XNAS:OBAF OBA Financial Services Inc Quarterly Report 10-Q Filing - 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period ended March 31, 2012

or

 

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

For transition period from              to             

Commission File Number 001-34593

 

 

OBA FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Maryland   27-1898270

(State or Other Jurisdiction

of Incorporation)

 

(I.R.S. Employer

Identification No.)

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

(301) 916-0742

Registrant’s telephone number, including area code

Not Applicable

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

 

 

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

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

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

 

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

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

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

4,144,242 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of May 9, 2012.

 

 

 


Table of Contents

OBA FINANCIAL SERVICES, INC. AND SUBSIDIARY

Form 10-Q Quarterly Report

Table of Contents

 

PART I – FINANCIAL INFORMATION

  
 

Forward-Looking Statements Disclosure

     3   

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Condition (Unaudited) As of March 31, 2012 and June 30, 2011

     5   
 

Consolidated Statements of Income (Unaudited) for the three and nine months ended March 31, 2012 and 2011

     6   
 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) for the nine months ended March 31, 2012 and 2011

     7   
 

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended March 31, 2012 and 2011

     8   
 

Notes to Consolidated Financial Statements (Unaudited)

     9   

Item 2.

 

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

     30   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     38   

Item 4.

 

Controls and Procedures

     38   

PART II – OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     39   

Item 1A.

 

Risk Factors

     39   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     39   

Item 3.

 

Defaults Upon Senior Securities

     39   

Item 4.

 

Mine Safety Disclosures

     39   

Item 5.

 

Other Information

     39   

Item 6.

 

Exhibits

     39   

Signatures

       40   

 

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Table of Contents

Forward-looking Statements

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

3


Table of Contents
   

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.

 

4


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Condition (Unaudited)

 

     March 31,
2012
    June 30,
2011
 
(In thousands, except share data)             

Assets:

    

Cash and due from banks

   $ 24,613      $ 32,535   

Federal funds sold

     13,025        5,433   
  

 

 

   

 

 

 

Cash and cash equivalents

     37,638        37,968   

Interest bearing deposits with other banks

     9,984        7,058   

Securities available for sale

     37,542        35,828   

Securities held to maturity (fair value of $2,842 and $3,795)

     2,690        3,623   

Federal Home Loan Bank stock, at cost

     2,471        2,987   

Loans

     284,877        281,866   

Less: allowance for loan losses

     2,664        2,246   
  

 

 

   

 

 

 

Net loans

     282,213        279,620   

Premises and equipment, net

     6,348        6,285   

Bank owned life insurance

     8,824        8,601   

Other assets

     4,102        4,475   
  

 

 

   

 

 

 

Total assets

   $ 391,812      $ 386,445   
  

 

 

   

 

 

 

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 35,613      $ 29,468   

Interest-bearing

     222,347        227,563   
  

 

 

   

 

 

 

Total deposits

     257,960        257,031   

Securities sold under agreements to repurchase

     13,276        15,566   

Federal Home Loan Bank advances

     42,028        29,618   

Advance payments from borrowers for taxes and insurance

     1,089        1,921   

Other liabilities

     1,635        1,449   
  

 

 

   

 

 

 

Total liabilities

     315,988        305,585   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

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

     —          —     

Common stock (par value $.01); authorized 100,000,000 shares; issued and outstanding 4,176,550 and 4,602,050 shares at March 31, 2012 and June 30, 2011, respectively

     42        46   

Additional paid-in capital

     38,991        44,419   

Unearned ESOP shares

     (3,286     (3,425

Retained earnings

     39,331        39,141   

Accumulated other comprehensive income

     746        679   
  

 

 

   

 

 

 

Total stockholders’ equity

     75,824        80,860   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 391,812      $ 386,445   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Income (Unaudited)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  
(In thousands, except per share data)                         

Interest and Dividend Income:

        

Loans receivable, including fees

   $ 3,629      $ 3,784      $ 11,120      $ 11,391   

Investment securities:

        

Interest - taxable

     289        256        819        840   

Dividends

     10        5        21        14   

Federal funds sold

     18        8        72        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     3,946        4,053        12,032        12,284   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

        

Deposits

     484        596        1,868        1,910   

Federal Home Loan Bank advances

     280        298        848        1,042   

Securities sold under agreements to repurchase

     46        51        164        182   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     810        945        2,880        3,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     3,136        3,108        9,152        9,150   

Less provision for loan losses

     270        189        646        592   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     2,866        2,919        8,506        8,558   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income:

        

Customer service fees

     90        91        273        311   

Loan servicing fees

     7        10        23        32   

Bank owned life insurance income

     73        78        223        226   

Net gains (losses)

     (34     (4     (59     91   

Other non-interest income

     32        15        91        91   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     168        190        551        751   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Expense:

        

Salaries and employee benefits

     1,760        1,563        5,165        4,473   

Occupancy and equipment

     394        415        1,179        1,336   

Data processing

     220        199        570        537   

Directors’ fees

     91        74        260        241   

FDIC assessments

     75        52        211        200   

Other non-interest expense

     398        521        1,343        1,439   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     2,938        2,824        8,728        8,226   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     96        285        329        1,083   

Income tax expense

     76        86        139        349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 20      $ 199      $ 190      $ 734   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.01      $ 0.05      $ 0.05      $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.01      $ 0.05      $ 0.05      $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     3,864,229        4,277,016        3,994,788        4,272,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     3,884,532        4,277,016        4,005,445        4,272,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited)

Nine Months Ended March 31, 2012 and 2011

 

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

Balances at July 1, 2011

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

Comprehensive income:

             

Net income

           190           190   

Other comprehensive income, net of tax:

             

Net unrealized gains on available for sale securities, net of tax $42

              67        67   
             

 

 

 

Total comprehensive income

                257   

Purchase and retirement of 425,500 shares of Company stock

     (4     (6,116            (6,120

Share-based compensation expense

       627               627   

ESOP shares committed to be released (13,886 shares)

       61        139             200   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balances, March 31, 2012

   $ 42      $ 38,991      $ (3,286   $ 39,331       $ 746      $ 75,824   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balances at July 1, 2010

   $ 46      $ 44,759      $ (3,610   $ 38,284       $ 743      $ 80,222   

Comprehensive income:

             

Net income

           734           734   

Other comprehensive income (loss), net of tax:

             

Net unrealized losses on available for sale securities, net of tax of benefit ($166)

              (259     (259
             

 

 

 

Total comprehensive income

                475   

ESOP shares committed to be released (13,886 shares)

       34        138             172   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balances, March 31, 2011

   $ 46      $ 44,793      $ (3,472   $ 39,018       $ 484      $ 80,869   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

     Nine Months Ended
March 31,
 
(in thousands)    2012     2011  

Operating Activities:

    

Net income

   $ 190      $ 734   
  

 

 

   

 

 

 

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

    

Provision for loan losses

     646        592   

Depreciation and amortization of premises and equipment

     532        492   

Net amortization of securities premiums and discounts

     353        130   

Proceeds from sales of loans held for sale

     307        3,527   

Originated loans held for sale

     (301     (3,428

Net gains on sales of loans

     (6     (99

Amortization of net deferred loan costs (fees)

     1        (26

Write-down of real estate owned

     65        88   

Net gain on sale of deposits

     —          (80

Bank owned life insurance income

     (223     (226

ESOP expense

     200        172   

Share-based compensation expense

     627        —     

Amortization of mortgage servicing rights

     8        7   

Amortization of brokered deposit premiums

     13        21   

Changes in other assets and liabilities, net

     431        444   
  

 

 

   

 

 

 

Total adjustments

     2,653        1,614   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,843        2,348   
  

 

 

   

 

 

 

Investing Activities:

    

Principal collections and maturities of securities available for sale

     8,188        6,983   

Principal collections and maturities of securities held to maturity

     927        875   

Purchases of securities available for sale

     (10,140     —     

Redemption of Federal Home Loan Bank Stock, net

     516        414   

(Increase) decrease in interest bearing deposits with other banks, net

     (2,926     207   

Loan purchases

     —          (4,140

Loan originations less principal collections, net

     (3,240     (2,413

Purchases of premises and equipment

     (595     (588
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (7,270     1,338   
  

 

 

   

 

 

 

Financing Activities:

    

Sale of deposits

     —          (10,421

Increase (decrease) in other deposits

     929        (7,115

Decrease in securities sold under agreements to repurchase

     (2,290     (5,110

Proceeds from FHLB advances

     60,000        15,000   

Repayment of FHLB advances

     (47,590     (10,187

Net decrease in advance payments from borrowers for taxes and insurance

     (832     (1,081

Purchase and retirement of Company stock

     (6,120     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     4,097        (18,914
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (330     (15,228

Cash and cash equivalents at beginning of period

     37,968        36,046   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 37,638      $ 20,818   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Interest paid

   $ 3,002      $ 3,106   

Income taxes paid

     —          423   

See notes to consolidated financial statements.

 

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Table of Contents

OBA Financial Services, Inc. and Subsidiary

Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

OBA Bank (the “Bank”) is a community-oriented banking institution providing a variety of financial services to individuals and small businesses through its offices in Montgomery, Anne Arundel, and Howard Counties, Maryland. Its primary deposits are 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 Bank’s 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 holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

Basis of Presentation

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

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

Operating results for the three 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.

 

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Change in accounting estimate

During the Bank’s 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.

Reclassifications

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

 

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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:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2012      2011      2012      2011  
     (In thousands)                

Unrealized gains (losses) on available for sale securities

   $ 113       $ 14       $ 109       $ (425

Tax effect

     44         5         42         (166
  

 

 

    

 

 

    

 

 

    

 

 

 

Net of tax amount

   $ 69       $ 9       $ 67       $ (259
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income consists of the following:

 

     March 31,
2012
     June 30,
2011
 
     (In thousands)  

Unrealized gains on available for sale securities

   $ 1,223       $ 1,114   

Tax effect

     477         435   
  

 

 

    

 

 

 

Total

   $ 746       $ 679   
  

 

 

    

 

 

 

 

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NOTE 3 — SECURITIES

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

 

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

March 31, 2012

          

Securities available for sale:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

   $ 36,194       $ 1,240       $ —        $ 37,434   

Trust preferred securities

     75         —           (17     58   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities available for sale

     36,269         1,240         (17     37,492   

Equity Securities

     50         —           —          50   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

     36,319         1,240         (17     37,542   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held to maturity:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

     2,690         152         —          2,842   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities held to maturity

     2,690         152         —          2,842   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 39,009       $ 1,392       $ (17   $ 40,384   
  

 

 

    

 

 

    

 

 

   

 

 

 

June 30, 2011

          

Securities available for sale:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

   $ 34,547       $ 1,116       $ —        $ 35,663   

Trust preferred securities

     117         —           (2     115   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities available for sale

     34,664         1,116         (2     35,778   

Equity Securities

     50         —           —          50   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

     34,714         1,116         (2     35,828   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held to maturity:

          

Debt Securities:

          

Residential mortgage-backed securities (1)

     3,623         172         —          3,795   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities held to maturity

     3,623         172         —          3,795   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 38,337       $ 1,288       $ (2   $ 39,623   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) 

All residential mortgage-backed securities were issued by United States government agencies including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company had no private label residential mortgage-backed securities at March 31, 2012 and June 30, 2011.

 

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The amortized cost and fair value of debt securities by contractual maturity at March 31, 2012 are as follows:

 

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

Due after ten years

   $ 75       $ 58       $ —         $ —     

Residential mortgage-backed securities

     36,194         37,434         2,690         2,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,269       $ 37,492       $ 2,690       $ 2,842   
  

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

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

March 31, 20112

                 

Trust preferred security

   $ —         $ —         $ 17       $ 58       $ 17       $ 58   

June 30, 2011

                 

Trust preferred security

   $ —         $ —         $ 2       $ 115       $ 2       $ 115   

At March 31, 2012, the Company’s 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 Company’s 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 Bank’s determination as to the classification of loans is subject to review by the Bank’s primary federal regulator, the Office of the Comptroller of the Currency (“OCC”). The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations.

 

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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 borrower’s 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.

 

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The components of loans are as follows:

 

     March 31,
2012
    June 30,
2011
 
     (In thousands)  

Commerical business loans

     34,482        36,041   

Commercial real estate

     120,177        108,756   

Construction

     1,337        1,180   

Residential mortgages

     94,086        97,285   

Home equity loans and lines of credit

     34,590        38,329   
  

 

 

   

 

 

 

Loans

     284,672        281,591   

Net deferred commerical loan fees

     (168     (181

Net deferred home equity costs

     373        456   
  

 

 

   

 

 

 

Loans net of deferred (fees) costs

     284,877        281,866   

Allowance for loan losses

     2,664        2,246   
  

 

 

   

 

 

 

Total loans, net

   $ 282,213      $ 279,620   
  

 

 

   

 

 

 

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

 

March 31, 2012:    Pass      Special
Mention
     Substandard      Doubtful      Total  
(In thousands)                                   

Commerical business loans

   $ 31,284       $ 84       $ 3,114       $ —         $ 34,482   

Commercial real estate

     113,515         187         6,475         —           120,177   

Construction

     1,337         —           —           —           1,337   

Residential mortgages

     92,389         —           1,697         —           94,086   

Home equity loans and lines of credit

     34,573         —           17         —           34,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 273,098       $ 271       $ 11,303       $ —         $ 284,672   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
June 30, 2011:    Pass      Special
Mention
     Substandard      Doubtful      Total  
(In thousands)                                   

Commerical business loans

   $ 33,199       $ 1,788       $ 1,054       $ —         $ 36,041   

Commercial real estate

     98,084         3,687         6,985         —           108,756   

Construction

     1,180         —           —           —           1,180   

Residential mortgages

     96,588         —           697         —           97,285   

Home equity loans and lines of credit

     38,329         —           —           —           38,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 267,380       $ 5,475       $ 8,736       $ —         $ 281,591   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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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:

 

March 31, 2012:    30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days
and Over
Past Due
     Total
Past Due
     Current      Total
Loans
Receivable
     Total
Non-Accrual
Loans
 
(In thousands)                                                 

Commerical business loans

   $ —         $ —         $ —         $ —         $ 34,482       $ 34,482       $ —     

Commercial real estate

     —           —           300         300         119,877         120,177         5,079   

Construction

     —           —           —           —           1,337         1,337         —     

Residential mortgages

     —           —           894         894         93,192         94,086         894   

Home equity loans and lines of credit

     —           —           17         17         34,573         34,590         92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 1,211       $ 1,211       $ 283,461       $ 284,672       $ 6,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
June 30, 2011:    30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days
and Over
Past Due
     Total
Past Due
     Current      Total
Loans
Receivable
     Total
Non-Accrual
Loans
 
(In thousands)                                                 

Commerical business loans

   $ —         $ —         $ —         $ —         $ 36,041       $ 36,041       $ —     

Commercial real estate

     —           327         2,094         2,421         106,335         108,756         5,292   

Construction

     —           —           —           —           1,180         1,180         —     

Residential mortgages

     —           —           —           —           97,285         97,285         —     

Home equity loans and lines of credit

     198         75         —           273         38,056         38,329         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 198       $ 402       $ 2,094       $ 2,694       $ 278,897       $ 281,591       $ 5,292   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Management’s judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. The Bank considers residential mortgage loans and home equity loans and lines of credit 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:

 

  (1) specific allowances established for impaired loans (as defined by U.S. GAAP). The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the estimated fair value of the loan, or the loan’s observable market price, if any, or the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan exceeds the carrying value of the loan do not require 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 class. The Bank applies an estimated loss rate to each loan class. 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 specific or general allowance. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used for estimating specific and general allowances.

 

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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.

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

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
(In thousands)    2012     2011     2012     2011  

Balance at beginning of period

   $ 2,619      $ 2,170      $ 2,246      $ 1,737   

Provision for loan losses

     270        189        646        592   

Charge-offs

     (225     (171     (243     (171

Recoveries

     —          —          15        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 2,664      $ 2,188      $ 2,664      $ 2,188   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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:

 

Three Months Ended March 31, 2012                                            
     Commerical
business loans
    Commerical
real estate
    Construction     Residential
mortgages
    Home equity
loans and lines
of credit
    Unallocated      Total  
(In thousands)                                            

Allowance for loan losses:

               

Beginning Balance

   $ 622      $ 652      $ 2      $ 711      $ 414      $ 218       $ 2,619   

Charge-offs

     —          (152     —          —          (73     —           (225

Recoveries

     —          —          —          —          —          —           —     

Provisions

     6        253        2        (38     37        10         270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 628      $ 753      $ 4      $ 673      $ 378      $ 228       $ 2,664   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
Nine Months Ended March 31, 2012                                            
     Commerical
business loans
    Commerical
real estate
    Construction     Residential
mortgages
    Home equity
loans and lines
of credit
    Unallocated      Total  
(In thousands)                                            

Allowance for loan losses:

               

Beginning Balance

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

Charge-offs

     —          (170     —          —          (73     —           (243

Recoveries

     —          —          —          —          15        —           15   

Provisions

     245        217        2        145        (4     41         646   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 628      $ 753      $ 4      $ 673      $ 378      $ 228       $ 2,664   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
Three Months Ended March 31, 2011                                            
     Commerical
business loans
    Commerical
real estate
    Construction     Residential
mortgages
    Home equity
loans and lines
of credit
    Unallocated      Total  
(In thousands)                                            

Allowance for loan losses:

               

Beginning Balance

   $ 270      $ 1,021      $ 3      $ 500      $ 164      $ 212       $ 2,170   

Charge-offs

     —          (77     —          (15     (79     —           (171

Recoveries

     —          —          —          —          —          —           —     

Provisions

     (30     169        (1     (201     252        —           189   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 240      $ 1,113      $ 2      $ 284      $ 337      $ 212       $ 2,188   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
Nine Months Ended March 31, 2011                                            
     Commerical
business loans
    Commerical
real estate
    Construction     Residential
mortgages
    Home equity
loans and lines
of credit
    Unallocated      Total  
(In thousands)                                            

Allowance for loan losses:

               

Beginning Balance

   $ 237      $ 945      $ 2      $ 214      $ 175      $ 164       $ 1,737   

Charge-offs

     —          (77     —          (15     (79     —           (171

Recoveries

     —          —          —          —          30        —           30   

Provisions

     3        245        —          85        211        48         592   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 240      $ 1,113      $ 2      $ 284      $ 337      $ 212       $ 2,188   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

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:

 

March 31, 2012:    Commerical
business loans
     Commerical
real estate
     Construction      Residential
mortgages
     Home equity
loans and lines
of credit
     Unallocated      Total loans  
(In thousands)                                                 

Allowance for Loan Losses:

                    

Ending allowance balance related to loans:

                    

Individually evaluated for impairment

   $ —         $ —         $ —         $ 90       $ —         $ —         $ 90   

Collectively evaluated for impairment

     628         753         4         583         378         228         2,574   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 628       $ 753       $ 4       $ 673       $ 378       $ 228       $ 2,664   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Ending loan balance

                    

Individually evaluated for impairment

   $ 10       $ 6,475       $ —         $ 1,184       $ 17          $ 7,686   

Collectively evaluated for impairment

     34,472         113,702         1,337         92,902         34,573            276,986   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loan balance

   $ 34,482       $ 120,177       $ 1,337       $ 94,086       $ 34,590          $ 284,672   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 
June 30, 2011:    Commerical
business loans
     Commerical
real estate
     Construction      Residential
mortgages
     Home equity
loans and lines
of credit
     Unallocated      Total loans  
(In thousands)                                                 

Allowance for Loan Losses:

                    

Ending allowance balance related to loans:

                    

Individually evaluated for impairment

   $ —         $ —         $ —         $ 90       $ —         $ —         $ 90   

Collectively evaluated for impairment

     383         706         2         438         440         187         2,156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Ending loan balance

                    

Individually evaluated for impairment

   $ —         $ 6,985       $ —         $ 697       $ —            $ 7,682   

Collectively evaluated for impairment

     36,041         101,771         1,180         96,588         38,329            273,909   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loan balance

   $ 36,041       $ 108,756       $ 1,180       $ 97,285       $ 38,329          $ 281,591   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

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Table of Contents

The following tables summarize information in regards to impaired loans by portfolio class as of and for the periods ended March 31, 2012 and 2011:

 

                          March 31, 2012  
     At March 31, 2012      Three Months Ended      Nine Months Ended  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
(In thousands)                                                 

With No Related Allowance Recorded:

                    

Commercial business loans

   $ 10       $ 10       $ —         $ 10       $ —         $ 5       $ —     

Commercial real estate

     6,475         6,564         —           6,529         97         6,823         380   

Residential mortgages

     491         491         —           491         1         262         10   

Home equity loans and lines of credit

     17         90         —           17         —           8         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no allowance recorded

   $ 6,993       $ 7,155       $ —         $ 7,047       $ 98       $ 7,098       $ 391   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an Allowance Recorded:

                    

Commercial business loans

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

Commercial real estate

     —           —           —           —           —           —           —     

Residential mortgages

     693         693         90         694         13         651         28   

Home equity loans and lines of credit

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with allowance recorded

   $ 693       $ 693       $ 90       $ 694       $ 13       $ 651       $ 28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Commercial business loans

   $ 10       $ 10       $ —         $ 10       $ —         $ 5       $ —     

Commercial real estate

     6,475         6,564         —           6,529         97         6,823         380   

Residential mortgages

     1,184         1,184         90         1,185         14         913         38   

Home equity loans and lines of credit

     17         90         —           17         —           8         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,686       $ 7,848       $ 90       $ 7,741       $ 111       $ 7,749       $ 419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                          March 31, 2011  
     At March 31, 2011      Three Months Ended      Nine Months Ended  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
(In thousands)                                                 

With No Related Allowance Recorded:

                    

Commercial business loans

   $ —         $ —         $ —         $ —         $ —         $ 32       $ —     

Commercial real estate

     7,080         7,246         371         4,472         17         4,468         151   

Residential mortgages

     —           —           —           —           —           —           13   

Home equity loans and lines of credit

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no allowance recorded

   $ 7,080       $ 7,246       $ 371       $ 4,472       $ 17       $ 4,500       $ 164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an Allowance Recorded:

                    

Commercial business loans

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

Commercial real estate

     —           —           —           —           —           —           —     

Residential mortgages

     699         699         90         700         13         693         99   

Home equity loans and lines of credit

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with allowance recorded

   $ 699       $ 699       $ 90       $ 700       $ 13       $ 693       $ 99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Commercial business loans

   $ —         $ —         $ —         $ —         $ —         $ 32       $ —     

Commercial real estate

     7,080         7,246         371         4,472         17         4,468         151   

Residential mortgages

     699         699         90         700         13         693         112   

Home equity loans and lines of credit

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,779       $ 7,945       $ 461       $ 5,172       $ 30       $ 5,193       $ 263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

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:

 

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

Troubled debt restructurings:

        

Commercial business loans

     1       $ 104       $ 10   

Commercial real estate

     1       $ 3,198       $ 3,259   

Residential mortgage

     1         76         76   
  

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

     3       $ 3,378       $ 3,345   
  

 

 

    

 

 

    

 

 

 

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.

 

21


Table of Contents

NOTE 5 — FAIR VALUE MEASUREMENTS AND DISCLOSURES

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

 

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

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between fair value hierarchy levels are recognized as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between fair value hierarchy levels for the three or nine months ended March 31, 2012 or 2011.

 

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Table of Contents

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:

 

(In thousands)           (Level 1)                

Description

   March 31,
2012
     Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other

Observable
Inputs
     (Level 3)
Significant

Unobservable
Inputs
 

Residential mortgage-backed securities (1)

   $ 37,434       $ —         $ 37,434       $ —     

Trust preferred securities

     58         —           —           58   

Equity securities

     50         —           50         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available for sale

   $ 37,542       $ —         $ 37,484       $ 58   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Description

   June 30,
2011
     (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Residential mortgage-backed securities (1)

   $ 35,663       $ —         $ 35,663       $ —     

Trust preferred securities

     115         —           —           115   

Equity securities

     50         —           50         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available for sale

   $ 35,828       $ —         $ 35,713       $ 115   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

All residential mortgage-backed securities were issued by United States government agencies including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company had no private label residential mortgage-backed securities at March 31, 2012 and June 30, 2011.

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:

 

(In thousands)    Three Months
Ended
    Nine Months
Ended
 

Beginning balance

   $ 97      $ 115   

Principal repayments

     (32     (42

Unrealized losses included in other comprehensive income

     (7     (15
  

 

 

   

 

 

 

Ending balance

   $ 58      $ 58   
  

 

 

   

 

 

 

Level 3 securities consist of one trust preferred security at March 31, 2012.

 

23


Table of Contents

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:

 

(In thousands)           (Level 1)              

Description

   March 31,
2012
     Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other

Observable
Inputs
   (Level 3)
Significant

Unobservable
Inputs
 

Impaired loans

   $ 603       $ —            $ 603   
  

 

 

    

 

 

    

 

  

 

 

 

Real estate owned

   $ 40       $ —            $ 40   
  

 

 

    

 

 

    

 

  

 

 

 

 

Description

   June 30,
2011
     (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
   (Level 3)
Significant
Unobservable
Inputs
 

Impaired loans

   $ 607       $ —            $ 607   
  

 

 

    

 

 

    

 

  

 

 

 

Real estate owned

   $ 105       $ —            $ 105   
  

 

 

    

 

 

    

 

  

 

 

 

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 Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate fair values at 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 security’s terms and conditions, among other things.

The market for pooled trust preferred securities is inactive. A significant widening of the bid/ask spreads in the markets in which these securities trade was followed by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and no new pooled trust preferred securities have been issued since 2007. Since there were limited observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using primarily

 

24


Table of Contents

unobservable Level 3 inputs. Fair value estimates for trust preferred securities were based on discounting expected cash flows using a risk-adjusted discount rate. The Company develops the risk-adjusted discount rate by considering the time value of money (risk-free rate) adjusted for an estimated risk premium for bearing the uncertainty in future cash flows and, given current adverse market conditions, a liquidity adjustment based on an estimate of the premium that a market participant would require assuming an orderly transaction. Management determined that sensitivity to inputs are not significant due to the immaterial nature of trust preferred securities as a level 3 asset.

Securities Held to Maturity (Carried at Amortized Cost)

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

Federal Home Loan Bank Stock (Carried at Cost)

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

Loans Receivable (Carried at Cost)

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

Impaired Loans (Generally Carried at Fair Value)

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

 

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Table of Contents

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:

 

(In thousands)                      
     Quantitative Information about Level 3 Fair Value  Measurements
     Fair Value
Estimate
     Valuation
Techniques
   Unobservable
Inputs
   Estimated
Range

Impaired loans

   $ 603       Appraisal of
collateral
   Appraisal
adjustments
   0.0% to -25.0%
         Liquidation
expenses
   -3.0% to -5.0%

 

26


Table of Contents

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

 

(In thousands)

   Carrying
Amount
     Fair
Value
     Fair Value Hierarchy at
March 31, 2012
 
         Quoted Prices in
Active Markets
For Identical
Assets

(Level 1)
     Significant  Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level  3)
 

Financial assets:

              

Cash and cash equivalents

   $ 37,638       $ 37,638       $ 37,638       $ —         $ —     

Interest bearing deposits with other banks

     9,984         9,984         9,984         —           —     

Securities available for sale

     37,542         37,542         —           37,484         58   

Securities held to maturity

     2,690         2,842         —           2,842         —     

Federal Home Loan Bank stock

     2,471         2,471         —           2,471         —     

Loans receivable, net

     282,213         288,134         —           —           288,134   

Accrued interest receivable

     1,162         1,162         —           1,162         —     

Mortgage servicing rights

     80         80         —           —           80   

Financial liabilities:

              

Deposits

     257,960         256,601         189,846         66,755         —     

Securities sold under agreements to repurchase

     13,276         13,420         —           13,420         —     

Federal Home Loan Bank Advances

     42,028         44,784         —           44,784         —     

Accrued interest payable

     153         153         —           153         —     

Off-Balance sheet financial instruments

     —           —           —           —           —     

 

(In thousands)

   June 30, 2011  
   Carrying
Amount
     Fair
Value
 

Financial assets:

     

Cash and cash equivalents

   $ 37,968       $ 37,968   

Interest bearing deposits with other banks

     7,058         7,058   

Securities available for sale

     35,828         35,828   

Securities held to maturity

     3,623         3,795   

Federal Home Loan Bank stock

     2,987         2,987   

Loans receivable, net

     279,620         288,282   

Accrued interest receivable

     1,208         1,208   

Mortgage servicing rights

     88         88   

Financial liabilities:

     

Deposits

     257,031         257,981   

Securities sold under agreements to repurchase

     15,566         15,780   

Federal Home Loan Bank Advances

     29,618         32,241   

Accrued interest payable

     276         276   

Off-Balance sheet financial instruments

     —           —     

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 Bank’s contributions to the ESOP and dividends payable on the stock, if any. The interest rate on the ESOP loan adjusts annually and is the prime rate on the first business day of the calendar year, as published in The Wall Street Journal.

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

 

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Shares held by the ESOP trust at March 31, 2012 and 2011 were as follows:

 

     March 31,  
     2012      2011  

Allocated shares

     40,541         23,144   

Unallocated shares

     328,641         347,156   
  

 

 

    

 

 

 

Total ESOP shares

     369,182         370,300   
  

 

 

    

 

 

 

Fair value of unallocated shares, in thousands

   $ 4,683       $ 5,041   
  

 

 

    

 

 

 

NOTE 8 — SHARE BASED COMPENSATION

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

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 648,025. Total share-based compensation expense for the 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.

Stock Options

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

 

     Options      Weighted
average
exercise
price
     Remaining
contractual
life (years)
 

Options outstanding at June 30, 2011

     —         $ —        

Granted

     272,150         14.79      

Exercised

     —           —        

Forfeited

     —           —        

Expired

     —           —        

Options outstanding at March 31, 2012

     272,150       $ 14.79         9.3   

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.

 

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The fair value of the Company’s stock options was determined using the Black-Scholes option pricing formula. The following ranges of assumptions were used in the formula:

 

Expected volatility

   19.09% - 52.59%

Risk-free interest rate

   1.17% - 2.11%

Expected dividends

   1.62% - 1.62%

Expected life (in years)

   6.50 - 6.50

Exercise price for the stock options

   $14.35 - $14.81

Grant date fair value for the stock options

   $3.40 - $7.63

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 Company’s common stock, the Company’s 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 Company’s 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 Company’s stock on the date of grant.

Restricted Stock Awards

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

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

 

     Service-Based
Restricted
stock

awards
     Weighted
average
grant date
fair value
     Performance-Based
Restricted

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

Non-vested at June 30, 2011

     —         $ —           —         $ —           —         $ —     

Granted

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

Vested

     —           —           —           —           —           —     

Forfeited

     —           —           —           —           —           —     

Non-vested at March 31, 2012

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

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.

 

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Table of Contents

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.

 

     Three Months Ended
March 31
     Nine Months Ended
March 31
 
(Dollars in thousands, except share data)    2012      2011      2012      2011  

Net income

   $ 20       $ 199       $ 190       $ 734   

Weighted average number of shares used in:

           

Basic earnings per share

     3,864,229         4,277,016         3,994,788         4,272,353   

Diluted common stock equivalents:

           

Restricted stock

     20,303         —           10,657         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

     3,884,532         4,277,016         4,005,445         4,272,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share, basic

   $ 0.01       $ 0.05       $ 0.05       $ 0.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share, diluted

   $ 0.01       $ 0.05       $ 0.05       $ 0.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

FINANCIAL REVIEW

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

Overview of Income and Expenses

Income

The Company has two primary sources of pre-tax income. Net interest income 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 Company’s primary sources of income.

 

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Table of Contents

Expenses

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

Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees, 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:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
(in thousands)    2012     2011     2012     2011  

Balance at beginning of period

   $ 2,619      $ 2,170      $ 2,246      $ 1,737   

Provision for loan losses

     270        189        646        592   

Charge-offs

     (225     (171     (243     (171

Recoveries

     —          —          15        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 2,664      $ 2,188      $ 2,664      $ 2,188   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

        

Net charge-offs to average loans

     0.32     0.25     0.11     0.07

Allowance for loan losses to loans

     0.94        0.77        0.94        0.77   

 

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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:

 

(dollars in thousands)    March 31,
2012
    June 30,
2011
 

Non-performing assets

    

Non-accrual loans:

    

Commercial real estate

   $ 5,079      $ 5,292   

Residential mortgages

     894        —     

Home equity loans and lines of credit

     92        —     
  

 

 

   

 

 

 

Total non-accrual loans

     6,065        5,292   

Other real estate owned

     40        105   
  

 

 

   

 

 

 

Total non-performing assets

   $ 6,105      $ 5,397   
  

 

 

   

 

 

 

Asset quality ratios:

    

Non-performing loans to total loans

     2.13     1.88

Non-performing assets to total assets

     1.56        1.40   

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.

 

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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 Company’s 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 Company’s Board of Directors adopted a second stock repurchase program, previously disclosed in the Company’s 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:

 

     Ratios at        
     March 31,
2012
    June 30,
2011
    “Well-Capitalized”
Minimums
 

Consolidated Capital Ratios:

      

Total Capital to risk-weighted assets

     30.26     33.16     —     

Tier 1 Capital to risk-weighted assets

     29.22     32.26     —     

Tier 1 Leverage

     19.22     20.81     —     

Bank Capital Ratios:

      

Total Capital to risk-weighted assets

     24.16     24.40     10.00

Tier 1 Capital to risk-weighted assets

     23.12     23.49     6.00

Tier 1 Leverage

     15.21     15.15     5.00

The Company’s 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.

 

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Table of Contents

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 Company’s 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.

 

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

 

     Three Months Ended
March 31,
    Change  
     2012     2011     $     %  
     (In thousands)              

Customer service fees

   $ 90      $ 91      $ (1     (1.1 )% 

Loan servicing fees

     7        10        (3     (30.0

Bank owned life insurance income

     73        78        (5     (6.4

Other non-interest income

     32        15        17        113.3   
  

 

 

   

 

 

   

 

 

   

Non-interest income before net gains (losses)

     202        194        8        4.1   

Net gain on sale of loans

     —          4