September 30, 2012 as compared to $3.0 million for the three months ended September 30, 2011. Total interest expense decreased $473 thousand, or 42.6%, to $637 thousand for the three months ended September 30, 2012 as compared to $1.1 million for the three months ended September 30, 2011. The decrease in interest expense was primarily the result of the Bank decreasing deposit rates while maintaining its competitive position within the local market, paying off all matured brokered certificates of deposit exclusive of the Certificate of Deposit Account Registry Service (“CDARS”) program and several matured higher costing term Federal Home Loan Bank advances, and reducing the rate on customer repurchase agreements. Interest and dividend income decreased by $192 thousand to $3.9 million for the three months ended September 30, 2012 as compared to $4.1 million for the three months ended September 30, 2011. This decrease is primarily due to lower yields in the loan and investment portfolios, as well as, a decrease in lower yielding fed funds sold.

The net interest margin was 3.62% for the three months ended September 30, 2012 compared to 3.52% for the three months ended September 30, 2011. The increase in the net interest margin was primarily a result of an increase in average interest-earning assets and a decrease in the total interest-bearing liabilities average yield of 62 basis points as compared to a decrease in the total interest-earning asset yield of 50 basis points. Net interest-earning assets increased $34.9 million as average interest-earning assets increased $22.2 million to $357.6 million for the period ended September 30, 2012 compared to $335.4 million for the period ended September 30, 2011. Average interest-bearing liabilities decreased $12.7 million to $268.9 million for the period ended September 30, 2012 as compared to $281.6 million for the period ended September 30, 2011.

 

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Table of Contents

Interest and Dividend Income. Interest and dividend income decreased $192 thousand to $3.9 million from $4.1 million for the three months ended September 30, 2012 and 2011, respectively, as continued low market interest rates caused lower yields on new loan production and an increase in loan refinancing. Interest income on loans decreased $167 thousand to $3.6 million from $3.8 million for the periods ended September 30, 2012 and 2011, respectively. Interest income on investments was down slightly to $270 thousand for the period ended September 30, 2012 as compared to $282 thousand for the period ended September 30, 2011. Interest income on fed funds sold decreased $15 thousand, or 51.7%, to $14 thousand as fed funds sold decreased $15.9 million at September 30, 2012. The decrease in fed funds sold was primarily used to fund the increase in the loan portfolio which increased $16.0 million to $298.0 million at September 30, 2012 from $282.0 million at September 30, 2011.

The average yield on loans decreased 47 basis points, to 4.86%, for the three months ended September 30, 2012 from 5.33% for the three months ended September 30, 2011. Total average loans increased $14.6 million to $295.0 million, reflecting an increase in the average balance of commercial loans of $24.8 million to $170.7 million for the three months ended September 30, 2012. The increase in average commercial loans was offset by a decrease in average residential mortgage loans of $4.3 million to $92.3 million and a decrease in average consumer loans of $5.9 million to $32.1 million for the three months ended September 30, 2012 as compared to $96.5 million and $38.1 million, respectively, for the three months ended September 30, 2011.

The average yield on securities decreased 21 basis points to 2.16% for the three months ended September 30, 2012 from 2.37% for the three months ended September 30, 2011, reflecting continued low market interest rates and repayments of higher yielding securities within the mortgage backed securities portfolio.

Interest Expense. Interest expense decreased $473 thousand to $637 thousand from $1.1 million for the three months ended September 30, 2012 and 2011, respectively. Deposit expense decreased by $404 thousand to $352 thousand for the three months ended September 30, 2012 as the average rate paid on deposits decreased 66 basis points to 0.60% for the three months ended September 30, 2012 from 1.26% for three months ended September 30, 2011.

Interest expense on borrowings decreased $69 thousand to $285 thousand for the three months ended September 30, 2012 from $354 thousand for the three months ended September 30, 2011. The average cost of borrowings decreased 14 basis points to 2.82% for the three months ended September 30, 2012 as a result of paying off higher costing term Federal Home Loan Bank advances.

Provision for Loan Losses. The Company’s provision for loan losses for the three months ended September 30, 2012 was $112 thousand, a decrease of $35 thousand from $147 thousand for the three months ended September 30, 2011. For further discussion related to the provision for loan losses, see “Allowance for Loan Losses” in the “Comparison of Financial Condition at September 30, 2012 and June 30, 2012.” For further discussions related to loan portfolio performance, see “Non-performing Assets” in the “Comparison of Financial Condition at September 30, 2012 and June 30, 2012” and Note 4 of the notes to the consolidated financial statements.

 

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Table of Contents

Non-Interest Income. The following table summarizes changes in non-interest income:

 

     Three Months Ended
September 30,
     Change  
     2012      2011      $     %  
     (In thousands)               

Customer service fees

   $ 90       $ 91       $ (1     (1.1 )% 

Loan servicing fees

     5         9         (4     (44.4

Bank owned life insurance income

     73         75         (2     (2.7

Other non-interest income

     32         30         2        6.7   
  

 

 

    

 

 

    

 

 

   

Non-interest income before net gains

     200         205         (5     (2.4

Net gain on sale of loans

     —           6         (6     (100.0
  

 

 

    

 

 

    

 

 

   

Net gains

     —           6         (6     (100.0
  

 

 

    

 

 

    

 

 

   

Total non-interest income

   $ 200       $ 211       $ (11     (5.2
  

 

 

    

 

 

    

 

 

   

Total non-interest income decreased $11 thousand to $200 thousand for the three months ended September 30, 2012 as compared to $211 thousand for the three months ended September 30, 2011.

Non-Interest Expense. The following table summarizes changes in non-interest expense:

 

     Three Months Ended
September 30,
     Change  
     2012      2011      $     %  
     (In thousands)               

Salaries and employee benefits

   $ 1,770       $ 1,738       $ 32        1.8

Occupancy and equipment

     388         386         2        0.5   

Data processing

     197         177         20        11.3   

Directors’ fees

     94         80         14        17.5   

FDIC assessments

     69         67         2        3.0   

Other non-interest expense

     403         488         (85     (17.4
  

 

 

    

 

 

    

 

 

   

Total non-interest expense

   $ 2,921       $ 2,936       $ (15     (0.5
  

 

 

    

 

 

    

 

 

   

Total non-interest expense remained relatively unchanged with a decrease of $15 thousand to $2.9 million for the three months ended September 30, 2012. Directors’ fees increased $14 thousand, or 17.5%, to $94 thousand from $80 thousand for the three month periods ended September 30, 2012 and 2011, respectively. The increase is primarily due to addition of one new director in June 2011. Data processing expenses increased $20 thousand, or 11.3%, to $197 thousand for the three months ended September 30, 2012 as compared to $177 thousand for the three months ended September 30, 2011. The increase is primarily the result of increased licensing fees and processing costs. Other non-interest expense decreased $85 thousand to $403 thousand from $488 thousand for the three month periods ended September 30, 2012 and 2011, respectively. The decrease in other non-interest expense is primarily due to lower legal and professional fees, dues and licensing fees, and other operating expenses, and a decrease in miscellaneous losses.

 

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Table of Contents

Income Taxes. The Company recorded income tax expense of $162 thousand for the three months ended September 30, 2012, reflecting an effective tax rate of 38.4%, compared to income tax expense of $14 thousand for the three months ended September 30, 2011, reflecting an effective tax rate of 13.7%. The lower effective tax rate for the three months ended September 30, 2011 as compared to September 30, 2012 is primarily the result of tax-exempt BOLI income representing a larger portion of pre-tax income. The difference from the effective tax rate to the statutory tax rate reflects the amount of income received from bank-owned life insurance, which is tax-exempt for federal and state tax purposes, relative to total pre-tax income for each period.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required, as the Registrant is a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2012. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2012, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

As of September 30, 2012, the Company was not subject to any legal actions, the outcome of which was expected to have a material effect on our financial condition or results of operations.

 

ITEM 1A. RISK FACTORS

Not required, as the Company is a smaller reporting company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information in connection with repurchases of the Company’s shares of common stock for the period of July 1, 2012 through September 30, 2012. All shares repurchased during the three months ended September 30, 2012 have been retired. On March 16, 2012, the Board of Directors authorized the repurchase of up to 208,294 shares, or 5% of the Company’s common stock outstanding at the completion of the Company’s initial repurchase program approved on May 19, 2011. The repurchase authorization has no expiration date.

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per
Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number of
Shares That May yet
be Purchased Under
the Plans or
Programs
 

July 1, 2012 through July 31, 2012

     7,826       $ 14.84         7,826         174,190   

August 1, 2012 through August 31, 2012

     33,703         14.85         33,703         140,487   

September 1, 2012 through September 30, 2012

     12,887         14.85         12,887         127,600   
  

 

 

       

 

 

    

Total

     54,416         14.85         54,416         127,600   
  

 

 

       

 

 

    

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Exhibit Index” immediately following the Signatures.

 

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Table of Contents

SIGNATURES

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

 

      OBA FINANCIAL SERVICES, INC.
      (Registrant)
Date: November 14, 2012      

/s/    CHARLES E. WELLER

      Charles E. Weller
      President and Chief Executive Officer
Date: November 14, 2012      

/S/    DAVID A. MILLER

      David A. Miller
      Senior Vice President and Chief Financial Officer

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Description

  31.1    Certification of Charles E. Weller, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
  31.2    Certification of David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
  32    Certification of Charles E. Weller, President and Chief Executive Officer, and David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

39