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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Quarterly Period ended March 31, 2012
For transition period from to
Commission File Number 001-34593
OBA FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Charter)
Registrants telephone number, including area code
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Indicate the number of shares outstanding of each of the Issuers classes of common stock as of the latest practicable date.
4,144,242 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of May 9, 2012.
OBA FINANCIAL SERVICES, INC. AND SUBSIDIARY
Form 10-Q Quarterly Report
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:
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:
These forward-looking statements are based on the Companys current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Companys 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.
Consolidated Statements of Condition (Unaudited)
See notes to consolidated financial statements.
Consolidated Statements of Income (Unaudited)
See notes to consolidated financial statements.
Consolidated Statements of Stockholders Equity and Comprehensive Income (Unaudited)
Nine Months Ended March 31, 2012 and 2011
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows (Unaudited)
See notes to consolidated financial statements.
Notes to the Consolidated Financial Statements (Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
OBA Bank (the Bank) is a community-oriented banking institution providing a variety of financial services to individuals and small businesses through its offices in Montgomery, Anne Arundel, and Howard Counties, Maryland. Its primary deposits are demand and time certificate accounts and its primary lending products are residential mortgage and commercial mortgage loans.
In December 2007, the Bank reorganized into a three-tier mutual holding company structure. As part of the reorganization, the Bank converted from a mutual savings bank into a federally chartered stock savings bank and formed OBA Bancorp, Inc., a federally chartered mid-tier stock holding company, and OBA Bancorp, MHC, a federally chartered mutual holding company. The Bank became a wholly-owned subsidiary of OBA Bancorp, Inc. and OBA Bancorp, Inc. became a wholly-owned subsidiary of OBA Bancorp, MHC.
On January 21, 2010, OBA Bancorp, MHC completed its plan of conversion and reorganization from a mutual holding company to a stock holding company. In accordance with the plan, OBA Bancorp, MHC and OBA Bancorp, Inc. ceased to exist and a newly formed stock holding company, OBA Financial Services, Inc. (of which OBA Bank became a wholly owned subsidiary) sold and issued shares of capital stock to eligible depositors of OBA Bank. A total of 4,628,750 shares were issued in the conversion at $10 per share, raising $46.3 million of gross proceeds. Approximately $1.5 million in stock offering costs were offset against the gross proceeds. OBA Financial Services, Inc.s common stock began trading on the NASDAQ Capital Market under the symbol OBAF on January 22, 2010.
In accordance with regulations of the Office of Thrift Supervision, the Banks previous primary federal regulator at the time of the conversion from a mutual holding company to a stock holding company, the Bank substantially restricted retained earnings by establishing a liquidation account. The liquidation account is maintained for the benefit of eligible account holders who keep their accounts at the Bank after conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holders interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
Basis of Presentation
The consolidated financial statements include the accounts of OBA Financial Services Inc., and OBA Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and are presented in accordance with instructions for Form 10-Q and Rule 10-01 of the SEC Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation are of a normal and recurring nature and have been included.
Operating results for the three and nine months ended March 31, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012 or any other interim period. The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes filed on Form 10-K for the fiscal year ended June 30, 2011.
In preparing the accompanying consolidated financial statements, the Company has evaluated subsequent events through the financial statement issue date. There were no subsequent events identified by the Company as a result of the evaluation that require recognition or disclosure in the consolidated financial statements.
Use of Estimates
In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Statement of Condition and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly sensitive to change in the near term relates to the determination of the allowance for loan losses, values related to the share-based incentive plans, and other than temporary impairment of investment securities.
Change in accounting estimate
During the Banks third fiscal quarter of 2012, Management evaluated its methodology to determine the adequacy of the allowance for loan losses. This evaluation was performed as a result of the rapidly changing economic conditions in our market area. As part of this evaluation, Management increased the number of periods utilized to determine loss factors for homogeneous pools of loans collectively evaluated and measured for impairment under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450, Contingencies, from the most recent rolling eight quarters (two years) to the most recent rolling twelve quarters (three years) to better reflect the current credit environment. This change in accounting estimate was applied prospectively in accordance with FASB ASC 250, Accounting Changes and Error Corrections. The impact of this change resulted in an increase in the provision for loan losses of $123 thousand in the third fiscal quarter of 2012.
From time to time, certain amounts in the prior period financial statements are reclassified to conform with current period presentation. Such reclassifications, if any, have no impact on consolidated net income or stockholders equity.
Recent Accounting Pronouncements
Accounting Standards Update 2011-05
In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments improve the comparability, consistency and transparency of financial reporting to increase the prominence of items reported on other comprehensive income. The effective date is fiscal years and interim periods within those years beginning after December 15, 2011. Early application is permitted. This update is not expected to have an impact on the Companys consolidated financial statements.
Accounting Standards Update 2011-10
In December, 2011, the FASB issued Accounting Standards Update (ASU) 2011-10, Derecognition of in Substance Real Estate a Scope Clarification. This ASU clarifies previous guidance for situations in which a reporting entity would relinquish control of the assets of a subsidiary in order to satisfy the nonrecourse debt of the subsidiary. The ASU concludes that if control of the assets has been transferred to the lender, but not legal ownership of the assets; then the reporting entity must continue to include the assets of the subsidiary in its consolidated financial statements. The amendments in this ASU are effective for public entities for annual and interim periods beginning on or after June 15, 2012. Early adoption is permitted. The Company does not expect this ASU to have a significant impact on its consolidated financial statements.
Accounting Standards Update 2011-11
In December, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, in an effort to improve comparability between U.S. GAAP and IFRS financial statements with regard to the presentation of offsetting assets and liabilities on the statement of financial position arising from financial and derivative instruments, and repurchase agreements. The ASU establishes additional disclosures presenting the gross amounts of recognized assets and liabilities, offsetting amounts, and the net balance reflected in the statement of financial position. Descriptive information regarding the nature and rights of the offset must also be disclosed. The amendments in this ASU are effective for public entities for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The Company does not expect this ASU to have a significant impact on its consolidated financial statements.
Accounting Standards Update 2011-12
In December, 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05. In response to stakeholder concerns regarding the operational ramifications of the presentation of these reclassifications for current and previous years, the FASB has deferred the implementation date of this provision to allow time for further consideration. The requirement in ASU 2011-05, Presentation of Comprehensive Income, for the presentation of a combined statement of comprehensive income or separate, but consecutive, statements of net income and other comprehensive income is still effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 for public companies. The Company does not expect this ASU to have a significant impact on its consolidated financial statements.
NOTE 2 COMPREHENSIVE INCOME
U.S. GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the Statement of Condition, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) and related tax effects are as follows:
Accumulated other comprehensive income consists of the following:
NOTE 3 SECURITIES
The amortized cost and fair value of securities with gross unrealized gains and losses are as follows:
The amortized cost and fair value of debt securities by contractual maturity at March 31, 2012 are as follows:
At March 31, 2012 and June 30, 2011, the market value of securities securing dealer and customer repurchase agreements was $14.3 million and $16.7 million, respectively.
Information pertaining to securities with gross unrealized losses at March 31, 2012 and June 30, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
At March 31, 2012, the Companys sole trust preferred security is a variable rate pool of trust preferred securities issued by insurance companies or their holding companies. This position and the related unrealized loss in the trust preferred security is not material to the Companys consolidated financial position or results of operations. The decline in the fair value of this security has been caused by (1) collateral deterioration due to failures and credit concerns across the financial services sector, (2) the widening of credit spreads for asset-backed securities, and (3) general illiquidity and, as a result, inactivity in the market for these securities. The Company has no intent or requirement to sell this security.
NOTE 4 CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES
Various Bank policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans, or portions of loans, classified as loss are those considered uncollectible and of such little value that their continuance as an loan is not warranted. Since such loans are written off in full, the Bank will not have any such loans classified as loss at the end of a reporting period. Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as Special Mention.
The Bank maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the statement of condition date. The Banks determination as to the classification of loans is subject to review by the Banks primary federal regulator, the Office of the Comptroller of the Currency (OCC). The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations.
Management evaluates the allowance for loan losses based upon the combined total of the specific, general, and unallocated components as discussed below. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Commercial real estate loans generally have greater credit risks compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment expectations on loans secured by income-producing properties typically depend on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Commercial business loans generally have greater credit risks compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment expectations on commercial business loans typically depend on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Generally, the Bank underwrites commercial real estate loans at a loan-to-value ratio of 75% or less and residential mortgage loans at a loan-to-value ratio not exceeding 80%. In the event that a loan becomes past due, management will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to estimate property values. The Bank may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrowers condition. For loans initially determined to be impaired loans, the Bank generally utilizes the appraised property value in determining the appropriate specific allowance for loan losses attributable to a loan. In addition, changes in the appraised value of properties securing loans can result in an increase or decrease in the general allowance for loan losses as an adjustment to the historical loss experience due to qualitative and environmental factors.
The loan portfolio is evaluated on a quarterly basis and the allowance is adjusted accordingly. While the best information available is used to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the OCC will periodically review the allowance for loan losses. The OCC may require the Bank to recognize additions to the allowance based on its analysis of information available at the time of the examination.
The components of loans are as follows:
The following tables present the classes of the loan portfolio summarized by loan rating within the Banks internal risk rating system:
Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. Loans are generally placed on non-accrual status if collection of principal or interest, in full, is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed and further income is recognized only when full repayment of the loan is complete or the loan returns to accrual status, at which point income is recognized to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due and non-accrual status:
There are no loans 90 days and over past due that are still accruing at the date indicated.
The Bank provides for loan losses based upon the consistent application of the documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in Managements judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. The Bank considers residential mortgage loans and home equity loans and lines of credit to customers as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience. Commercial mortgage and business loans are viewed individually and considered impaired if it is probable that the Bank will not be able to collect scheduled payments of principal and interest when due; according to the contractual terms of the loan agreements. The allowance for loan losses consists of three components:
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 managements evaluation of several qualitative and environmental factors, including:
The following table summarizes activity in the allowance for loan losses:
The following tables set forth the activity in and allocation of the allowance for loan losses by loan portfolio class for the three and nine months ended March 31, 2012 and 2011:
The following tables present the balance in the allowance for loan losses and the recorded in investment in loans by portfolio class and based on impairment method:
The following tables summarize information in regards to impaired loans by portfolio class as of and for the periods ended March 31, 2012 and 2011:
There were no troubled debt restructurings during the three month period ended March 31, 2012. The following table presents troubled debt restructurings occurring during the nine-month period ended March 31, 2012:
Generally, the Bank does not forgive principal or interest on loans or modify the interest rate on loans to rates that are below market rates based on the risks associated with the modified loans. Loans can be modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. These troubled debt restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to financial difficulties of the borrower. During the three and nine months ended March 31, 2012, no loans previously classified as troubled debt restructurings subsequently defaulted. The Bank identified no loans for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology that are now considered troubled debt restructurings in accordance with ASU No. 2011- 02.
NOTE 5 FAIR VALUE MEASUREMENTS AND DISCLOSURES
Management uses its best judgment in estimating the fair value of the Companys assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all assets and liabilities, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates and have not been re-evaluated or updated subsequent to those respective dates. As such, the estimated fair values of these assets and liabilities subsequent to the respective reporting dates may be different than the amounts reported at each reporting date. Accounting guidance related to fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
An asset or liabilitys level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between fair value hierarchy levels are recognized as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between fair value hierarchy levels for the three or nine months ended March 31, 2012 or 2011.
For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and June 30, 2011 are as follows:
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended March 31, 2012:
Level 3 securities consist of one trust preferred security at March 31, 2012.
For assets measured at fair value on a nonrecurring basis at March 31, 2012 and June 30, 2011, the fair value measurements by level within the fair value hierarchy are as follows:
The methods and assumptions used to estimate the fair values included in the above tables are included in the disclosures that follow.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Companys assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Companys disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate fair values at March 31, 2012 and June 30, 2011:
Cash and Cash Equivalents and Interest Bearing Securities with Other Banks (Carried at Cost)
The carrying amounts of cash and short-term instruments approximate fair value and are classified within level 1 of the fair value hierarchy.
Securities Available for Sale (Carried at Fair Value)
The fair values of securities available for sale, excluding trust preferred securities, are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the securitys terms and conditions, among other things.
The market for pooled trust preferred securities is inactive. A significant widening of the bid/ask spreads in the markets in which these securities trade was followed by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and no new pooled trust preferred securities have been issued since 2007. Since there were limited observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using primarily
unobservable Level 3 inputs. Fair value estimates for trust preferred securities were based on discounting expected cash flows using a risk-adjusted discount rate. The Company develops the risk-adjusted discount rate by considering the time value of money (risk-free rate) adjusted for an estimated risk premium for bearing the uncertainty in future cash flows and, given current adverse market conditions, a liquidity adjustment based on an estimate of the premium that a market participant would require assuming an orderly transaction. Management determined that sensitivity to inputs are not significant due to the immaterial nature of trust preferred securities as a level 3 asset.
Securities Held to Maturity (Carried at Amortized Cost)
The fair values of securities held to maturity are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the securitys terms and conditions, among other things.
Federal Home Loan Bank Stock (Carried at Cost)
The carrying amount of Federal Home Loan Bank stock approximates fair value and considers the limited marketability of such securities.
Loans Receivable (Carried at Cost)
The fair values of loans (except impaired loans) are estimated using discounted cash flow analyses which use market rates at the statement of condition date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. Loans are classified within level 3 of the fair value hierarchy.
Impaired Loans (Generally Carried at Fair Value)
Impaired loans are those for which the Company has measured impairment generally based on the fair value of the loans collateral. Fair value of real estate collateral is generally determined based upon independent third-party appraisals of the properties, which consider sales prices of similar properties in the proximate vicinity or by discounting expected cash flows from the properties by an appropriate risk adjusted discount rate. Fair value of collateral other than real estate is based on an estimate of the liquidation proceeds. Impaired loans are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances net of a valuation allowance. The appraisals generally include various level 3 inputs which are not observable.
Real Estate Owned (Carried at Lower of Cost or Fair Value less Estimated Selling Costs)
Fair values of foreclosed assets are based on independent third party appraisals of the properties or discounted cash flows based upon the expected sales proceeds from disposition of the assets. These values were generally determined based on the sales prices of similar properties in the proximate vicinity. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The appraisals generally include various level 3 inputs which are not identifiable. Management determined that sensitivity to inputs are not significant due to the immaterial nature of the real estate owned as a level 3 asset.
Mortgage Servicing Rights (Carried at Lower of Cost or Fair Value)
At origination, the Company estimates the fair value of mortgage servicing rights at 1% of the principal balances of loans sold. The Company amortizes that amount over the estimated period of servicing revenues or charges the entire amount to income upon prepayment of the related loan. Due to the immaterial balance of mortgage servicing rights, the Company did not perform any further analysis or estimate their fair values. Therefore, the Company has disclosed that the carrying amounts of mortgage servicing rights approximate fair value. Mortgage servicing rights are classified within level 3 of the fair value hierarchy. Management determined that sensitivity to inputs are not significant due to the immaterial nature of the Mortgage servicing rights as a level 3 asset.
Deposit Liabilities (Carried at Cost)
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities. Deposits are classified within level 1 of the fair value hierarchy.
Federal Home Loan Bank Advances (Carried at Cost)
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms, and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Federal Home Loan Bank Advances are classified within level 2 of the fair value hierarchy.
Securities Sold Under Agreement to Repurchase (Carried at Cost)
The carrying amounts of securities sold under agreements to repurchase approximate fair value for short-term obligations. The fair values for longer term repurchase agreements are based on current market interest rates for similar transactions. Securities sold under agreement to repurchase are classified within level 2 of the fair value hierarchy.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amounts of accrued interest approximate fair value. Accrued Interest Receivable and Payable are classified within level 2 of the fair value hierarchy.
Off-Balance-Sheet Credit-Related Instruments (Disclosures at Cost)
Fair values for off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The fair value of these instruments is not material.
Quantitative information about Level 3 Fair Value Measurement at March 31, 2012 is included in the table below:
The estimated fair values of the Companys financial instruments were as follows:
NOTE 6 GUARANTEES
The Company has not issued any guarantees that would require liability recognition or disclosure other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of March 31, 2012, the Company had $421 thousand of outstanding letters of credit. Management believes the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. Management believes the current amount of the liability as of March 31, 2012 for guarantees under letters of credit issued is not material.
NOTE 7 EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 2010, the Company adopted an Employee Stock Ownership Plan (ESOP) for eligible employees. The ESOP borrowed $3.7 million from the Company and used those funds to acquire 370,300 shares, or 8.0%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.
The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20 year term of the loan with funds from the Banks contributions to the ESOP and dividends payable on the stock, if any. The interest rate on the ESOP loan adjusts annually and is the prime rate on the first business day of the calendar year, as published in The Wall Street Journal.
Shares purchased by the ESOP are held by a trustee in an unallocated suspense account and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participants proportional share of compensation relative to all participants. Total ESOP shares may be reduced as a result of employees leaving the Company; shares that have previously been released to those exiting employees may be removed from the plan and transferred to that employee. As shares are committed to be released from the suspense account, the Bank reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit to stockholders equity. Compensation expense recognized for the nine months ended March 31, 2012 and 2011 amounted to $200 thousand and $172 thousand, respectively. Compensation expense recognized for the three months ended March 31, 2012 and 2011 amounted to $66 thousand and $65 thousand, respectively.
Shares held by the ESOP trust at March 31, 2012 and 2011 were as follows:
NOTE 8 SHARE BASED COMPENSATION
In May 2011, the Companys stockholders approved the OBA Financial Services, Inc. 2011 Equity Incentive Plan (Plan) which provides for awards of stock options and restricted stock to key officers and outside directors. The cost of the Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Companys stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on managements judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards. A portion of the restricted stock award vesting is contingent upon meeting certain company-wide performance goals.
Until such time as awards of stock are granted and vest or options are exercised, shares of the Companys common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 648,025. Total share-based compensation expense for the nine months ended March 31, 2012 was $627 thousand. Total share-based compensation expense for the three months ended March 31, 2012 was $232 thousand.
The table below presents the stock option activity for the period shown:
As of March 31, 2012, the Company had $847 thousand of unrecognized compensation costs related to stock options. The cost of stock options will be amortized in equal annual installments over the five-year vesting period. There were no options vested in the three or nine months ended March 31, 2012. Stock option expense for the three and nine months ended March 31, 2012 was $49 thousand and $129 thousand, respectively. The aggregate grant date fair value of the stock options was $976 thousand.
The fair value of the Companys stock options was determined using the Black-Scholes option pricing formula. The following ranges of assumptions were used in the formula:
Expected volatility Based on the historical volatility of a peer group of comparable banks as contained in the Keefe, Bruyette & Woods, Inc. Regional Bank Index (KRX) at the time of grant. Due to the recent initial public offering and issuance of the Companys common stock, the Companys shares are not actively traded and its volatility is not reflective of an actively traded institution. Therefore, the Company estimates that the expected volatility will equal the peer group of comparable banks volatility over the expected life of the options at the time of grant.
Risk-free interest rate Based on the U.S. Treasury yield curve and expected life of the options at the time of grant.
Expected dividend yield Based on the Companys peer group of comparable banks, as contained in the Keefe, Bruyette & Woods, Inc. Regional Bank Index (KRX). The Company currently does not pay a dividend; therefore, the expected dividend yield was weighted for the portion of the life of the options that the Company expects to pay a dividend. The Company estimates that the expected dividend yield will equal the peer group of comparable banks dividend yield over the expected life of the options at the time of grant.
Expected life Based on a weighted-average of the five year vesting period and the ten year contractual term of the stock option plan.
Exercise price for the stock options Based on the closing price of the Companys stock on the date of grant.
Restricted Stock Awards
Restricted stock awards are accounted for as fixed grants using the fair value of the Companys stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.
The table below presents the restricted stock award activity for the period shown:
As of March 31, 2012, the Company had $3.2 million of unrecognized compensation cost related to restricted stock awards. The cost of the restricted stock awards will be amortized in equal annual installments over the five-year vesting period. The vesting of the performance-based stock awards is contingent upon meeting certain company-wide performance goals. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. Restricted stock expense for the nine months ended March 31, 2012 was $498 thousand. Restricted stock expense for the three months ended March 31, 2012 was $183 thousand.
NOTE 9 EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period exclusive of unallocated ESOP shares and unvested restricted stock. Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the Treasury Stock method. The table below sets forth the dilutive effect of the stock options and unvested restricted shares. The Company had no potentially dilutive common shares for the three and nine month periods ended March 31, 2011.
The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of OBA Financial Services Inc., and its subsidiary, OBA Bank. The discussion and tabular presentations should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes.
Overview of Income and Expenses
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 received from providing products and services and from other income. The majority of the non-interest income is earned from service charges on deposit accounts, bank owned life insurance income, and loan servicing fees. The Company also earns income from the sale of residential mortgage loans and other fees and charges.
The Company recognizes gains or losses as a result of sales of investment securities, foreclosed property, and premises and equipment. In addition, the Company recognizes losses on its investment securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Companys primary sources of income.
The non-interest expenses the Company incurs in operating its business consist primarily of salaries and employee benefits, occupancy and equipment expense, external processing fees, FDIC assessments, Director fees, and other non-interest expenses.
Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees, payroll taxes, and expenses for stock benefit and compensation plans, health care, retirement, and other employee benefits.
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, attorney, accountant and consultant fees, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.
Critical Accounting Policies and Estimates
There are no material changes to the critical accounting policies disclosed in OBA Financial Services, Inc.s Annual Report on Form 10-K for the fiscal year ended June 30, 2011.
Comparison of Financial Condition at March 31, 2012 and June 30, 2011
Assets. Total assets increased $5.4 million, or 1.4%, to $391.8 million at March 31, 2012 from $386.4 million at June 30, 2011. The increase was primarily due to an increase in loans and interest bearing deposits with other banks partially offset by an increase in the allowance for loan losses.
Cash and Cash Equivalents. At March 31, 2012, cash and cash equivalents decreased by $330 thousand, to $37.6 million from $38.0 million at June 30, 2011. Cash held at the Federal Reserve Bank of Richmond decreased by $7.9 million while federal funds sold to other financial institutions increased $7.6 million.
Loans. At March 31, 2012, total gross loans were $284.9 million, an increase of $3.0 million, or 1.1%, as compared to $281.9 million at June 30, 2011. The commercial loan portfolio increased $10.0 million to $155.8 million at March 31, 2012 from $145.8 million at June 30, 2011 as the Company continued its focus on the commercial loan portfolios. This increase was offset by decreases of $3.2 million and $3.7 million in the residential mortgage loan and home equity loan and line of credit portfolios, respectively. For further detail, see Note 4 Credit Quality of Loans and Allowance for Loan Losses in the accompanying financial statements.
Allowance for Loan Losses.
The following table summarizes activity in the allowance for loan losses:
At March 31, 2012, the allowance for loan losses was $2.6 million compared with $2.2 million at June 30, 2011 and $2.2 million at March 31, 2011. The allowance for loan losses as a percentage of total loans at March 31, 2012 was 0.94% compared to 0.80% at June 30, 2011 and 0.77% at March 31, 2011. Net charge-offs as a percentage of average loans was 0.32% for the three months ended March 31, 2012 and 0.11% for the nine months ended March 31, 2012. At March 31, 2012, the Bank had $7.0 million in impaired loans as compared to $7.7 million at June 30, 2011. Total impaired loans are primarily made up of two loan relationships with not-for-profit entities that have collateral values well in excess of the loan value. Based on the value of the collateral, no specific allowances are required for these loans. For more information on the loan portfolios see Loans in Comparison of Financial Condition at March 31, 2012 and June 30, 2011.
Non-performing Assets. Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless well secured and in the process of collection. Loans can also be placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected. At March 31, 2012 and June 30, 2011, the Company had $6.1 million and $5.4 million in total non-performing assets, respectively. Primarily, these totals represent commercial real estate and residential mortgage loans. Of the $6.1 million in non-performing assets the Company reported at March 31, 2012, $3.3 million were also troubled debt restructurings.
The following table summarizes non-performing assets:
The non-performing loans to total loans ratio increased 25 basis points from 1.88% at June 30, 2011 to 2.13% at March 31, 2012 and the non-performing assets to total assets ratio increased 16 basis points from 1.40% at June 30, 2011 to 1.56% at March 31, 2012. Both ratios increased primarily as a result of a two residential mortgage loans and two home equity lines of credit moving to non-accrual status at December 31, 2011. The four loans comprised a total of three relationships. For further detail, see Note 4 Credit Quality of Loans and Allowance for Loan Losses in the accompanying financial statements.
Troubled Debt Restructurings. At March 31, 2012 and June 30, 2011, the Bank had $5.6 million and $2.8 million of modified loans, respectively, which were considered troubled debt restructurings. At March 31, 2012, the Bank had $726 thousand in residential mortgage loans that were considered troubled debt restructurings and $4.8 million in commercial real estate loans that were considered troubled debt restructurings. At June 30, 2011, the Bank had $731 thousand in residential mortgage loans and home equity loans and lines of credit that were considered troubled debt restructurings and $2.0 million in commercial real estate loans that were considered troubled debt restructurings. Of the $5.6 million in modified loans considered troubled debt restructurings, $3.3 million were also non-performing loans. For further detail, see Note 4 Credit Quality of Loans and Allowance for Loan Losses in the accompanying financial statements.
Securities. At March 31, 2012, the securities portfolio totaled $40.2 million, or 10.3% of total assets, as compared to $39.5 million, or 10.2% of total assets, at June 30, 2011.
Deposits. At March 31, 2012, deposits increased $929 thousand, or 0.4%, to $258.0 million from $257.0 million at June 30, 2011. Total certificates of deposit decreased $844 thousand including a decrease in brokered deposits of $12.8 million. In addition, total checking accounts increased $14.9 million while total money market accounts decreased $13.6 million.
Borrowings. At March 31, 2012, total borrowings increased $10.1 million, or 22.4%, to $55.3 million from $45.2 million at June 30, 2011. Repurchase agreements decreased $2.3 million, or 14.7%, to $13.3 million at March 31, 2012. At March 31, 2012, Federal Home Loan Bank advances totaled $42.0 million, an increase of $12.4 million from June 30, 2011 primarily due to an increase in short term advances.
At March 31, 2012, the Company had access to additional Federal Home Loan Bank advances of up to $52.9 million.
Equity. Equity totaled $75.8 million and $80.9 million at March 31, 2012 and June 30, 2011, respectively. The decrease of $5.0 million was primarily the result of the continuation of the Companys share repurchase program. At March 31, 2012, the Company had repurchased 452,200 shares of its common stock of the 462,875 shares approved in its initial share repurchase program. The Companys Board of Directors adopted a second stock repurchase program, previously disclosed in the Companys 8-K filed on March 21, 2012, to begin at the conclusion of the initial program.
Capital and Liquidity. The Bank intends to maintain a strong capital position that supports its strategic goals while exceeding regulatory standards. At March 31, 2012, the Bank met the definition of a well-capitalized institution by exceeding all regulatory minimum capital requirements. The following tables summarize the Consolidated and Bank capital ratios:
The Companys primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Company invests excess funds in short-term interest-earning securities and other assets which provide liquidity to meet lending requirements.
The Company is a member of the Federal Home Loan Bank of Atlanta, whose competitive advance programs provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in liquidity could result in the Company seeking other sources of funds, including, but not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of available-for-sale investment securities, and the sale of loans or other assets.
Comparison of Operating Results for the Three Months Ended March 31, 2012 and 2011
General. Net income decreased $179 thousand to $20 thousand for the three months ended March 31, 2012 from net income of $199 thousand for the three months ended March 31, 2011. The decrease in net income was primarily a result of an increase in non-interest expense of $114 thousand, a decrease in non-interest income of $22 thousand, and an increase in the provision for loan losses of $81 thousand offset by an increase in net interest income of $28 thousand.
Net Interest Income. Net interest income increased by $28 thousand, to $3.1 million for the three months ended March 31, 2012, effectively unchanged from $3.1 million for the three months ended March 31, 2011. Total interest expense decreased $135 thousand, or 14.3%, to $810 thousand for the three months ended March 31, 2012 as compared to $945 thousand for the three months ended March 31, 2011. The decrease in interest expense was primarily the result of the Bank decreasing deposit rates while maintaining its competitive position within the local market, paying off several higher costing term Federal Home Loan Bank advances, and increasing lower costing short term Federal Home Loan Bank advances. Interest and dividend income decreased by $107 thousand to $3.9 million for the three months ended March 31, 2012. This decrease is primarily due to lower yields in the loan portfolios.
The net interest margin was 3.63% for the three months ended March 31, 2012 compared to 3.92% for the three months ended March 31, 2011. The decrease in the net interest margin was primarily a result of a decrease in average net interest-earning assets and a decrease in the total interest-earning asset average yield of 55 basis points as compared to a decrease in the total interest bearing liability yield of 39 basis points. Net interest-earning assets decreased $5.8 million as average interest-earning assets increased $26.2 million to $347.5 million for the period ended March 31, 2012 compared to $321.3 million for the period ended March 31, 2011 and average interest-bearing liabilities increased $32.0 million to $276.3 million for the period ended March 31, 2012 as compared to $244.3 million for the period ended March 31, 2011.
Interest and Dividend Income. Interest and dividend income decreased $107 thousand to $3.9 million from $4.1 million for the three months ended March 31, 2012 and March 31, 2011, respectively. Interest income on loans decreased $155 thousand and was offset by an increase in interest income on investment securities and fed funds sold of $48 thousand for the three months ended March 31, 2012.
The average yield on loans decreased 26 basis points, to 5.16% for the three months ended March 31, 2012 from 5.42% for the three months ended March 31, 2011. Total average loans were effectively unchanged at $282.8 million, reflecting an average balance increase in commercial loans of $13.7 million to $153.3 million for the three months ended March 31, 2012 offset by a decrease in average residential mortgage loans of $8.5 million to $94.2 million and a decrease in average consumer loans of $5.4 million to $35.3 million for the three months ended March 31, 2012 as compared to $102.7 million and $40.7 million, respectively, for the three months ended March 31, 2011.
The average yield on securities decreased 78 basis points to 2.24% for the three months ended March 31, 2012 from 3.02% for the three months ended March 31, 2011, reflecting continued low market interest rates and repayments of higher yielding securities within the mortgage backed securities portfolio.
Interest Expense. Interest expense decreased $135 thousand to $810 thousand from $945 thousand for the three months ended March 31, 2012 and March 31, 2011, respectively. Deposit expense decreased by $112 thousand to $484 thousand for the three months ended March 31, 2012 as the average rate paid on deposits decreased 37 basis points to 0.86% for the three months ended March 31, 2012 from 1.23% for three months ended March 31, 2011.
Interest expense on borrowings decreased $23 thousand to $326 thousand for the three months ended March 31, 2012 from $349 thousand for the three months ended March 31, 2011. The average cost of borrowings decreased 22 basis points to 2.39% for the three months ended March 31, 2012 as a result of paying off several higher costing term Federal Home Loan Bank advances and replacing those with lower costing short term Federal Home Loan Bank advances.
Provision for Loan Losses. The Companys provision for loan losses for the three months ended March 31, 2012 was $270 thousand, an increase of $81 thousand from $189 thousand for the three months ended March 31, 2011. During the three months ended March 31, 2012, the Company partial charged-offs of two loans in the amount $225 thousand. For further discussion related to the provision for loan losses, see Allowance for Loan Losses in the Comparison of Financial Condition at March 31, 2012 and June 30, 2011. For further discussions related to loan portfolio performance, see Non-performing Assets in the Comparison of Financial Condition at March 31, 2012 and June 30, 2011 and Note 4 of the notes to the consolidated financial statements.
Non-Interest Income. The following table summarizes changes in non-interest income: