10-K 1 d589252d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

For the Fiscal Year Ended June 30, 2013

OR

 

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

For the transition period from             to             

Commission File Number: 001-34593

 

 

OBA Financial Services, Inc.

(Name of Registrant as Specified in its Charter)

 

Maryland   27-1898270

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

20300 Seneca Meadows Parkway, Germantown, Maryland   20876
(Address of Principal Executive Office)   (Zip Code)

(301) 916-0742

(Registrant’s Telephone Number including area code)

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

Common Stock, par value $0.01 per share

(Title of Class)

The NASDAQ Stock Market LLC

(Name of exchange on which registered)

Securities Registered Under Section 12(g) of the Exchange Act:

None

 

 

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file reports), and (2) has been subject to such requirements for the past 90 days.

(1)    YES  x    NO  ¨

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

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    x  NO

The aggregate value of the voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price of the Registrant’s shares of common stock as of December 31, 2012 ($17.59) was $69.2 million.

As of September 20, 2013, there were 4,038,006 shares outstanding of the Registrant’s common stock.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

1. Proxy Statement for the 2013 Annual Meeting of Stockholders (Part II and III)

 

 

 


Table of Contents

OBA FINANCIAL SERVICES, INC.

FORM 10-K

INDEX

 

PART I

  

Forward-looking Statements

     1   

Item 1. Business

     3   

Item 1A. Risk Factors

     18   

Item 1B. Unresolved Staff Concerns

     25   

Item 2. Properties

     25   

Item 3. Legal Proceedings

     25   

Item 4. Mine Safety Disclosures

     25   

PART II

  

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     26   

Item 6. Selected Financial Data

     28   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 8. Financial Statements and Supplementary Data

     54   

Item 9. Changes in And Disagreements With Accountants on Accounting and Financial Disclosure

     96   

Item 9A. Controls and Procedures

     96   

Item 9B. Other Information

     96   

PART III

  

Item 10. Directors, Executive Officers, and Corporate Governance

     97   

Item 11. Executive Compensation

     97   

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     97   

Item 13. Certain Relationships and Related Transactions and Director Independence

     97   

Item 14. Principal Accountant Fees and Services

     97   

PART IV

  

Item 15. Exhibits and Financial Statement Schedules

     98   

Signatures

     100   


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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 commercial, residential, consumer 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;

 

   

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 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;

 

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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 (“FASB”), the Securities and Exchange Commission (“SEC”), and the Public Company Accounting Oversight Board (“PCAOB”), or changes to the Company’s primary banking 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;

 

   

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

 

ITEM 1. Business

OBA Financial Services, Inc.

OBA Financial Services, Inc. is a Maryland corporation that owns 100% of the common stock of OBA Bank (“Bank”). On January 21, 2010, the Company completed its initial public offering of common stock in connection with the mutual-to-stock conversion of OBA Bancorp, MHC, selling 4,628,750 shares of common stock at $10.00 per share and raising $46.3 million of gross proceeds. Since the completion of the initial public offering, the Company has not engaged in any significant business activity other than owning the common stock of and having deposits in the Bank. At June 30, 2013 the Company had consolidated assets of $381.6 million, consolidated deposits of $283.3 million, and consolidated stockholders’ equity of $71.3 million.

The Company’s executive offices are located at 20300 Seneca Meadows Parkway, Germantown, Maryland 20876. The Company’s telephone number at this address is (301) 916-0742.

OBA Bank

The Bank is a federally chartered savings bank headquartered in Germantown, Maryland. The Bank was organized in 1861 and reorganized into the mutual holding company structure in 2007. The Bank is a wholly-owned subsidiary of OBA Financial Services, Inc. The Bank provides financial services to individuals, families, and businesses through six banking offices located in the Maryland counties of Montgomery, Howard, and Anne Arundel.

The Bank’s executive offices are located at 20300 Seneca Meadows Parkway, Germantown, Maryland 20876. The Bank’s telephone number at this address is (301) 916-0742.

Available Information

OBA Financial Services, Inc. is a public company and files interim, quarterly, and annual reports with the SEC. These respective reports are on file and a matter of public record with the SEC and may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

The Company’s website address is www.obabank.com. Information on this website should not be considered a part of this annual report.

General

The Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in commercial real estate, commercial business, construction, and residential mortgage loans, home equity loans and lines of credit, and investment securities. To a lesser extent, the Bank also originates other consumer loans. The Bank offers a variety of deposit accounts, including commercial and consumer checking, money market, savings, individual retirement accounts, and certificates of deposit.

Market Area

The Bank’s operations are conducted from four full-service branch offices located in Montgomery County, Maryland, which is on the northwest border of Washington, D.C., a full-service branch office located in Howard

 

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County, Maryland, and a full-service branch office in Anne Arundel County, Maryland. Government, professional and business services, and education and health services are the leading industries in the local economy. Maryland has a larger share of professional, technical, and government jobs and a smaller share of manufacturing jobs as compared to the United States.

The national unemployment rate dropped from 8.2% to 7.4% from July 2012 to July 2013. The state of Maryland unemployment rate increased from at 7.2% in July 2012 to 7.5% in July 2013. Maryland’s labor force, at approximately 3.1 million for June 2013, remained essentially unchanged from June 2012. Unemployment rates for Montgomery and Howard Counties were 5.5% for July 2013, down from 6.0% and 5.7%, respectively. Anne Arundel County was down slightly from 6.8% in July 2012 to 6.7% for July 2013.

While rates have risen from their historic lows, total housing starts in the United States increased on an annualized basis by 20.9% in July 2013 as compared to July 2012. In Maryland, housing starts were up approximately 18% in the first quarter of 2013 compared to the first quarter of 2012. Existing home sales in Maryland were up approximately 7.5% during the twelve months ended March 31, 2013 as compared to March 31, 2012. In Maryland, the average sales price of existing homes in July 2013 was approximately $293 thousand higher, or 6.1%, than July 2012 when the average sale price of existing homes was $276 thousand. The average sales price of homes in Howard County increased by approximately 4.8% in April 2013, to approximately $434 thousand, as compared to April 2012. In Montgomery County, the median sales price increased to $435 thousand in July 2013 as compared to July 2012, an increase of approximately 11%. Median home prices in Anne Arundel County increased to $325 thousand in July 2013 as compared to July 2012, an increase of 8%.

Competition

The Bank faces intense competition in making loans and attracting deposits in the market areas served by the Bank. The Bank competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and investment banking firms. Some competitors have greater name recognition and market presence that benefit them in attracting business and offer certain services that the Bank does not or cannot provide.

Lending Activities

The Bank’s primary lending activities are the origination of commercial real estate, commercial business, construction, and residential mortgage loans, and home equity loans and lines of credit. To a lesser extent, the Bank also originates other consumer loans.

Commercial Real Estate Loans. Properties securing the Bank’s commercial real estate loans generally include small office buildings, office/warehouse space, and other general use commercial structures. The Bank is seeking to originate more loans for business owner-occupied properties and select investment properties. The Bank typically seeks to originate commercial real estate loans with initial principal balances of $2.5 million or less. All of the Bank’s commercial real estate loans are secured by properties located in the Bank’s primary market area.

In the underwriting of commercial real estate loans, the Bank generally lends up to the lesser of 80% of the property’s appraised value or purchase price. The credit decision is based primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, the ratio of the property’s projected net cash flow to the loan’s debt service requirement, generally requiring a minimum ratio of 125%, is emphasized and is computed after deductions for a vacancy factor and property expenses, as deemed appropriate. Personal guarantees are usually obtained from commercial real estate borrowers. The Bank requires title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect the Bank’s security interest in the underlying property. Almost all of the Bank’s commercial real estate loans are generated internally by the Bank’s loan officers.

 

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Commercial Business Loans. The Bank makes secured and unsecured commercial business loans primarily to small and medium sized businesses primarily located in Montgomery, Howard, and Anne Arundel Counties, Maryland. The Bank is well diversified from an industry perspective with no major concentrations in any industry. Commercial business loans, both fixed and adjustable rate, consist of term loans, as well as, closed and open-end lines of credit for the purpose of current asset financing, equipment purchase, working capital, and other general business purposes. The adjustable-rate is generally indexed to a short-term market rate. The Bank seeks to originate loans with principal balances between $100 thousand and $2.5 million. Generally, the maximum term of a commercial business loan is ten years.

Construction Loans. The Bank makes construction loans for rental properties, commercial buildings, and homes built by developers on speculative, undeveloped property. The terms of commercial construction loans are made in accordance with the Bank’s commercial loan policy. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to an 80% loan-to-completed-appraised-value ratio. Generally, before making a commitment to fund a construction loan, the Bank requires an appraisal of the property by a state-certified or state-licensed appraiser. The Bank reviews and inspects all properties before disbursement of funds during the term of the construction loan. Repayment of construction loans on residential properties is normally expected from the property’s eventual rental income, income from the borrower’s operating entity, or the sale of the subject property. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. Construction loans are interest-only loans during the construction period, which generally will not exceed twelve months, and convert to permanent, fully amortizing financing following the completion of construction. The Bank typically provides the permanent mortgage financing on the Bank’s construction loans on income-producing property.

Residential Mortgage Loans. The Bank offers fixed-rate and adjustable-rate residential mortgage loans with maturities up to 30 years. Residential mortgage loans are generally underwritten according to Freddie Mac guidelines. The Bank refers to loans that conform to such guidelines as Conforming Loans. The Bank generally originates both fixed and adjustable rate mortgage loans in amounts up to the maximum Conforming Loan limits as established by the Federal Housing Finance Agency; which is, generally, $417 thousand for single-family homes, but is $626 thousand for single-family homes located in the Washington, DC metropolitan area. The Bank also originates loans above the amounts for Conforming Loans, which are referred to as Jumbo Loans. The Bank’s maximum loan amount for Jumbo Loans is generally $1.0 million. The Bank generally underwrites Jumbo Loans in a manner similar to Conforming Loans. Jumbo Loans are not uncommon in the Bank’s market area. Loans in excess of $417 thousand are generally originated for retention in the Bank’s loan portfolio.

The Bank’s loan policies allow for the origination of loans with loan-to-value ratios up to 95%. The Bank generally requires private mortgage insurance for loans with loan-to-value ratios in excess of 80%. During the year ended June 30, 2013, the Bank did not originate any residential mortgage loans with loan-to-value ratios in excess of 80%.

The Bank offers a first-time home buyer program. Through this program, the borrower could potentially qualify for a credit towards closing costs.

Other than construction loans and home equity lines of credit, the Bank does not offer interest only mortgage loans on residential properties. An interest only loan is defined as the borrower paying interest only for an initial period, after which the loan converts to a fully amortizing loan. Additionally, the Bank does not offer loans that provide for negative amortization of principal. These loans allow the borrower to pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. The Bank does not offer subprime loans, loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios, or Alt-A loans, traditionally defined as loans having less than full documentation.

 

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Home Equity Loans and Lines of Credit. Home equity loans and lines of credit are secured by the borrower’s primary residence or secondary residence. The Bank’s home equity loans are originated with fixed rates of interest and with terms of up to fifteen years. Home equity lines of credit have a maximum term of 25 years. The borrower is permitted to draw against the line during the first ten years of the line of credit. During this draw period, repayments are made on an interest-only basis. After this initial ten-year draw period, the borrower is required to make payments to principal based on a fifteen year amortization.

The home equity lines of credit are currently originated with adjustable rates of interest. Home equity loans and lines of credit are generally underwritten with the same criteria that are used to underwrite residential mortgage loans. For a borrower’s primary residence, home equity loans and lines of credit may be underwritten with a maximum loan-to-value ratio of 75% when combined with the principal balance of the existing mortgage loan, while the maximum loan-to-value ratio on secondary residences and investment properties is 70% when combined with the principal balance of the existing mortgage loan.

The Bank requires appraisals on home equity loans and lines of credit. At the time of closing a home equity loan or line of credit, the Bank records the mortgage to perfect the security interest in the underlying collateral. At June 30, 2013, the Bank’s self-imposed maximum limit for a home equity loan or a line of credit was generally $200 thousand.

Loan Originations, Purchases, Sales, Participations and Servicing. All loans originated are underwritten pursuant to the Bank’s policies and procedures, which incorporate standard underwriting guidelines, including those of Freddie Mac, to the extent applicable. The Bank originates both adjustable-rate and fixed-rate loans. Most of the Bank’s residential mortgage loan originations are generated by the Bank’s employees located in the Bank’s branch offices and corporate headquarters.

The Bank intends to sell most of the residential mortgage loans it originates servicing released, but will retain many of its originated jumbo residential mortgage loans. Loans sold by the Bank are sold without recourse, except for normal representations and warranties provided in sale transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of un-remedied defaults, making certain insurance and tax payments are paid on behalf of the borrowers, and generally administering the loans. The Bank retains a portion of the interest paid by the borrower on the loans serviced as consideration for the servicing activities.

During the fiscal years ended June 30, 2013 and 2012, the Bank did not have to repurchase any loans or provide loss reimbursement on loans sold.

From time to time, the Bank enters into participations in commercial loans with other banks. In these circumstances, the Bank will generally follow the Bank’s customary loan underwriting and approval policies.

Loan Approval Procedures and Authority. The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Bank’s Board of Directors (“Board”). The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan. To assess the borrower’s ability to repay, the Bank reviews the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. The Bank requires full documentation on all loan applications.

Management establishes the Bank’s policies and loan approval limits; which are approved by the Board. Consumer loans in amounts up to $100 thousand, residential real estate loans up to the Freddie Mac conforming loan limit, and commercial loans up to $2.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority. Relationships in excess of these amounts require the approval of the Board or its loan committee.

 

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The Bank requires appraisals for all real property securing residential mortgage and commercial real estate loans and home equity loans and lines of credit. All appraisals are performed by state-licensed or state-certified appraisers. The Bank’s practice is to have local appraisers approved annually by the Board.

Investments

The Bank’s securities portfolio consists primarily of mortgage-backed securities issued by U.S. Government agencies or U.S. Government-sponsored enterprises that are backed by the full faith and credit of the U.S. government.

The Bank’s Investment Committee, which is comprised of the Board’s Executive Committee and the Bank’s Chief Financial Officer, has primary responsibility for establishing and overseeing the investment policy. The general investment strategies are developed by the Chief Financial Officer and approved by the Management Asset Liability Committee and the Investment Committee or Board. The Bank’s President and the Chief Financial Officer are responsible for the execution of specific investment actions. These officers are authorized to execute investment transactions of up to $1.0 million per transaction without the Investment Committee or Board’s prior approval of the investment strategy provided the transactions are within the scope of the established investment policy. The investment policy is reviewed and approved annually by the Management Asset Liability Committee and changes to the policy are subject to approval by the Investment Committee or Board. Investment policy objectives include, but are not limited to, providing liquidity necessary to conduct business activities of the Bank, collateral for pledging, a portfolio of high credit quality assets, and enhancing profitability within the overall asset/liability management objectives of the Bank. All gains and losses on securities transactions are reported to the Board on a monthly basis.

The Bank’s current investment policy permits, among other securities, investments in securities issued by the U.S. Government as well as mortgage-backed securities and direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae. The Bank’s current investment policy does not permit investment derivatives as defined in federal banking regulations or in other high-risk securities. The investment policy permits, among other assets and with certain limitations, investments in certificates of deposit, collateralized mortgage obligations, auction rate/money market preferred securities, and mutual funds, limited to adjustable rate mortgage funds. The policy also permits investments in equity securities, generally limited to agency and Federal Home Loan Bank of Atlanta (“FHLB”) common and preferred stock. The Bank’s investment in equity securities outside the policy’s general limitation totaled $50 thousand at June 30, 2013 and is not considered material.

The Bank’s investment policy expressly prohibits the use of the investment portfolio for market-oriented trading activities or speculative purposes unless otherwise approved by the Board. The Bank does not intend to profit in the investment account from short-term securities price movements. Accordingly, the Bank does not currently have a trading account for investment securities.

Accounting guidance requires that, at the time of purchase, the Bank designate a security as either held to maturity, available-for-sale, or trading based upon the Bank’s ability and intent to hold the security. Securities available-for-sale and trading securities are reported at fair value and securities held to maturity are reported at amortized cost. A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary. The fair values of mortgage-backed securities are based on quoted market prices or, when quoted prices in active markets for identical assets are not available, are based on matrix pricing, which is a mathematical technique that relies on the securities’ relationship to other benchmark quoted prices.

Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as pass-through certificates

 

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because the principal and interest of the underlying loans are passed through to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of residential mortgages. Issuers of such securities pool the loans and resell the participation interests in the form of securities to investors. The interest rate on the security is lower than the interest rates on the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, Fannie Mae, and Freddie Mac, either guarantee the payments or guarantee the timely payment of principal and interest to investors. Mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize borrowings. Investments in mortgage-backed securities include a risk that actual principal payments will be greater or less than the prepayment rate estimated at the time of purchase, or prepayment risk. The difference in expected cash flow may require adjustments to the amortization of premium or accretion of discount relating to the security, thereby affecting the net yield on the security.

Sources of Funds

General. Deposits traditionally have been the primary source of funds for investment and lending activities. The Bank also borrows from the Federal Home Loan Bank of Atlanta and from securities dealers to supplement cash flow needs, change the maturity of liabilities for interest rate risk management purposes, and manage the Bank’s cost of funds. Additional sources of funds are scheduled loan payments, maturing investments, loan repayments, customer repurchase agreements, retained earnings, income on other earning assets, and the proceeds of loan sales.

Deposits. The Bank accepts deposits primarily from the areas in which the Bank’s offices are located. The Bank relies on competitive pricing and products, convenient locations, and quality customer service to attract and retain deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The deposit accounts consist of commercial and consumer checking, money market, savings, individual retirement accounts, and certificates of deposit. The Bank accepts deposits through the Certificate of Deposit Account Registry Service (“CDARS”) program, which are classified as brokered deposits for regulatory purposes and can accept brokered deposits.

Interest rates paid, maturity terms, service fees, and withdrawal penalties are reviewed and adjusted on a periodic basis by Management and approved by the Bank’s Asset Liability Committee. Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements, and the Bank’s deposit growth goals.

Borrowings. The Bank’s borrowings consist of advances from the Federal Home Loan Bank of Atlanta and funds borrowed from securities dealers and customers under repurchase agreements. Advances from the Federal Home Loan Bank of Atlanta are secured by pledged mortgage-backed securities, as well as, a blanket pledge on various categories of assets. Repurchase agreements are generally secured by mortgage-backed securities.

Personnel

As of June 30, 2013, the Company had 63 full-time employees and nine part-time employees. The Company’s employees are not represented by any collective bargaining group. Management believes that there is a good working relationship with the Company’s employees.

 

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FEDERAL AND STATE TAXATION

Federal Taxation

General. OBA Financial Services, Inc. and OBA Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company.

Method of Accounting. For federal income tax purposes, the Bank files a consolidated tax return with OBA Financial Services, Inc., reports its income and expenses on the accrual method of accounting, and uses a tax year ending June 30th for filing their consolidated federal income tax returns.

Corporate Dividends. OBA Financial Services, Inc. can exclude from its income 100.0% of dividends received from OBA Bank as a member of the same affiliated group of corporations.

Audit of Tax Returns. The Company’s federal income tax returns, as applicable, have not been audited in the most recent five-year period.

State Taxation

The State of Maryland imposes an income tax of approximately 8.25% on income measured substantially the same as federally taxable income, except that U.S. Government interest is not fully taxable. The Company’s state income tax returns have not been audited in the most recent five-year period.

SUPERVISION AND REGULATION

General

The Bank is supervised and examined by the Office of the Comptroller of the Currency (“OCC”) and is subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance funds and depositors, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and, sensitivity to market interest rates. The OCC examines the Bank and prepares reports on any operating deficiencies for the consideration of its Board of Directors. The Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System (the “FRB”), governing reserves to be maintained against deposits and other matters. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents.

Any change in these laws or regulations, whether by the FDIC, the OCC, or Congress, could have a material adverse impact on the Company, and its operations.

OBA Financial Services, Inc., as a savings and loan holding company, is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Federal Reserve Board. The Company is also subject to the rules and regulations of the SEC under the federal securities laws.

 

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Certain of the regulatory requirements that are applicable to OBA Bank and OBA Financial Services, Inc. are described below. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on OBA Bank and OBA Financial Services, Inc., and is qualified in its entirety by reference to the actual statutes and regulations.

Dodd-Frank Act

The Dodd-Frank Act has changed bank regulatory structure and is affecting the lending, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated the Company’s former primary federal regulator, the Office of Thrift Supervision (“OTS”) and required the Bank to be regulated by the OCC, the primary federal regulator for national banks, as of July 21, 2011. The Dodd-Frank Act also authorizes the FRB to supervise and regulate all savings and loan holding companies in addition to the bank holding companies that it previously regulated. The Dodd-Frank Act also requires the FRB to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries. Additionally, the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.

The Dodd-Frank Act also created the Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets continue to be examined for compliance by their applicable bank regulators. The legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation also broadened the base for FDIC insurance assessments. Assessments are now based on an institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250 thousand per depositor. The legislation also required rules governing retention of a portion of credit risk by originators of certain securitized loans, stipulated regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related to mortgage originations. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit votes for their own candidates using a company’s proxy materials. The legislation directed the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. The Dodd-Frank Act provided for originators of certain securitized loans to retain a percentage of the risk for transferred loans, directed the FRB to regulate pricing of certain debit card interchange fees and contained a number of reforms related to mortgage origination.

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended and federal regulations. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities, and certain other assets, subject to applicable limits. The Bank also may invest specified amounts in subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.

 

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Capital Requirements. Federal regulations require savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.

The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the purchaser’s recourse against the savings bank. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

At June 30, 2013, the Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.

Qualified Thrift Lender Test. As a federal savings bank, the Bank must satisfy the qualified thrift lender test (“QTL”). Under the QTL, the Bank must maintain at least 65% of its portfolio assets in qualified thrift investments, primarily residential mortgages and related investments, including mortgage-backed securities, in at least nine months of the most recent 12-month period. Portfolio assets generally mean total assets of a savings

 

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bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the Bank’s business. The Bank also may satisfy the QTL by qualifying as a domestic building and loan association as defined in the Internal Revenue Code. A savings bank that fails the QTL is subject to certain operating restrictions. In addition, the Dodd-Frank Act made noncompliance with the QTL potentially subject to agency enforcement action for violation of laws.

Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A savings bank must file an application for approval of a capital distribution if:

 

   

the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years;

 

   

the savings bank would not be at least adequately capitalized following the distribution;

 

   

the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition; or

 

   

the savings bank is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings bank that is a subsidiary of a holding company must still file a regulatory notice at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.

Such a notice or application may be disapproved if:

 

   

the savings bank would be undercapitalized following the distribution;

 

   

the proposed capital distribution raises safety and soundness concerns; or

 

   

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.

Liquidity. A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. The Bank’s primary source of liquidity to meet short- and long-term funding needs are cash balances at the Federal Reserve Bank, deposits, loan repayments, repurchase agreements with security dealers, and borrowing lines at the Federal Home Loan Bank of Atlanta.

Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings bank, the OCC is required to assess the savings bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by regulators and the Department of Justice. The Bank received an “outstanding” Community Reinvestment Act rating in its most recent federal examination. The Community Reinvestment Act requires all Federal Deposit Insurance-insured institutions to publicly disclose their rating.

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act and its

 

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implementation of Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is generally a company that controls, is controlled by, or is under common control with an insured depository institution such as the Bank. OBA Financial Services, Inc. is an affiliate of OBA Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings banks to maintain detailed records of all transactions with affiliates.

The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:

 

  (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

  (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by the Bank’s Board of Directors. Extensions of credit to executive officers are also subject to additional restrictions.

Enforcement. The OCC has primary enforcement responsibility over federal savings banks and has the authority to bring enforcement action against all institution-affiliated parties, including directors, officers, stockholders, attorneys, appraisers, and/or accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25 thousand per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Prompt Corrective Action Regulations. Under prompt corrective action regulations, the OCC is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank is placed in one of the following five categories based on the savings bank’s capital:

 

   

well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

 

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adequately capitalized (at least 4% leverage capital (3% for savings banks with a composite examination rating of 1), 4% Tier 1 risk-based capital and 8% total risk-based capital);

 

   

undercapitalized (less than 4% leverage capital (3% for savings banks with a composite examination rating of 1), 4% Tier 1 risk-based capital or 3% leverage capital);

 

   

significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); or

 

   

critically undercapitalized (less than 2% tangible capital).

Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is critically undercapitalized within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings bank receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Any holding company of the savings bank that is required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings bank’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors. The final rule discussed above that increases regulatory capital requirements will revise the prompt corrective action categories accordingly.

At June 30, 2013, the Bank met the criteria for being considered “well-capitalized.”

Insurance of Deposit Accounts. The Deposit Insurance Fund (“DIF”) of the FDIC insures deposits at FDIC-insured depository institutions, such as the Bank. Deposit accounts in the Bank are insured by the FDIC; generally up to a maximum of $250 thousand per separately insured depositor and up to a maximum of $250 thousand for self-directed retirement accounts.

The FDIC charges insured depository institutions premiums to maintain the DIF. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels, and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates. Assessment rates range from 2.5 to 45 basis points of an institution’s total assets less tangible capital.

The Dodd-Frank Act increased the minimum target ratio for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-term fund ratio of 2%.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs, and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2013, the annualized FICO assessment was equal to 64 basis points of an institution’s total assets less tangible capital.

 

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Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. The Bank does not know of any practice, condition, or violation that could lead to termination of its deposit insurance.

Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

 

   

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

   

Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

 

   

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

   

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;

 

   

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

 

   

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

 

   

Truth in Savings Act; and

 

   

Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of the Bank also are subject to the:

 

   

Right to Financial Privacy Act which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

   

Electronic Funds Transfer Act and Regulation E promulgated there under, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

   

Check Clearing for the 21st Century Act (“Check 21”), which gives substitute checks, such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

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The USA PATRIOT Act, which requires savings banks to, among other things, establish broadened anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

 

   

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to opt out of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General . OBA Financial Services, Inc. is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, the Company is registered with the FRB and subject to FRB regulations, examinations, supervision, and reporting requirements. In addition, the FRB has enforcement authority over the Company and its subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

The functions of the OTS relating to savings and loan holding companies and their subsidiaries, as well as rulemaking and supervision authority over savings and holding companies, were transferred to the FRB on July 21, 2011, as required by the Dodd-Frank Act.

Permissible Activities. The business activities of the Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to prior regulatory approval and certain additional activities authorized by federal regulations.

Federal law prohibits a savings and loan holding company, including the Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company, without prior written approval of the Federal Reserve Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the FRB must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

The FRB is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

 

  (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and

 

  (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

 

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Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital, which is currently permitted for bank holding companies. The final capital rule discussed above implements the consolidated capital requirements for savings and loan holding companies effective January 1, 2015, with the capital conservation buffer phased in between 2016 and 2019.

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

Dividends and Repurchases. The FRB has issued a supervisory letter regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the supervisory letter provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality, and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the Company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the Company’s overall rate of earnings retention is inconsistent with the Company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The supervisory letter also provides for regulatory review prior to a holding Company redeeming or repurchasing its stock in certain circumstances. These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions.

Acquisition. Under the Federal Change in Control Act, a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire direct or indirect control of a savings and loan holding company. Under certain circumstances, such as where the company involved has securities registered with the SEC under the Securities Exchange Act of 1934, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the FRB has found that the acquisition will not result in control of the company. That rebuttable presumption applies to the Company. A change in control is defined under federal law to occur upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Control Act, the FRB generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

Federal Securities Laws

The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934. The Company is subject to the information, proxy solicitation, insider trading restrictions and, other requirements under the Securities Exchange Act of 1934.

OBA Financial Services, Inc. common stock held by persons who are affiliates (generally officers, directors and principal shareholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period.

 

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Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal control over financial reporting; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the Company’s internal control over financial reporting; and they have included information in the Company’s quarterly and annual reports about their evaluation and whether there have been changes in the Company’s internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. The Company was subject to further reporting requirements beginning with the fiscal year ended June 30, 2011 under the requirements of the Sarbanes-Oxley Act. The Company has prepared policies, procedures and systems designed to ensure compliance with these regulations.

 

ITEM 1A. Risk Factors

Readers should carefully consider the following risks prior to making an investment decision regarding OBA Financial Services, Inc. The following risk factors may cause future earnings to be lower or the financial condition less favorable than Management expects. In addition, other risks of which Management is not currently aware or which Management does not believe to be material, may cause earnings to be lower or may cause the financial condition to be worse than expected. Please consider all information contained within this Annual Report on Form 10-K, as well as, the documents incorporated by reference.

The Company intends to continue its emphasis on commercial real estate and commercial business loan originations. Credit risk will increase and a continued downturn in the local real estate market or the local or national economy could adversely affect earnings.

The Company intends to continue its recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than residential mortgage loans that the Bank originates. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As the Company’s commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. This increasing risk has contributed to the Company’s need to increase the allowance for loan losses through charges to earnings. Future increases in commercial real estate loans and commercial loans may require additional increases in the Company’s allowance for loan losses through charges to earnings.

The Company has begun to focus on construction loan originations. Credit risk will increase and a continued downturn in the local real estate market and economy could adversely affect earnings.

The Company began to focus on originating commercial and residential construction loans. Construction loans generally have more risk than residential mortgage loans that the Bank originates. The repayment of construction loans depends on the successful management and completion of the construction project and the ability of the borrower to acquire permanent financing or sell the property. The Company typically originates construction loans that, when the project is complete, the Company will extend permanent financing to the

 

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borrower and/or the property is considered owner occupied. The repayment of such loans can be affected by adverse conditions in the local real estate market or economy. As the Company’s construction loan portfolio increases, the corresponding risks and potential for losses from these loans may also increase. This increasing risk has contributed to the Company’s need to increase the allowance for loan losses through charges to earnings. Future increases in construction loans may require additional increases in the Company’s allowance for loan losses through charges to earnings.

The Company continues to originate and retain in its portfolio some residential mortgage loans. A continued downturn in the local real estate market and economy could adversely affect earnings.

The Company has continued its origination and retention of certain residential mortgage loans. Although the local real estate market and economy have performed better than many other markets, a downturn could cause higher unemployment, more delinquencies, and could adversely affect the value of properties securing loans. In addition, the real estate market may take longer to recover or not recover to previous levels. These risks increase the probability of an adverse impact on the Company’s financial results as fewer borrowers would be eligible to borrow and property values could be below necessary levels required for adequate coverage on the requested loan.

A portion of the commercial business and construction loan portfolios are unseasoned.

The Company has grown its commercial business and construction loan portfolios over the past several years. The future performance of this portion of the loan portfolio is difficult to assess due to the general unseasoned nature of the portfolio. These loans may have delinquency or charge-off levels above the Company’s historical experience, which could adversely affect future performance.

If the Company’s allowance for loan losses is not sufficient to cover actual loan losses, earnings could be adversely affected.

The Company makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of the Company’s borrowers and the value of the real estate and other assets serving as collateral for the repayment of the Company’s loans. In determining the amount of the allowance for loan losses, Management reviews the loans and the loss and delinquency experience, and evaluates economic conditions. If the assumptions are incorrect, the allowance for loan losses may not be sufficient to cover probable incurred losses in the Company’s loan portfolio, resulting in additions to the allowance through charges to earnings. Material additions to the allowance could materially decrease the Company’s net income. In addition, bank regulators periodically review the Company’s allowance for loan losses and may require the Company to increase the allowance for loan losses or recognize further loan charge-offs. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on the Company’s financial condition and results of operations.

The Company’s branch network expansion strategy may negatively affect the Company’s financial performance.

The Company intends to expand its branch network over the next five years. This strategy may not generate earnings, or may not generate earnings within a reasonable period of time. Numerous factors contribute to the performance of a new branch, such as a suitable location, qualified personnel, and an effective marketing strategy. Additionally, a new branch takes time to originate sufficient loans and generate sufficient deposits to produce enough income to offset expenses, some of which, like salaries and occupancy expense, are relatively fixed costs.

 

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Concentration of loans in the Company’s primary market area, which has recently experienced an economic downturn, may increase risk.

The Company’s success depends primarily on the general economic conditions in Montgomery, Howard, and Anne Arundel Counties, Maryland as most of the Company’s loans are to customers in these markets. Accordingly, the local economic conditions in these markets have a significant impact on the ability of borrowers to repay loans as well as the Company’s ability to originate new loans. As such, a decline in real estate values in these markets would lower the value of the collateral securing loans on properties in these markets. In addition, a continued weakening in general economic conditions, such as; inflation, recession, unemployment, or other factors beyond the Company’s control could negatively affect financial results.

A continuation or worsening of economic conditions could adversely affect our financial condition and results of operations.

Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in sales volumes and continued elevated unemployment levels may result in higher than expected loan delinquencies, increases in our nonperforming and criticized classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.

The Company’s 2011 Equity Incentive Plan will increase expenses and reduce income.

In May 2011, the Company’s stockholders approved the OBA Financial Services, Inc. 2011 Equity Incentive Plan. Stockholders approved the issuance of a total of 648,025 shares under the plan. Grants under the plan were issued on July 21, 2011 as described in the Company’s Current Report on Form 8-K as filed with the SEC on May 17, 2011. Subsequent periods included expenses for the 2011 equity incentive plan which reduced income.

The implementation of the 2011 Equity Incentive Plan may dilute stockholders’ ownership interest.

The Company’s 2011 Equity Incentive Plan was funded from the issuance of authorized but unissued shares of common stock. The ability to repurchase shares of common stock to fund the plan will be subject to many factors, including, but not limited to, applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, alternative uses for the capital, and the Company’s capital levels and financial performance. Although the Company’s current intention is to fund the plan with stock repurchases, the Company may not be able to conduct such repurchases. If the Company does not repurchase shares of common stock to fund the plan, then stockholders would experience a reduction in their ownership interest, which would total 12.3% in the event newly issued shares are used to fund stock options or awards of shares of common stock under the plan.

If the Company’s investment in the common stock of the Federal Home Loan Bank of Atlanta is classified as other-than-temporarily impaired, the Company’s earnings and stockholders’ equity could decrease.

The Company owns stock of the Federal Home Loan Bank of Atlanta, which is part of the Federal Home Loan Bank system. The FHLB common stock is held to qualify for membership in the FHLB and to be eligible to borrow funds under the FHLB’s advance programs. There is no market for FHLB common stock.

Although the FHLB is not reporting current operating difficulties, it is possible that the capital of the Federal Home Loan Bank system, including the FHLB, could be substantially diminished. This could occur with respect to an individual Federal Home Loan Bank due to the requirement that each Federal Home Loan Bank is

 

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jointly and severally liable along with the other Federal Home Loan Banks for the consolidated obligations issued through the Office of Finance, a joint office of the Federal Home Loan Banks, or due to the merger of a Federal Home Loan Bank experiencing operating difficulties into a stronger Federal Home Loan Bank. Consequently, there continues to be a risk that the Company’s investment in FHLB common stock could be deemed other-than-temporarily impaired at some time in the future, and if this occurs, it would cause the Company’s earnings and stockholders’ equity to decrease by the impairment charge.

Strong competition within the Company’s market areas may limit the Company’s growth and profitability.

Competition in the banking and financial services industry is intense. In the Company’s market areas, the Company competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that the Company does not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively, which could affect the Company’s ability to grow and remain profitable on a long-term basis. The Company’s profitability depends upon the continued ability to successfully compete in the Company’s market areas. If interest rates paid on deposits increase or interest rates charged on loans decrease, net interest margin and profitability could be adversely affected. For additional information see “Item 1. Business—Competition.”

Future changes in interest rates could reduce profits.

The Company’s ability to make a profit largely depends on net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:

 

   

the interest income earned on interest-earning assets, such as loans and securities; and

 

   

the interest expense paid on interest-bearing liabilities, such as deposits and borrowings.

Net interest income is affected by changes in market interest rates because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. In a period of rising interest rates, the interest income earned on assets, such as loans and investments, may not increase as rapidly as the interest paid on liabilities, such as deposits, causing a reduction in net interest income. In a period of declining interest rates, the interest income earned on assets may decrease more rapidly than the interest paid on liabilities; causing a reduction in net interest income.

Changes in market interest rates create reinvestment or prepayment risk, which is the risk that the Bank receives an amount of cashflows inconsistent with original estimates. In a declining rate environment, the risk is that Management may not be able to reinvest additional prepayments at interest rates that are comparable to the interest rates earned on the prepaid loans or securities. In an increasing rate environment, loan demand may decrease, the repayment of adjustable-rate loans may be more difficult for borrowers, and a decrease in prepayments may result in a lost opportunity to reinvest those additional cash flows at higher yields.

Changes in interest rates also affect the current fair value of interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Government responses to economic conditions may adversely affect operations, financial condition and earnings.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for

 

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banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect the Company’s operations by restricting its business activities, including the ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of the Bank’s loan and investment securities portfolios, which also would negatively affect financial performance. In addition, the Dodd-Frank Act and implementing regulations are likely to have a significant effect on the financial services industry, which are likely to increase operating costs and reduce profitability. Regulatory or legislative changes could make regulatory compliance more difficult or expensive, and could cause changes to or limits on some products and services, or the way business is operated.

If the Board of Governors of the Federal Reserve System increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering the Bank’s operating costs, could have a significant negative effect on the Bank’s borrowers, especially business borrowers, and the values of underlying collateral securing loans, which could negatively affect the Bank’s financial performance.

The Company is subject to extensive regulatory oversight.

The Company is subject to extensive regulation and supervision. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There also is increased scrutiny of compliance practices generally and particularly with the rules enforced by the Office of Foreign Assets Control. The Company’s failure to comply with these and other regulatory requirements could lead to, among other remedies, administrative enforcement actions and legal proceedings.

Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as the Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.

Proposed and final regulations could restrict the Company’s ability to originate and sell loans.

The Consumer Financial Protection Bureau has issued a rule, effective January 10, 2014, designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would otherwise hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

 

   

excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

 

   

interest-only payments;

 

   

negative-amortization; and

 

   

terms of longer than 30 years.

The final rule also established general underwriting criteria for qualified mortgages, including that the consumer has a total (or “back end”) debt-to-income ratio that is less than or equal to 43%. Lenders must also

 

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verify and document the income and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit the Company’s ability or desire to make certain types of loans or loans to certain borrowers, or could make it more costly/and or time consuming to make these loans, which could limit the Company’s growth or profitability.

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies initially issued a proposed rule to implement this requirement in April 2011. A revised proposed rule was issued in August 2013. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations. Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict the Company’s ability to make loans.

The corporate governance provisions in the Company’s articles of incorporation and bylaws, the Bank’s Charter, and the corporate governance provisions under Maryland law, may prevent or impede the holders of the Company’s common stock from obtaining representation on the Company’s Board of Directors and may impede takeovers of the company that the board might conclude are not in the best interest of the Company or its stockholders.

Provisions in the Company’s articles of incorporation and bylaws may prevent or impede holders of the Company’s common stock from obtaining representation on the Company’s Board of Directors and may make takeovers of the Company more difficult. For example, the Company’s Board of Directors is divided into three staggered classes. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. The Company’s articles of incorporation include a provision that no person will be entitled to vote any shares of the Company’s common stock in excess of 10% of the Company’s outstanding shares of common stock. This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by the Company. In addition, the Company’s articles of incorporation and bylaws restrict who may call special meetings of stockholders and how directors may be removed from office. The charter of the Bank generally provides that for a period of five years from the closing of the stock offering, no person other than the Company may directly or indirectly acquire or offer to acquire the beneficial ownership of more than 10% of any class of equity security of the Bank. In addition, during this five-year period, all shares owned over the 10% limit may not be voted on any matter submitted to stockholders for a vote. Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority vote of stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of the Company’s Board of Directors.

The requirement to account for certain assets at estimated fair value may adversely affect results of operations.

The Company reports certain assets, including securities, at fair value. Generally, for securities that are reported at fair value, the Company uses quoted market prices or valuation models that utilize observable market inputs to estimate fair value. Because these assets are carried on the Company’s books at their estimated fair value, the Company may record losses even if the asset in question presents minimal credit risk.

Changes in the Company’s accounting policies or in accounting standards could materially affect how the Company reports its financial condition and results of operations.

The Company’s accounting policies are essential to understanding financial condition and results of operations of the Company. Some of these policies require the use of estimates and assumptions that may affect

 

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the value of the Company’s assets or liabilities and financial results. Some of the Company’s accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying the financial statements are incorrect, the Company may experience material losses.

From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of the Company’s financial statements. These changes are beyond the control of the Company, can be hard to predict and could materially affect how the Company reports its financial condition and results of operations. The Company could also be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements in material amounts.

Because the nature of the financial services business involves a high volume of transactions, the Bank may face significant operational risks.

The Company operates in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from the Company’s operations, including but not limited to, the risk of fraud by employees or persons outside the company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action, and suffer damage to the Company’s reputation.

Risks associated with system failures, interruptions, or breaches of security could negatively affect the Company’s earnings.

Information technology systems are critical to the Company’s business. The Bank uses various technology systems to manage customer relationships, the general ledger, securities, deposits, and loans. The Bank has established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of the Bank’s systems could deter customers from using the Bank’s products and services. Although the Bank relies on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect the Bank’s systems from compromises or breaches of security.

In addition, the Bank outsources a majority of the data processing to certain third-party providers. If these third-party providers encounter difficulties, or if the Bank has difficulty communicating with them, the Bank’s ability to adequately process and account for transactions could be affected, and the Bank’s business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any system failures, interruption, or breach of security could damage the Bank’s reputation and result in a loss of customers and business thereby subjecting the Bank to additional regulatory scrutiny, or could expose the Bank to litigation and possible financial liability. Any of these events could have a material adverse effect on the Bank’s financial condition and results of operations.

 

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The Company’s risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

The Company’s risk management framework is designed to minimize risk and loss. The Company seeks to identify, measure, monitor, report and control exposure to risk, including, but not limited to, strategic, market, liquidity, compliance and operational risks. While the Company uses a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased the Company’s level of risk. Accordingly, the Company could suffer losses as a result of its failure to properly anticipate and manage these risks.

Historically low interest rates may adversely affect the Company’s net interest income and profitability.

The Federal Reserve Board has recently maintained interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a general matter, the Company’s interest-bearing liabilities reprice or mature more quickly than its interest-earning assets. This has resulted in increases in net interest income in the short term. The Company’s ability to lower its interest expense is limited at these interest rate levels while the average yield on its interest-earning assets may continue to decrease. The FRB has indicated its intention to maintain low interest rates for an extended period. Accordingly, the Company’s net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may decrease, which may have an adverse affect on its profitability.

 

ITEM 1B. Unresolved Staff Concerns

Not applicable.

 

ITEM 2. Properties

The Bank operates from a main office and three full-service branches located in Montgomery County, a full-service branch located in Howard County, Maryland, and a full-service branch located in Anne Arundel County, Maryland. The following table sets forth information with respect to the Company’s full-service banking offices, including the expiration date of leases with respect to leased facilities.

 

CORPORATE

HEADQUARTERS -
GERMANTOWN BRANCH

20300 Seneca Meadows Parkway
Germantown, MD 20876

  BETHESDA

5229 River Road

Bethesda, MD 20816

2/28/2021

  GAITHERSBURG

201 N. Frederick Avenue

Suite 100

Gaithersburg, MD 20877

11/30/2018

COLUMBIA

10840 Little Patuxent Parkway
Columbia, MD 21044

2/28/2013

  ROCKVILLE

451 Hungerford Drive

Suite 101

Rockville, MD 20850

9/30/2020

  ARUNDEL MILLS

7556 Teague Road

Suite 108

Hanover, MD 21076

11/30/2021

 

ITEM 3. Legal Proceedings

At June 30, 2013, the Company was not involved in any legal proceedings the outcome of which the Company believes would be material to its financial condition or results of operations.

 

ITEM 4. Mine Safety Disclosures

Not Applicable.

 

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PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market, Holder and Dividend Information. The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “OBAF.” The approximate number of holders of record of OBA Financial Services, Inc.’s common stock as of September 20, 2013 was 835. Certain shares of OBA Financial Services, Inc. are held in nominee or street name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The following table presents quarterly market information for OBA Financial Services, Inc.’s common stock for the past two fiscal years. The following information with respect to trading prices was provided by the NASDAQ Capital Market.

 

Year ended June 30, 2013

   High      Low      Dividends
Declared
 

Quarter ended September 30, 2012

   $ 15.29       $ 14.50         —     

Quarter ended December 31, 2012

   $ 18.25       $ 15.06         —     

Quarter ended March 31, 2013

   $ 19.50       $ 17.50         —     

Quarter ended June 30, 2013

   $ 19.00       $ 18.06         —     

 

Year ended June 30, 2012

   High      Low      Dividends
Declared
 

Quarter ended September 30, 2011

   $ 15.00       $ 13.50         —     

Quarter ended December 31, 2011

   $ 14.61       $ 13.55         —     

Quarter ended March 31, 2012

   $ 14.98       $ 14.00         —     

Quarter ended June 30, 2012

   $ 15.25       $ 14.04         —     

Dividend payments by OBA Financial Services, Inc. are dependent on dividends it receives from OBA Bank, because OBA Financial Services, Inc. has no source of income other than dividends from OBA Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by OBA Financial Services, Inc. and interest payments with respect to OBA Financial Services, Inc.’s loan to the Employee Stock Ownership Plan. See “Item 1. Business—Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

(b) Sales of Unregistered Securities. Not applicable.

(c) Use of Proceeds. Not applicable.

(d) Securities Authorized for Issuance Under Equity Compensation Plans. The following table sets forth the information as of June 30, 2013 with respect to compensation plans (other than the Company’s employee stock ownership plan) under which equity securities of the registrant are authorized for issuance.

 

     Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
    Weighted average
exercise prices of
outstanding
options, warrants
and rights
    Number of common
stock remaining
available for

future issuance
under stock based
compensation plans
(excluding
securities reflected
in first column)
 

Equity compensation plans approved by stockholders

     531,103 (1)    $ 14.88 (2)      116,922   

Equity compensation plans not approved by stockholders

     N/A        N/A        N/A   
  

 

 

   

 

 

   

 

 

 

Total

         531,103      $     14.88            116,922   
  

 

 

   

 

 

   

 

 

 

 

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(1) Grants under the plan were issued on July 21, 2011, December 19, 2011, and March 1, 2013.
(2) Reflects exercise price of options only.

(e) Stock Repurchases. The following table sets forth information in connection with repurchases of the Company’s shares of common stock during the periods listed. On April 29, 2013, the Board of Directors authorized the repurchase of up to approximately 210 thousand shares, or 5% of the Company’s common stock outstanding at the completion of the Company’s repurchase program approved on March 16, 2012. 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
 

April 1, 2013 through April 30, 2013

     110,861       $     18.54         110,861         146,277   

May 1, 2013 through May 31, 2013

     2,998         18.49         2,998         143,279   

June 1, 2013 through June 30, 2013

     92,000         18.50         92,000         51,279   
  

 

 

       

 

 

    

Total

         205,859             18.52             205,859             51,279   
  

 

 

       

 

 

    

(f) Stock Performance Graph. Not applicable.

 

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ITEM 6. Selected Financial Data

The following selected consolidated financial and other data have been derived, in part, from the consolidated financial statements and notes appearing elsewhere in this annual report.

 

     At June 30,  
     2013      2012     2011      2010     2009  
     (in thousands)  

Selected Financial Condition Data:

            

Total assets

   $ 381,611       $ 392,086      $ 386,445       $ 374,095      $ 362,361   

Cash and cash equivalents

     16,173         31,525        37,968         36,046        33,657   

Interest bearing deposits with other banks

     6,692         9,490        7,058         5,072        —     

Securities available for sale

     37,174         34,454        35,828         29,346        25,909   

Securities held to maturity

     1,445         2,396        3,623         4,637        —     

Federal Home Loan Bank stock, at cost

     1,160         2,169        2,987         3,883        3,883   

Loans receivable, net

     299,803         293,206        279,620         276,098        283,459   

Bank owned life insurance

     9,182         8,898        8,601         8,297        5,455   

Deposits

     283,263         269,572        257,031         233,441        244,536   

Securities sold under agreements to repurchase

     8,544         16,434        15,566         20,292        18,779   

Federal Home Loan Bank advances

     15,623         26,997        29,618         36,834        56,400   

Stockholders’ equity

     71,304         75,715        80,860         80,222        38,502   
     For The Years Ended June 30,  
     2013      2012     2011      2010     2009  
     (in thousands)  

Selected Operating Data:

            

Interest and dividend income

   $ 16,066       $ 15,908      $ 16,248       $ 16,050      $ 17,398   

Interest expense

     2,282         3,599        4,201         5,921        8,880   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     13,784         12,309        12,047         10,129        8,518   

Provision for loan losses

     503         1,085        739         1,278        877   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

     13,281         11,224        11,308         8,851        7,641   

Noninterest income, excluding net gains (losses)

     738         819        876         950        878   

Net gains (losses)

     58         (85     91         (1,819     (967

Noninterest expense

     12,251         11,505        11,035         9,331        8,764   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     1,826         453        1,240         (1,349     (1,212

Income tax expense (benefit)

     704         185        383         (639     (552
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 1,122       $ 268      $ 857       $ (710   $ (660
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
      At or For The Years Ended June 30,  
     2013     2012     2011     2010     2009  

Selected Operating Data:

          

Performance Ratios:

          

Return on average assets

     0.29     0.07     0.23     (0.19 )%      (0.19 )% 

Return on average equity

     1.49        0.35        1.06        (1.24     (1.70

Interest rate spread (1)

     3.68        3.35        3.36        2.82        2.21   

Net interest margin (2)

     3.89        3.59        3.70        3.09        2.52   

Efficiency ratio (3)

     81.00        87.64        85.39        84.22        93.27   

Non-interest expense to average total assets

     3.18        2.97        3.02        2.48        2.48   

Average interest-earning assets to average interest-bearing liabilities

     132.11        123.48        125.92        114.80        111.72   

Average equity to average total assets

     19.54        19.93        22.15        15.23        11.01   

Basic earnings (loss) per share

   $ 0.28      $ 0.07      $ 0.20      $ (0.17     na   

Diluted earnings (loss) per share

   $ 0.28      $ 0.07      $ 0.20      $ (0.17     na   

Asset Quality Ratios:

          

Non-performing loans to total loans

     0.23     2.04     1.88     0.16     0.86

Non-performing assets to total assets

     0.18        1.55        1.40        0.17        0.73   

Allowance for loan losses to non-performing loans

     498.28        50.20        42.44        389.46        47.46   

Allowance for loan losses to total loans

     1.15        1.02        0.80        0.63        0.41   

Capital Ratios (bank-level only):

          

Total capital (to risk-weighted assets)

     22.53     23.42     24.40     25.54     17.34

Tier I capital (to risk-weighted assets)

     21.34        22.29        23.49        24.69        16.84   

Tier I capital (to average assets)

     16.14        15.41        15.98        15.22        11.03   

Other Data:

          

Number of full service offices

     6        6        5        5        5   

Full time equivalent employees

     68        67        67        61        59   

 

(1) The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.
(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(3) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.

 

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ITEM  7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The principal objective of this financial review is to provide an overview of the consolidated financial condition and results of operations of OBA Financial Services, Inc. and its subsidiary, OBA Bank. This discussion and tabular presentations should be read in conjunction with the accompanying Consolidated Financial Statements and Notes, as well as, other information contained herein.

Overview of Income and Expenses

Income

The Company has two primary sources of pre-tax 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 the compensation received from providing products and services and from other income. Non-interest income is primarily earned from service charges on deposit accounts, loan servicing fees, and bank owned life insurance income. The Company also earns income from the sale of residential mortgage loans and other fees and charges.

The Company recognizes gains or losses as a result of the sale 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 expenses the Company incurs in operating its business consist 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, expenses for health care, retirement, and other employee benefits, stock based compensation, and payroll taxes

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.

External processing fees are paid to third parties primarily for data processing services.

Other expenses include expenses for professional services, including, but not limited to, legal, accounting, and consulting services, the early repayment of certain borrowings, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.

Critical Accounting Policies and Estimates

The Notes to the Consolidated Financial Statements contain a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as, estimates made by Management, are integral to the presentation of the Company’s operations and financial condition. These accounting policies require that Management make highly difficult, complex, or subjective judgments and estimates at times regarding matters that are inherently uncertain or susceptible to change. Management has discussed these significant accounting policies, the related estimates, and its judgments with the Audit Committee of the Board. Additional information regarding these policies can be found in the Notes to the Consolidated Financial Statements.

 

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Table of Contents

Discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of the Company, which are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis and bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Management believes the following critical accounting policies require the most significant judgments and estimates used in preparation of the financial statements:

Allowance for Loan Losses. Management 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. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss rates for each loan group and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, or an estimate of the value of collateral. Based on the estimate of the level of allowance for loan losses required, Management records a provision for loan losses to maintain the allowance for loan losses at an appropriate level.

The determination of the allowance for loan losses is based on Management’s current judgments about the loan portfolio credit quality and Management’s consideration of all known relevant internal and external factors that affect loan collectability, as of the reporting date. Management cannot predict with certainty the amount of loan charge-offs that will be incurred. Management does not currently determine a range of loss with respect to the allowance for loan losses. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Such agencies may require that Management recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Accordingly, actual results could differ from those estimates.

Deferred Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be used. The recoverability of deferred tax assets is dependent upon future taxable income.

Other-Than-Temporary Impairment. In estimating other-than-temporary impairment of investment securities, securities are evaluated periodically, and at least quarterly, to determine whether a decline in their value is other than temporary.

Management considers numerous factors when determining whether potential other-than-temporary impairment exists and the period over which a debt security is expected to recover. The principal factors considered are the length of time and the extent to which the fair value has been less than the amortized cost basis, the financial condition of the issuer (and guarantor, if any), any adverse conditions specifically related to the security, industry, or geographic area, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of a security by a rating agency, and the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

For debt securities, other-than-temporary impairment is considered to have occurred if Management intends to sell the security, Management will, more likely than not, be required to sell the security before recovery of its amortized cost basis, or the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. In determining the present value of expected cash flows, Management discounts the expected cash flows at the effective interest rate implicit in the security at the date of acquisition or, for debt securities that are

 

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beneficial interests in securitized financial assets, at the current rate used to accrete the beneficial interest. In estimating cash flows expected to be collected, Management uses available information with respect to security prepayment speeds, expected deferral rates and severity, whether subordinated interests, if any, are capable of absorbing estimated losses and the value of any underlying collateral.

Overview

Total assets decreased $10.5 million, or 2.7%, to $381.6 million at June 30, 2013 from $392.1 million at June 30, 2012. For the fiscal year ended June 30, 2013, the Company had net income of $1.1 million, or $0.28 basic and diluted earnings per share, compared to net income of $268 thousand, or $0.07 basic and diluted earnings per share, for the fiscal year ended June 30, 2012. Net interest margin, the percentage of net interest income to average interest-earning assets, increased to 3.89% for the fiscal year ended June 30, 2013 from 3.59% for the fiscal year ended June 30, 2012. Net interest income, the difference between interest income and interest expense, increased $1.5 million to $13.8 million for the fiscal year ended June 30, 2013 from $12.3 million for the fiscal year ended June 30, 2012.

Non-performing assets totaled $697 thousand, or 0.18% of total assets, at June 30, 2013, compared to $6.1 million, or 1.55% of total assets, at June 30, 2012. The Bank had $779 thousand of loans delinquent 30 days or greater at June 30, 2013, compared to $6.1 million of such delinquencies at June 30, 2012. In addition, the Bank provided $503 thousand for loan losses during the fiscal year ended June 30, 2013 compared to a provision for loan losses of $1.1 million during the fiscal year ended June 30, 2012, or a decrease of $582 thousand.

Balance Sheet Analysis

Cash and Cash Equivalents. At June 30, 2013 and 2012, the Company had $16.2 million and $31.5 million of cash and cash equivalents, respectively. The reduction in cash and cash equivalents was primarily due to an increase in loans and securities and a decrease in borrowings partially offset by an increase in total deposits.

Loans. At June 30, 2013, total loans were $303.3 million, or 79.5% of total assets, as compared to $296.2 million, or 75.6% of total assets at June 30, 2012. During the year ended June 30, 2013, the loan portfolio increased $7.0 million, or 2.4%. The increase in loans was primarily due to an increase in commercial business, commercial real estate, and construction loans partially offset by decreases in residential mortgage loans and home equity loans and lines of credit.

Loan Portfolio Composition. The following table sets forth the composition of the Company’s loan portfolio at the dates indicated.

 

    At June 30,  
    2013     2012     2011     2010     2009  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  

Real estate loans:

                   

Residential mortgage

  $ 80,529       26.6   $ 93,266       31.5   $ 97,285       34.5   $ 123,452       44.5   $ 151,468       53.3

Commercial real estate

    140,104       46.2       136,036       45.9       108,756       38.6       85,423       30.7       64,930       22.8  

Construction

    13,044       4.3       1,850       0.6       1,180       0.4       1,071       0.4       4,935       1.7  

Home equity loans and lines of credit

    27,598       9.1       33,110       11.2       38,785       13.8       41,655       15.0       40,812       14.3  

Commercial business

    42,001       13.8       31,979       10.8       35,860       12.7       26,234       9.4       22,481       7.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    303,276       100.0     296,241       100.0     281,866       100.0     277,835       100.0     284,626       100.0
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Allowance for loan losses

    (3,473       (3,035       (2,246       (1,737       (1,167  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total loans, net

  $ 299,803       $ 293,206       $ 279,620       $ 276,098       $ 283,459    
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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Loan Portfolio Maturities. The following table summarizes the scheduled repayments of the loan portfolio at the dates indicated. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

 

     Residential
Mortgage
     Commercial
Real Estate
     Construction      Home Equity
Loans and
Lines of Credit
     Commercial
Business
     Total  
     (In thousands)  

Due during the Years Ending
June 30,

              

2014

   $ 5,079       $ 10,964       $ 3,123       $ 506       $ 4,669       $ 24,341   

2015

     4,436         12,750         9,921         117         3,799         31,023   

2016

     4,450         20,180         —           119         3,657         28,406   

2017 to 2018

     8,477         41,083         —           227         5,938         55,725   

2019 to 2023

     16,880         44,318         —           551         2,570         64,319   

2024 to 2028

     14,822         6,840         —           3,460         69         25,191   

2029 and beyond

     26,385         3,969         —           22,618         21,299         74,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 80,529       $ 140,104       $ 13,044       $ 27,598       $ 42,001       $ 303,276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at the date indicated:

 

     Due after June 30, 2013  
     Fixed      Adjustable      Total  
     (In thousands)  

Real estate loans:

        

Residential mortgages

   $ 57,657       $ 17,793       $ 75,450   

Commercial real estate

     90,925         38,215         129,140   

Construction

     —           9,921         9,921   

Home equity loans and lines of credit

     1,508         25,584         27,092   

Commercial business

     16,950         20,382         37,332   
  

 

 

    

 

 

    

 

 

 

Loans contractually due after one year

     167,040         111,895         278,935   

Loans contractually due one year or less

     17,867         6,474         24,341   
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 184,907       $ 118,369       $ 303,276   
  

 

 

    

 

 

    

 

 

 

Securities. The following table sets forth the amortized cost and estimated fair value of the available for sale and held to maturity securities portfolios, excluding Federal Home Loan Bank of Atlanta common stock, at the dates indicated.

 

     At June 30,  
     2013      2012      2011  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Residential mortgage-backed securities

   $ 38,426       $ 38,604       $ 35,406       $ 36,899       $ 38,170       $ 39,458   

Trust preferred securities

     41         40         70         54         117         115   

Other securities

     50         50         50         50         50         50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 38,517       $ 38,694       $ 35,526       $ 37,003       $ 38,337       $ 39,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s mortgage-backed securities are guaranteed by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. Total residential mortgage-backed securities increased $1.8 million to $38.6 million, or 10.1% of total assets, at June 30, 2013 from $36.9 million, or 9.4% of total assets, at June 30, 2012. The reduction in the unrealized gain in the securities portfolio as of June 30, 2013 was the result of an increase in long term market interest rates as compared to the original purchase yield of the securities.

 

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The Company currently owns one immaterial position in an insurance company-backed pooled trust preferred security that is performing as contractually obligated.

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2013 are summarized in the following table. Maturities are based on the final contractual maturity dates and do not reflect the impact of repayments or early redemptions that may occur. No tax-equivalent adjustments have been made, as the Company did not hold any tax-advantaged investment securities at June 30, 2013.

 

    One Year or Less     More than One Year
through Five Years
    More than Five Years
through Ten Years
    More than Ten Years     Total Securities  
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Weighted
Average
Yield
    Amortized
Cost
    Fair Value     Weighted
Average
Yield
 
                (Dollars in thousands)                                            

Residential mortgage-backed securities

  $     —              —     $         —                  —     $     5,967              3.20   $     32,459        2.56   $     38,426      $     38,604            2.66

Trust preferred securities

    —          —          —          —          —          —          41        1.53        41        40        1.53   

Other securities

    —          —          —          —          —          —          50        —          50        50        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —          —     $ —          —     $ 5,967        3.20   $ 32,550            2.55   $ 38,517      $ 38,694        2.65
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits. The Bank accepts deposits primarily from the areas in which the Bank’s offices are located. Management’s focus is building broader customer relationships and targeting small business customers to increase core deposits. The Bank also relies on enhanced technology and customer service to attract and retain deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s deposit accounts consist of commercial and retail checking accounts, money market deposit accounts, savings accounts, certificates of deposit, and individual retirement accounts. The Bank accepts deposits through the CDARS program, which are classified as brokered deposits for regulatory purposes, and can accept other brokered deposits.

Interest rates paid, maturity terms, service fees, and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements, and the Bank’s deposit growth goals.

During the fiscal year ended June 30, 2013, deposits increased $13.7 million, or 5.1%, to $283.3 million from $269.6 million at June 30, 2012. The increase primarily resulted from an increase in time certificates of deposit of $11.1 million and a $2.4 million increase in non-interest bearing demand accounts. The Bank issued, at historically low long-term interest rates, longer-term brokered certificates of deposit to match the interest rate risk characteristics of the commercial loan portfolios.

The following tables set forth the distribution of the average total deposit accounts by account type, for the years indicated.

 

     For the Fiscal Years Ended June 30,  
     2013     2012     2011  
     (dollars in thousands)  
     Average
Balance
     Percent     Weighted
Average
Rate
    Average
Balance
     Percent     Weighted
Average
Rate
    Average
Balance
     Percent     Weighted
Average
Rate
 

Non-interest bearing

   $ 40,306         14.8     —     $ 32,736         12.6     —     $ 25,761         11.1     —  

Interest bearing checking

     72,414         26.5        0.43        63,684         24.4        0.58        59,917         25.9        0.57   

Savings and escrow

     7,402         2.7        0.12        7,181         2.8        0.32        7,134         3.1        0.43   

Money Market

     91,237         33.4        0.44        88,355         33.9        0.76        68,145         29.5        0.79   

Certificates of deposit

     61,770         22.6        0.88        68,834         26.3        1.74        70,131         30.4        2.44   
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

Total deposits

   $ 273,129         100.0     0.46   $ 260,790         100.0     0.87   $ 231,088         100.0     1.14
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

 

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The following table sets forth the maturities of certificates of deposit in amounts greater than or equal to $100 thousand as of the date indicated.

 

     At
June 30, 2013
 
     (In thousands)  

Three months or less

   $ 9,866   

Over three months through six months

     6,848   

Over six months through one year

     8,814   

Over one year to three years

     11,928   

Over three years

     2,202   
  

 

 

 

Total

   $     39,658   
  

 

 

 

Borrowings. The Company’s borrowings consist primarily of advances from the Federal Home Loan Bank of Atlanta and funds borrowed from depositors; primarily small business customers under repurchase agreements. During the fiscal year ended June 30, 2013, borrowings decreased $19.3 million, or 44.4%, to $24.2 million. At June 30, 2013, Federal Home Loan Bank advances totaled $15.6 million, or 5.0% of total liabilities, and repurchase agreements totaled $8.5 million, or 2.8% of total liabilities. The Company’s sole repurchase agreement with a securities dealer matured during the fiscal year ended June 30, 2013. That matured repurchase agreement was $5.0 million and the rate was 3.23%. The Company had two long term FHLB advances, for a total of $8.0 million, mature during the fiscal year ended June 30, 2013 at an average rate of 3.06%. Also, the Company repaid $3.3 million of a longer term, $10.0 million, Federal Home Loan Bank advance, which carries a rate of 5.15%, incurring a loss of $488 thousand.

At June 30, 2013, the Company had access to additional Federal Home Loan Bank advances of up to $46.6 million. As of June 30, 2013, the Company’s available credit lines and other sources of liquidity had not been reduced compared to levels from June 30, 2012.

The following table sets forth information concerning balances and interest rates on Federal Home Loan Bank advances at the dates and for the fiscal years indicated.

 

     At or for the Years Ended June 30,  
     2013     2012     2011  
     (dollars in thousands)  

Balance at end of year

   $     15,623      $     26,997      $     29,618   

Average balance during the year

   $ 22,658      $ 34,082      $ 35,845   

Maximum outstanding at any month end

   $ 29,426      $ 42,058      $ 43,166   

Weighted average interest rate at end of year

     4.26     4.00     3.90

Weighted average interest rate during year

     3.89     3.30     3.72

The following table sets forth information concerning balances and interest rates on securities dealer repurchase agreements at the dates and for the years indicated.

 

     At or for the Years Ended June 30,  
     2013     2012     2011  
     (dollars in thousands)  

Balance at end of year

   $ —        $     5,000      $     5,000   

Average balance during the year

   $     3,562      $ 5,000      $ 5,000   

Maximum outstanding at any month end

   $ 5,000      $ 5,000      $ 5,000   

Weighted average interest rate at end of year

     —       3.23     3.23

Weighted average interest rate during year

     3.23     3.23     3.23

 

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The following table sets forth information concerning balances and interest rates on customer repurchase agreements at the dates and for the years indicated.

 

     At or for the Years Ended June 30,  
     2013     2012     2011  
     (dollars in thousands)  

Balance at end of year

   $ 8,544      $ 11,434      $ 10,566   

Average balance during the year

   $ 9,273      $ 10,196      $ 12,300   

Maximum outstanding at any month end

   $     14,132      $     14,291      $     18,361   

Weighted average interest rate at end of year

     0.22     0.20     0.58

Weighted average interest rate during year

     0.20     0.49     0.68

Stockholders’ Equity. At June 30, 2013, stockholders’ equity was $71.3 million, a decrease of $4.4 million, or 5.8%, from $75.7 million at June 30, 2012 primarily due to the Company’s share repurchase program.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and rates, and certain other information for the years indicated. No tax-equivalent yield adjustments were made, as the Company did not hold any tax-advantaged interest-earning assets during the fiscal years indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.

 

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Table of Contents
(dollars in thousands)   For the Fiscal Years Ended June 30,  
    2013     2012     2011  
    Average
Outstanding
Balance
    Interest     Yield/
Rate
    Average
Outstanding
Balance
    Interest     Yield/
Rate
    Average
Outstanding
Balance
    Interest     Yield/
Rate
 

Assets:

                 

Interest-earning assets:

                 

Loans:

                 

Residential mortgage

  $ 87,675      $ 3,773        4.30   $ 94,643      $ 4,417        4.67   $ 108,174      $ 5,490        5.08

Commercial real estate

    135,065        7,877        5.83        115,935        7,079        6.11        100,047        6,273        6.27   

Construction

    4,999        245        4.90        1,170        59        5.04        1,458        73        5.01   

Home equity & lines of credit

    30,282        929        3.07        36,056        1,143        3.17        40,504        1,315        3.25   

Commercial business

    39,442        2,143        5.43        34,362        1,998        5.81        30,867        1,912        6.19   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total loans

    297,463        14,967        5.03        282,166        14,696        5.21        281,050        15,063        5.36   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Loans held for sale

    260        9        3.46        14        1        7.14        —          —          —     

Investments

                 

Mortgage-backed securities

    42,301        926        2.19        37,969        984        2.59        27,546        1,016        3.69   

Trust preferred securities

    57        1        1.75        103        2        1.94        128        2        1.56   

Other investments & interest bearing deposits with banks

    10,248        126        1.23        11,774        131        1.11        9,207        102        1.11   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total investments

    52,606        1,053        2.00        49,846        1,117        2.24        36,881        1,120        3.04   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Other

    4,141        37        0.89        10,424        94        0.90        7,539        65        0.86   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    354,470        16,066        4.53        342,450        15,908        4.65        325,470        16,248        4.99   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Allowance for loan losses

    (3,269         (2,590         (2,078    

Cash and due from banks

    14,498            28,795            22,827       

Other assets

    19,551            19,338            19,113       
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 385,250          $ 387,993          $ 365,332       
 

 

 

       

 

 

       

 

 

     

Liabilities and Stockholders’ Equity:

                 

Interest-bearing liabilities:

                 

Interest-bearing checking

  $ 72,414      $ 309        0.43      $ 63,684      $ 369        0.58      $ 59,917      $ 342        0.57   

Savings and escrow

    7,402        9        0.12        7,181        23        0.32        7,134        31        0.43   

Money Market

    91,237        402        0.44        88,355        673        0.76        68,145        537        0.79   

Certificates of deposit

    61,770        546        0.88        68,834        1,197        1.74        70,131        1,713        2.44   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest bearing deposits

    232,823        1,266        0.54        228,054        2,262        0.99        205,327        2,623        1.28   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

FHLB advances

    22,658        882        3.89        34,082        1,126        3.30        35,845        1,333        3.72   

Repurchase agreements

    12,835        134        1.04        15,196        211        1.39        17,300        245        1.42   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    268,316        2,282        0.85        277,332        3,599        1.30        258,472        4,201        1.63   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing demand deposits

    40,306            32,736            25,761       

Other liabilities

    1,343            600            193       

Stockholders’ equity

    75,285            77,325            80,906       
 

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 385,250          $ 387,993          $ 365,332       
 

 

 

       

 

 

       

 

 

     

Net interest income

      13,784            12,309            12,047     
   

 

 

       

 

 

       

 

 

   

Net interest rate spread (1)

        3.68         3.35         3.36

Net interest-earning assets (2)

  $ 86,154          $ 65,118          $ 66,998       
 

 

 

       

 

 

       

 

 

     

Net interest margin (3)

        3.89         3.59         3.70

Average interest-earning assets to average interest-bearing liabilities

    132.11         123.48         125.92    

 

(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on the Company’s net interest income for the years indicated. The rate column shows the effects attributable to changes in rate, which are changes in rate multiplied by prior volume. The volume column shows the effects attributable to changes in volume, which are changes in volume multiplied by prior rate. The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

(in thousands)    2013 vs. 2012     2012 vs. 2011  
     Increase (Decrease)
Due to
    Total
Increase
    Increase (Decrease)
Due to
    Total
Increase
 
     Volume     Rate     (Decrease)     Volume     Rate     (Decrease)  

Assets:

            

Interest-earning assets:

            

Loans:

            

Residential mortgage

   $ (325   $ (319   $ (644   $ (687   $ (386   $ (1,073

Commercial real estate

     1,168        (370     798        996        (190     806   

Construction

     193        (7     186        (14     —          (14

Home equity & lines of credit

     (183     (31     (214     (144     (28     (172

Commercial business

     295        (150     145        216        (130     86   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     1,148        (877     271        367        (734     (367
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held for sale

     18        (10     8        —          1        1   

Investments

            

Mortgage-backed securities

     112        (170     (58     384        (416     (32

Trust preferred securites

     (1     —          (1     —          —          —     

Other investments & interest bearing deposits with banks

     (17     12        (5     28        1        29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     94        (158     (64     412        (415     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

     (57     —          (57     25        4        29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     1,203        (1,045     158        804        (1,144     (340
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

            

Interest-bearing liabilities:

            

Interest-bearing checking

     51        (111     (60     22        5        27   

Savings and escrow

     1        (15     (14     —          (8     (8

Money Market

     22        (293     (271     159        (23     136   

Certificates of deposit

     (123     (528     (651     (32     (484     (516
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing deposits

     (49     (947     (996     149        (510     (361
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FHLB advances

     (377     133        (244     (66     (141     (207

Repurchase agreements

     (33     (44     (77     (30     (4     (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (459     (858     (1,317     53        (655     (602
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 1,662      $ (187   $ 1,475      $ 751      $ (489   $ 262   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Operating Results for the Fiscal Years Ended June 30, 2013 and 2012

General. For the fiscal year ended June 30, 2013, the Company had net income of $1.1 million, or $0.28 basic and diluted earnings per share, compared to net income of $268 thousand, or $0.07 basic and diluted earnings per share, for the fiscal year ended June 30, 2012. For the fiscal year 2013, net income was positively impacted by an increase in net interest income, an increase in non-interest income and a decrease in the provision for loan losses offset by an increase in non-interest expense. Net interest income increased $1.5 million for the fiscal year ended June 30, 2013 to $13.8 million as total interest and dividend income increased and total interest expense decreased. Non-interest expense increased $746 thousand to $12.3 million for the fiscal year ended

 

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Table of Contents

June 30, 2013. The provision for loan losses decreased $582 thousand to $503 thousand for the year ended June 30, 2013. Non-interest income increased $62 thousand to $796 thousand for the fiscal year ended June 30, 2013.

Net Interest Income. Net interest income increased $1.5 million, or 12.0%, to $13.8 million for the fiscal year ended June 30, 2013 compared to $12.3 million for the fiscal year ended June 30, 2012. Interest expense decreased $1.3 million as continued low market interest rates allowed the Company to reduce deposit rates while maintaining a competitive position in its local market. Non-interest bearing deposits increased $2.4 million, or 6.0%, to $42.4 at June 30, 2013. The increase in deposits allowed the Company to pay off, at maturity, two higher costing FHLB borrowings and partially repay another higher costing FHLB borrowing. Interest and dividend income increased $158 thousand as interest and fees on loans increased $279 thousand. Net interest margin was 3.89% for the fiscal year ended June 30, 2013 as compared to 3.59% for fiscal year ended June 30, 2012. The Company also had two non-performing loans to not-for-profit entities pay off with full recovery on both loans during the fiscal year ended June 30, 2013.

Interest and Dividend Income. Interest and dividend income increased $158 thousand to $16.1 million for the fiscal year ended June 30, 2013 from $15.9 million for the fiscal year ended June 30, 2012. Interest income on loans increased $279 thousand to $15.0 million for the fiscal year ended June 30, 2013 from $14.7 million for the fiscal year ended June 30, 2012. The Company had two loans to not-for profit entities pay off with full recovery of principal, interest, and fees on both loans during the fiscal year ended June 30, 2013. During the fiscal year ended June 30, 2013, interest and dividend income on investments decreased $64 thousand to $1.1 million and income on fed funds sold decreased $57 thousand to $37 thousand. The decreases were the result of increased prepayments and lower reinvestment yields on investments due to lower market rates and a smaller fed funds sold position as cash balances were used to fund loan growth and reduce borrowings.

The average yield on loans decreased 18 basis points, to 5.03% for the fiscal year ended June 30, 2013 from 5.21% for the fiscal year ended June 30, 2012. Average loans increased $15.3 million, or 5.4%. Average commercial loans increased $28.0 million offset by decreases in average residential mortgage loans of $7.0 million, to $87.7 million, and in average home equity loans and lines of credit of $5.8 million, to $30.3 million, during the fiscal year ended June 30, 2013. The average balance of commercial loans increased 18.5% to $179.5 million for the fiscal year ended June 30, 2013 from $151.5 million for the fiscal year ended June 30, 2012. The reduction in the residential mortgage portfolio resulted from selling newly-originated residential mortgage loans, as well as, prepayments exceeding other originations that were held in portfolio.

The average yield on securities decreased 24 basis points to 2.00% for the fiscal year ended June 30, 2013 from 2.24% for the fiscal year ended June 30, 2012. The decrease in yield reflects the purchase of mortgage-backed securities at lower yields as market rates declined over the period. Additionally, as market rates declined, prepayment speeds on mortgage-backed securities increased causing the yield to decrease on bonds purchased at a premium.

Interest Expense. Interest expense decreased $1.3 million, or 36.6%, to $2.3 million for the fiscal year ended June 30, 2013 from $3.6 million for the fiscal year ended June 30, 2012. Continued low market interest rates allowed for the reduction of deposit expense by $996 thousand or 44.0%. The average rate paid on deposits decreased 45 basis points to 0.54% for the fiscal year ended June 30, 2013 from 0.99% for the fiscal year ended June 30, 2012. The average balance of interest bearing deposits increased $4.8 million during the fiscal year ended June 30, 2013. Average interest bearing checking deposits increased $8.7 million, or 13.7%, and average money market deposits increased $2.9 million, or 3.3%, for the fiscal year ended June 30, 2013. Average non-interest bearing demand checking accounts increased $7.6 million, or 23.1% to $40.3 million, for the fiscal year ended June 30, 2013.

Interest expense on Federal Home Loan Bank borrowings decreased $244 thousand to $882 thousand for the fiscal year ended June 30, 2013 from $1.1 million for the fiscal year ended June 30, 2012. This change resulted

 

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Table of Contents

from an $11.4 million, or 33.5%, decrease in average outstanding borrowings for the fiscal year ended June 30, 2013. For additional information, please see the “Borrowings” section under “Balance Sheet Analysis” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Additionally, interest expense on repurchase agreements decreased $77 thousand, or 36.5%, to $134 thousand for the fiscal year ended June 30, 2013. Average repurchase agreements decreased $2.4 million, or 15.5% for the fiscal year ended June 30, 2013. The average yield on repurchase agreements decreased 35 basis points to 1.04% for the fiscal year ended June 30, 2013 from 1.39% for the fiscal year ended June 30, 2012. The decrease in FHLB borrowings reflects management’s strategy to reduce high cost borrowings facilitated primarily by the inflow of core deposits.

Provision for Loan Losses. Based on an analysis of the factors described in “Allowance for Loan Losses,” the Company recorded a provision for loan losses of $503 thousand for the fiscal year ended June 30, 2013 and a provision for loan losses of $1.1 million for fiscal year ended June 30, 2012. During the fiscal years ended June 30, 2013 and 2012, the Company had net loan charge-offs of $65 thousand and $296 thousand, respectively. Net charge-offs for the fiscal year ended June 30, 2013 and 2012 include recoveries of $4 thousand in commercial loans and $15 thousand in residential mortgage loans. The remaining partial charge-offs include two residential mortgages, one commercial loan, and one consumer loan. Total loans increased by $7.0 million to $303.3 million at June 30, 2013 from $296.2 million at June 30, 2012. Commercial business loans increased $10.1 million, or 31.5%, to $42.3 million, construction loans increased $11.2 million to $13.0 million, and commercial real estate loans increased by $4.1 million to $140.1 million at June 30, 2013 as compared to June 30, 2012. This increase was partially offset by decreases in home equity loans and lines of credit of $5.4 million, or 16.6%, to $27.3 million and residential mortgage loans of $12.7 million, or 13.7%, to $80.5 million at June 30, 2013.

Non-performing loans totaled $697 thousand at June 30, 2013 and $6.0 million at June 30, 2012. The decrease was a result of the payoff of two commercial real estate loans to not-for-profit entities in which the Company had a full recovery on both loans.

The Company’s non-performing loans to total loans ratio decreased to 0.23% from 2.04% at June 30, 2013 and 2012, respectively.

Non-performing assets totaled $697 at June 30, 2013 and $6.1 million at June 30, 2012. In addition to the above-mentioned payoff of two not-for-profit entity loans, the Company sold its lone real estate owned property during the fiscal year ended June 30, 2013. The Company’s non-performing assets to total assets ratio decreased to 0.18% from 1.55% at June 30, 2013 and 2012, respectively.

There were $157 thousand in loans delinquent less than 90 days and $622 thousand in loans delinquent 90 days or more with total delinquencies of $779 thousand at June 30, 2013. This represents a decrease in total delinquent loans of $5.3 million from June 30, 2012. Total delinquent loans were $6.1 million at June 30, 2012. Loans delinquent less than 90 days were $1.7 million and loans delinquent 90 days or more were $4.4 million at June 30, 2012.

The allowance for loan losses to total loans was 1.15% and 1.02% at June 30, 2013 and 2012, respectively. The Company has provided for all losses that are both probable and reasonably estimable at June 30, 2013 and 2012.

 

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Table of Contents

Non-Interest Income. The following table summarizes changes in non-interest income for the fiscal years indicated.

 

     For the Years Ended June 30,     Change  
         2013             2012         $     %  
     (In thousands)              

Customer service fees

   $   349      $   372      $ (23     (6.2 )% 

Loan servicing fees

     (23     28        (51     (182.1

Bank owned life insurance income

     283        297        (14     (4.7

Other non-interest income

     129        122        7        5.7   
  

 

 

   

 

 

   

 

 

   

Non-interest income before net gains (losses)

     738        819        (81     (9.9

Net gain on sale of loans

     65        6        59        983.3   

Net loss on disposal of assets

     —          (26     26        (100.0

Write-down of other real estate property

     (7     (65         58        (89.2
  

 

 

   

 

 

   

 

 

   

Net gains (losses)

     58        (85     143        (168.2
  

 

 

   

 

 

   

 

 

   

Total non-interest income

   $ 796      $ 734      $ 62        8.4   
  

 

 

   

 

 

   

 

 

   

The Company’s non-interest income increased $62 thousand for the fiscal year ended June 30, 2013 to $796 thousand from $734 thousand for fiscal year end June 30, 2012. Net gains (losses) increased $143 thousand during the year ended June 30, 2013 to $58 thousand. The Company had an increase in net gains on sale of loans of $59 thousand, to $65 thousand, for the fiscal year ended June 30, 2013. The Company sold its sole other real estate owned property. Non-interest income before net gains (losses) decreased $81 thousand, or 9.9%, to $738 thousand for the year ended June 30, 2013 as compared to $819 thousand for the year ended June 30, 2012. Loan servicing fees decreased $51 thousand from $28 thousand during the year ended June 30, 2013 as the Company accelerated the amortization of servicing rights due to the repayment of underlying residential mortgages. Customer service and loan servicing fees decreased $23 thousand and $51 thousand, respectively, for the fiscal year end June 30, 2013. Bank owned life insurance income decreased $14 thousand, to $283 thousand, for the fiscal year ended June 30, 2013.

Non-Interest Expense. The following table summarizes changes in non-interest expense at the date and years indicated.

 

     For the Years Ended June 30,      Change  
         2013              2012              $         %  
     (In thousands)               

Salaries and employee benefits

   $ 7,055       $ 6,726       $ 329        4.9

Occupancy and equipment

     1,540         1,591         (51     (3.2

Data processing

     819         780         39        5.0   

Directors’ fees

     371         356         15        4.2   

FDIC assessments

     268         284         (16     (5.6

Other non-interest expense

     2,198         1,768         430        24.3   
  

 

 

    

 

 

    

 

 

   

Total non-interest expense

   $ 12,251       $ 11,505       $ 746        6.5   
  

 

 

    

 

 

    

 

 

   

The Company’s non-interest expense increased to $12.3 million for the fiscal year ended June 30, 2013 from $11.5 million for the fiscal year ended June 30, 2012. Other non-interest expense increased $430 thousand, to $2.2 million, for the fiscal year ended June 30, 2013 from $1.8 million for the fiscal year ended June 30, 2012. The Company partially closed a higher costing Federal Home Loan Bank borrowing during the fiscal year ended June 30, 2013. The Company completed an early repayment of $3.25 million of a $10.0 million borrowing causing a loss on repayment of $488 thousand. Salaries and employee benefits increased 4.9%, or $329 thousand, to $7.1 million in the period ended June 30, 2013 primarily due to additions to staff and higher employee benefits costs. Data processing and director’s fees increased slightly, $39 thousand and $15 thousand, respectively.

Income Tax Expense. The Company recorded income tax expense of $704 thousand for the fiscal year ended June 30, 2013, compared to income tax expense of $185 thousand for the fiscal year ended June 30, 2012. The effective tax rate for fiscal 2013 was 38.6%, while the effective tax rate for fiscal 2012 was 40.8%.

 

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Table of Contents

Non-performing and Problem Assets

When a residential mortgage loan or home equity line of credit is fifteen calendar days past due, a notice is mailed informing the borrower that the loan is past due. When the loan is twenty days past due, an additional notice is mailed and Company personnel attempt to achieve direct contact with the borrower as an additional reminder of the delinquency. When a loan is 30 days or more past due, a default notice is mailed and additional attempts at direct contact with the borrower are made. Company personnel attempt to determine the reason(s) for the delinquency and establish a course of action by which the borrower will bring the loan current. When the loan is 45 days past due, Company personnel investigate the issues surrounding the delinquency and repayment options and issue an additional demand letter. In addition, Management determines whether to initiate foreclosure proceedings and, if so, obtains Board approval. Foreclosure proceedings are initiated by counsel if the loan is not brought current by the end of the calendar month. Procedures for avoiding foreclosure can include restructuring the loan in a manner that provides concessions to the borrower to facilitate repayment.

Commercial business, commercial real estate, and construction loans and consumer loans are generally handled in the same manner as residential mortgage loans or home equity lines of credit.

A loan is placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. If a loan is well secured and in the process of collection, exceptions to the non-accrual policy may be made. Loans may also be 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.

Non-Performing Assets. The table below sets forth the amounts and categories of non-performing assets at the dates indicated.

 

     At June 30,  
     2013     2012     2011     2010     2009  
     (Dollars in thousands)  

Non-accrual loans:

          

Real estate loans:

          

Residential Mortgage

   $ 622      $ 891      $ —        $ 446      $ 1,155   

Commercial real estate

     —          5,080        5,292        —          —     

Construction

     —          —          —          —          1,304   

Home equity loans and lines of credit

     75        75        —          —          —     

Commercial business

     —          —          —          —          —     

Consumer

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans

     697        6,046        5,292        446        2,459   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan delinquent 90 days or greater and still accruing

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     697        6,046        5,292        446        2,459   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate owned:

          

Residential mortgage

     —          40        105        193        193   

Commercial real estate

     —          —          —          —          —     

Construction

     —          —          —          —          —     

Home equity loans and lines of credit

     —          —          —          —          —     

Commercial business

     —          —          —          —          —     

Consumer

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate owned

     —          40        105        193        193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 697      $ 6,086      $ 5,397      $ 639      $ 2,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Non-performing loans to total loans

     0.23     2.04     1.88     0.16     0.86

Non-performing assets to total assets

     0.18     1.55     1.40     0.17     0.73

 

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For the year ended June 30, 2013, gross interest income that would have been recorded had non-accruing loans been current in accordance with their original terms was $33 thousand. The Company recognized $2 thousand of interest income on such non-accruing loans on a cash basis during the fiscal year including interest recovered from prior periods.

Troubled Debt Restructurings. Loans are periodically modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. Generally, the Company does not forgive principal or interest on loans or modify the interest rate on loans to a rate that is below market rates. At June 30, 2013 and 2012, the Company had $3.5 million and $5.8 million of these modified loans, respectively. At June 30, 2013, the Company had $1.9 million in residential mortgage loans and home equity loans and lines of credit that were considered troubled debt restructures. At June 30, 2013, the Company had $1.6 million commercial real estate loans that were considered troubled debt restructures. At June 30, 2012, the Company had $1.1 million in residential mortgage loans and home equity loans and lines of credit and $4.7 million in commercial real estate loans that were considered troubled debt restructures. At June 30, 2011, the Company had $731 thousand in residential mortgage loans and home equity loans and lines of credit and $2.0 million in commercial real estate loans that were considered troubled debt restructures. At June 30, 2010, the Company had $1.9 million in residential mortgage loans and home equity loans and lines of credit and $1.5 million in commercial real estate loans that were considered troubled debt restructures. At June 30, 2009, the Company had $1.0 million in residential mortgage loans that were considered trouble debt restructures.

 

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Delinquent Loans. The following table sets forth loan delinquencies by type and by amount at the dates indicated.

 

(in thousands)    Loans Delinquent For         
     31-90 Days      Over 90 Days      Total  
     Amount      Amount      Amount  

At June 30, 2013

        

Real estate loans:

        

Residential mortgage

   $ —         $ 622       $ 622   

Commercial real estate

     82         —           82   

Construction

     —           —           —     

Home equity loans and lines of credit

     75         —           75   

Commercial business

     —           —           —     

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 157       $ 622       $ 779   
  

 

 

    

 

 

    

 

 

 

At June 30, 2012

        

Real estate loans:

        

Residential mortgage

   $ —         $ 894       $ 894   

Commercial real estate

     1,520         3,560         5,080   

Construction

     —           —           —     

Home equity loans and lines of credit

     139         —           139   

Commercial business

     —           —           —     

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,659       $ 4,454       $ 6,113   
  

 

 

    

 

 

    

 

 

 

At June 30, 2011

        

Real estate loans:

        

Residential mortgage

   $ —         $ —         $ —     

Commercial real estate

     327         2,094         2,421   

Construction

     —           —           —     

Home equity loans and lines of credit

     273         —           273   

Commercial business

     —           —           —     

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 600       $ 2,094       $ 2,694   
  

 

 

    

 

 

    

 

 

 

At June 30, 2010

        

Real estate loans:

        

Residential mortgage

     —         $ 446       $ 446   

Commercial real estate

     1,290         —           1,290   

Construction

     —           —           —     

Home equity loans and lines of credit

     —           —           —     

Commercial business

     —           —           —     

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,290       $ 446       $ 1,736   
  

 

 

    

 

 

    

 

 

 

At June 30, 2009

        

Real estate loans:

        

Residential mortgage

   $ 677         483         1,160   

Commercial real estate

     —           —           —     

Construction

     —           —           —     

Home equity loans and lines of credit

     —           —           —     

Commercial business

     —           —           —     

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 677       $ 483       $ 1,160   
  

 

 

    

 

 

    

 

 

 

 

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Real Estate Owned. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. When property is acquired it is recorded at estimated fair value at the date of foreclosure less the cost to sell, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions. Holding costs are expensed after acquisition. At June 30, 2013, the Company has no real estate owned. At June 30, 2012 the Company had $40 thousand of real estate owned. At June 30, 2011, 2010, and 2009, the same property was held at $105 thousand, $193 thousand, and $193 thousand, respectively, in real estate owned.

Classification of Assets. Various Company 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. An asset 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 assets include those assets characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets 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. Assets, or portions of assets, classified as loss are those considered uncollectible and of such little value that their continuance as an asset is not warranted. Assets that do not expose the Company 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 assets is subject to review by the Bank’s principal federal regulator, the OCC. The Company regularly reviews the asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table details classified assets, assets designated as special mention, and criticized assets at the dates indicated.

 

     At June 30,  
     2013      2012  
     (In thousands)  

Classified assets:

     

Substandard

   $ 8,249       $ 11,820   

Doubtful

     —           —     

Loss

     —           —     
  

 

 

    

 

 

 

Total classified assets

     8,249         11,820   

Special mention

     4,955         259   
  

 

 

    

 

 

 

Total criticized assets

   $ 13,204       $ 12,079   
  

 

 

    

 

 

 

The Company had $8.2 million in loans classified as substandard at June 30, 2013 as compared to $11.8 million at June 30, 2012. At June 30, 2013, $2.1 million of the loans classified as substandard were residential mortgage or commercial real estate loans that were collateral-dependent. Management reviewed these loans for impairment on an individual loan or relationship basis.

At June 30, 2013, Management determined that 11 of the loans listed as substandard, for a total of $3.5 million, were both considered impaired and troubled debt restructures. Accordingly, a specific allowance for loan losses for these loans was provided or the loans were written down to current market value. An analysis was completed for each of the loans listed as substandard according to the methodology described in “Allowance for Loan Losses.” Based on this analysis, the Company provided specific reserves of $148 thousand for these loans.

 

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Table of Contents

Allowance for Loan Losses

The Company 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 Company 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, construction, and commercial business loans are viewed individually and considered impaired if the probability exists that the Company 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 Company 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:

 

   

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

 

   

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.

 

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Table of Contents

Historically, the Company experienced limited loan losses. As the Company experiences additional loan losses, Management utilizes the Company’s historical loss experience in determining applicable portions of the allowance for loan losses. Periodically, the Company adjusts its historical loss experience to reflect current economic conditions.

Management evaluates the allowance for loan losses based upon the combined total of the specific, general, and unallocated components. 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.

Generally, the Company underwrites commercial real estate and residential real estate loans at a loan-to-value ratio of 75% or less. Accordingly, 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 ascertain property values. The Company 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. For loans initially determined to be impaired loans, the Company utilizes the ascertained or appraised property value in determining the appropriate specific allowance for loan losses attributable to a loan as described above. 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, as described above.

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 Company to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

 

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Table of Contents

The following table sets forth activity in the Company’s allowance for loan losses for the fiscal years indicated.

 

     At or for the Fiscal Years Ended June 30,  
     2013     2012     2011     2010     2009  
     (dollars in thousands)  

Balance at beginning of the year

   $ 3,035      $ 2,246      $ 1,737      $ 1,167      $ 483   

Charge-offs:

          

Real estate loans:

          

Residential mortgage

     63        3        15        1        39   

Commercial real estate

     6        218        166        136        164   

Construction

     —          —          —          —          —     

Home equity loans and lines of credit

     —          90        79        571        —     

Commercial business

     —          —          —          —          —     

Consumer

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     69        311        260        708        203   

Recoveries:

          

Real estate loans:

          

Residential mortgage

     —          15        —          —          —     

Commercial real estate

     4        —          —          —          —     

Construction

     —          —          —          —          —     

Home equity loans and lines of credit

     —          —          30        —          —     

Commercial business

     —          —          —          —          10   

Consumer

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     4        15        30        —          10   

Net charge-offs

     65        296        230        708        193   

Provision

     503        1,085        739        1,278        877   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 3,473      $ 3,035      $ 2,246      $ 1,737      $ 1,167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Net charge-offs to average loans

     0.02     0.10     0.08     0.26     0.07

Allowance for loan losses to non-performing loans

     498.28     50.20     42.44     389.46     47.46

Allowance for loan losses to total loans

     1.15     1.02     0.80     0.63     0.41

For additional information with respect to the portions of the allowance for loan losses attributable to the Company’s loan classifications see “—Allocation of Allowance for Loan Losses.” For additional information with respect to non-performing loans and delinquent loans, see “—Non-performing and Problem Assets—Non-performing Assets” and “—Non-performing and Problem Assets—Delinquent Loans.”

 

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Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category.

 

    At June 30,  
    2013     2012     2011     2010     2009  
    Allowance
for Loan

Losses
    Percent
of Total

Loans
    Allowance
for Loan
Losses
    Percent
of Total
Loans
    Allowance
for Loan
Losses
    Percent
of Total
Loans
    Allowance
for Loan
Losses
    Percent
of Total
Loans
    Allowance
for Loan
Losses
    Percent
of Total
Loans
 
    (dollars in thousands)  

Real estate loans:

                   

Residential mortgage

  $ 847        26.6   $ 773        31.5   $ 528        34.5   $ 449        44.5   $ 185        53.3

Commercial real estate

    1,573        46.2        951        45.9        697        38.6        820        30.7        319        22.8   

Construction

    122        4.3        7        0.6        2        0.4        2        0.4        285        1.7   

Home equity loans and lines of credit

    270        9.1        393        11.2        440        13.8        175        15.0        18        14.3   

Commercial business

    429        13.8        670        10.8        383        12.7        127        9.4        360        7.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allocated allowance

    3,241        100.0        2,794        100.0        2,050        100.0        1,573        100.0        1,167        100.0   

Unallocated

    232        —         241        —         196        —         164        —