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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period ended December 31, 2011

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.

4,201,250 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of February 10, 2012.

 

 

 

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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 December 31, 2011 and June 30, 2011			5
		Consolidated Statements of Income (Unaudited) for the three and six months ended December 31, 2011 and 2010.			6
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) for the six months ended December 31, 2011 and 2010			7
		Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 31, 2011 and 2010			8
		Notes to Consolidated Financial Statements (Unaudited)			9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			38
Item 4.		Controls and Procedures			38
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			38
Item 1A.		Risk Factors			38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3.		Defaults Upon Senior Securities			38
Item 4.		[Reserved]			38
Item 5.		Other Information			38
Item 6.		Exhibits			38
Signatures					39

 

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Forward-looking Statements

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

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•

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

 

•

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

 

•

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

 

•

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

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

 

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PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Condition (Unaudited)

 

		December 31, 2011				June 30, 2011
(In thousands, except share data)
Assets:
Cash and due from banks		$	17,815			$	32,535
Federal funds sold			10,608				5,433
Cash and cash equivalents			28,423				37,968
Interest bearing deposits with other banks			9,539				7,058
Securities available for sale			40,338				35,828
Securities held to maturity (fair value of $3,175 and $3,795)			3,010				3,623
Federal Home Loan Bank stock, at cost			2,471				2,987
Loans			281,560				281,866
Less: allowance for loan losses			2,619				2,246
Net loans			278,941				279,620
Premises and equipment, net			6,344				6,285
Bank owned life insurance			8,751				8,601
Other assets			4,200				4,475
Total assets		$	382,017			$	386,445
Liabilities:
Deposits:
Noninterest-bearing		$	30,905			$	29,468
Interest-bearing			220,968				227,563
Total deposits			251,873				257,031
Securities sold under agreements to repurchase			10,192				15,566
Federal Home Loan Bank advances			42,058				29,618
Advance payments from borrowers for taxes and insurance			285				1,921
Other liabilities			1,682				1,449
Total liabilities			306,090				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 4,210,850 and 4,602,050 shares at December 31, 2011 and June 30, 2011, respectively			42				46
Additional paid-in capital			39,230				44,419
Unearned ESOP shares			(3,333	)			(3,425	)
Retained earnings			39,311				39,141
Accumulated other comprehensive income			677				679
Total stockholders’ equity			75,927				80,860
Total liabilities and stockholders’ equity		$	382,017			$	386,445

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Income (Unaudited)

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2011				2010				2011				2010
(In thousands, except per share data)
Interest and Dividend Income:
Loans receivable, including fees		$	3,723			$	3,850			$	7,491			$	7,607
Investment securities:
Interest - taxable			248				266				530				584
Dividends			6				2				11				9
Federal funds sold			25				13				54				31
Total interest and dividend income			4,002				4,131				8,086				8,231
Interest Expense:
Deposits			628				638				1,384				1,314
Federal Home Loan Bank advances			277				352				568				744
Securities sold under agreements to repurchase			55				66				118				131
Total interest expense			960				1,056				2,070				2,189
Net interest income			3,042				3,075				6,016				6,042
Less provision for loan losses			229				245				376				403
Net interest income after provision for loan losses			2,813				2,830				5,640				5,639
Non-Interest Income:
Customer service fees			92				104				183				220
Loan servicing fees			7				11				16				22
Bank owned life insurance income			75				78				150				148
Net gains (losses)			(31	)			70				(25	)			95
Other non-interest income			29				45				59				76
Total non-interest income			172				308				383				561
Non-Interest Expense:
Salaries and employee benefits			1,667				1,449				3,405				2,910
Occupancy and equipment			399				470				785				921
Data processing			173				179				350				338
Directors’ fees			89				79				169				167
FDIC assessments			69				71				136				148
Other non-interest expense			457				469				945				918
Total non-interest expense			2,854				2,717				5,790				5,402
Income before income taxes			131				421				233				798
Income tax expense			49				138				63				263
Net income		$	82			$	283			$	170			$	535
Basic earnings per share		$	0.02			$	0.07			$	0.04			$	0.13
Diluted earnings per share		$	0.02			$	0.07			$	0.04			$	0.13
Basic weighted average shares outstanding			3,924,869				4,272,387				4,059,359				4,270,072
Diluted weighted average shares outstanding			3,933,087				4,272,387				4,064,369				4,270,072

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

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

Six Months Ended December 31, 2011 and 2010

 

		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															170								170
Other comprehensive income (loss), net of tax:
Net unrealized losses on available for sale securities, net of tax of benefit ($2)																			(2	)			(2	)
Total comprehensive income																							168
Purchase and retirement of 391,200 shares of Company stock			(4	)			(5,625	)															(5,629	)
Share-based compensation expense							395																395
ESOP shares committed to be released (9,258 shares)							41				92												133
Balances, December 31, 2011		$	42			$	39,230			$	(3,333	)		$	39,311			$	677			$	75,927
Balances at July 1, 2010		$	46			$	44,759			$	(3,610	)		$	38,284			$	743			$	80,222
Comprehensive income:
Net income															535								535
Other comprehensive income (loss), net of tax:
Net unrealized losses on available for sale securities, net of tax of benefit ($171)																			(268	)			(268	)
Total comprehensive income																							267
ESOP shares committed to be released (9,258 shares)							15				92												107
Balances, December 31, 2010		$	46			$	44,774			$	(3,518	)		$	38,819			$	475			$	80,596

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

		Six Months Ended December 31,
(in thousands)		2011				2010
Operating Activities:
Net income		$	170			$	535
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			376				403
Depreciation and amortization of premises and equipment			343				336
Net amortization of securities premiums and discounts			242				96
Proceeds from sales of loans held for sale			307				3,352
Originated loans held for sale			(301	)			(3,257	)
Net gains on sales of loans			(6	)			(95	)
Amortization of net deferred loan fees			(6	)			(24	)
Write-down of foreclosed assets			31				—
Bank owned life insurance income			(150	)			(148	)
ESOP expense			133				107
Share-based compensation expense			395				—
Amortization of mortgage servicing rights			5				4
Amortization of brokered deposit premiums			6				14
Changes in other assets and liabilities, net			468				63
Total adjustments			1,843				851
Net cash provided by operating activities			2,013				1,386
Investing Activities:
Principal collections and maturities of securities available for sale			5,388				5,215
Principal collections and maturities of securities held to maturity			609				623
Purchases of securities available for sale			(10,140	)			—
Redemption of Federal Home Loan Bank Stock, net			516				414
Increase in interest bearing deposits with other Banks, net			(2,481	)			(540	)
Loan purchases			—				(4,140	)
Loan originations less principal collections, net			309				(4,001	)
Purchases of premises and equipment			(402	)			(455	)
Net cash used in investing activities			(6,201	)			(2,884	)
Financing Activities:
Decrease in deposits			(5,158	)			(5,742	)
Decrease in securities sold under agreements to repurchase			(5,374	)			(6,935	)
Proceeds from FHLB advances			15,000				—
Repayment of FHLB advances			(2,560	)			(5,658	)
Net decrease in advance payments from borrowers for taxes and insurance			(1,636	)			(2,009	)
Purchase and retirement of Company stock			(5,629	)			—
Net cash used in financing activities			(5,357	)			(20,344	)
Decrease in cash and cash equivalents			(9,545	)			(21,842	)
Cash and cash equivalents at beginning of period			37,968				36,046
Cash and cash equivalents at end of period		$	28,423			$	14,204
Supplemental Disclosures:
Interest paid		$	2,183			$	2,220
Income taxes paid			—				195

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

OBA Bank (the “Bank”) is a community-oriented banking institution providing a variety of financial services to individuals and small businesses through its offices in Montgomery, Anne Arundel, and Howard Counties, Maryland. Its primary deposits are demand and time certificate accounts and its primary lending products are residential 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 six months ended December 31, 2011, 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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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 2011-03

In April 2011, the FASB issued Accounting Standards Update 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The amendments in ASU 2011-03 improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The effective date is the first interim or annual period beginning on or after December 15, 2011. Early application is not permitted. This update is not expected to have an impact on the Company’s consolidated financial statements.

Accounting Standards Update ASU 2011-04

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRSs. The effective date is the first interim or annual period beginning on or after December 15, 2011. Early application is not permitted. This update is not expected to have an impact on the Company’s consolidated financial statements.

Accounting Standards Update ASU 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 the first interim or annual period beginning on or 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. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013. Early adoption is permitted. The Company does not expect this ASU to have a significant impact on its consolidated financial statements.

Accounting Standards Update ASU 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 Company does not expect this ASU to have a significant impact on its consolidated financial statements.

Accounting Standards Update ASU 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 beginning after December 15, 2011 for public companies, and fiscal years ending after December 15, 2011 for nonpublic 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 December 31,								Six Months Ended December 31,
		2011				2010				2011				2010
		(In thousands)
Unrealized losses on available for sale securities		$	(237	)		$	(301	)		$	(4	)		$	(439	)
Tax effect			(93	)			(117	)			(2	)			(171	)
Net of tax amount		$	(144	)		$	(184	)		$	(2	)		$	(268	)

Accumulated other comprehensive income consists of the following:

 

		December 31, 2011				June 30, 2011
		(In thousands)
Unrealized gains on available for sale securities		$	1,110			$	1,114
Tax effect			433				435
Total		$	677			$	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)
December 31, 2011
Securities available for sale:
Debt Securities:
Residential mortgage-backed securities (1)		$	39,071			$	1,120			$	—			$	40,191
Trust preferred securities			107				—				(10	)			97
Total debt securities available for sale			39,178				1,120				(10	)			40,288
Equity Securities			50				—				—				50
Total securities available for sale			39,228				1,120				(10	)			40,338
Securities held to maturity:
Debt Securities:
Residential mortgage-backed securities (1)			3,010				165				—				3,175
Total debt securities held to maturity			3,010				165				—				3,175
Total investment securities		$	42,238			$	1,285			$	(10	)		$	43,513
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 December 31, 2011 and June 30, 2011 or during the six month periods then ended.

 

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The amortized cost and fair value of debt securities by contractual maturity at December 31, 2011 are as follows:

 

		Available for sale								Held to Maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
Due after ten years		$	107			$	97			$	—			$	—
Residential mortgage-backed securities			39,071				40,191				3,010				3,175
Total		$	39,178			$	40,288			$	3,010			$	3,175

At December 31, 2011 and June 30, 2011, the market value of securities securing dealer and customer repurchase agreements was $11.1 million and $16.7 million, respectively.

Information pertaining to securities with gross unrealized losses at December 31, 2011 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)
December 31, 2011
Trust preferred securities		$	—			$	—			$	10			$	97			$	10			$	97
June 30, 2011
Trust preferred securities		$	—			$	—			$	2			$	115			$	2			$	115

At December 31, 2011, 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. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets, or portions of assets, classified as loss are those considered uncollectible and of such little value that their continuance as an asset is not warranted. Since such assets are written off in full, the Bank will not have any such loans classified as loss at the end of a reporting period. Assets 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 assets 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 asset portfolio to determine whether any assets 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 one- to four-family 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 one- to four-family 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 Company underwrites commercial real estate loans at a loan-to-value ratio of 75% or less and residential real estate 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 Company may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrower’s condition. For loans initially determined to be impaired loans, the Company utilizes the ascertained or appraised property value in determining the appropriate specific allowance for loan losses attributable to a loan. 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 Company to recognize additions to the allowance based on its analysis of information available to them at the time of their examination.

The components of loans receivable are as follows:

 

		December 31, 2011				June 30, 2011
		(In thousands)
Commercial business loans			34,799				36,041
Commercial real estate			113,829				108,756
Construction			1,000				1,180
One-to four family residential			96,378				97,285
Home equity loans and lines of credit			35,314				38,329
Loans			281,320				281,591
Net deferred loan fees			(158	)			(181	)
Net deferred home equity costs			398				456
Loans net of deferred (fees) costs			281,560				281,866
Allowance for loan losses			2,619				2,246
Total loans, net		$	278,941			$	279,620

 

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

December 31, 2011:

 

		Pass				Special Mention				Substandard				Doubtful				Total
(In thousands)
Commerical business loans		$	31,598			$	85			$	3,116			$	—			$	34,799
Commercial real estate			107,242				191				6,396				—				113,829
Construction			1,000				—				—				—				1,000
One-to four family residential			94,371				—				2,007				—				96,378
Home equity loans and lines of credit			35,314				—				—				—				35,314
Total		$	269,525			$	276			$	11,519			$	—			$	281,320

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

The performance and credit quality of the loan portfolio is also monitored by the analyzing of 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:

December 31, 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		$	—			$	—			$	—			$	—			$	34,799			$	34,799			$	—
Commercial real estate			—				—				300				300				113,529				113,829				5,515
Construction			—				—				—				—				1,000				1,000				—
One-to four family residential			114				—				563				677				95,701				96,378				457
Home equity loans and lines of credit			130				95				—				225				35,089				35,314				603
Total		$	244			$	95			$	863			$	1,202			$	280,118			$	281,320			$	6,575

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				—
One-to four family residential			—				—				—				—				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.

 

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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 type. The Bank applies an estimated loss rate to each loan group. The loss rates applied are based upon loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions; and

 

(3)

unallocated allowances established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used for estimating specific and general allowances.

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 December 31,								Six Months Ended December 31
(in thousands)		2011				2010				2011				2010
Balance at beginning of period		$	2,408			$	1,925			$	2,246			$	1,737
Provision for loan losses			229				245				376				403
Charge-offs			(18	)			—				(18	)			—
Recoveries			—				—				15				30
Balance at end of period		$	2,619			$	2,170			$	2,619			$	2,170

 

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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 six months ended December 31, 2011:

Three Months Ended December 31, 2011

 

		Commerical business loans				Commerical real estate				Construction				One-to four family residential				Home equity loans and lines of credit				Unallocated				Total
(In thousands)
Allowance for loan losses:
Beginning Balance		$	493			$	746			$	2			$	600			$	405			$	162			$	2,408
Charge-offs			—				(18	)			—				—				—				—				(18	)
Recoveries			—				—				—				—				—				—				—
Provisions			129				(76	)			—				111				9				56				229
Ending balance		$	622			$	652			$	2			$	711			$	414			$	218			$	2,619

Six Months Ended December 31, 2011

 

		Commerical business loans				Commerical real estate				Construction				One-to four family residential				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			—				(18	)			—				—				—				—				(18	)
Recoveries			—				—				—				15				—				—				15
Provisions			239				(36	)			—				168				(26	)			31				376
Ending balance		$	622			$	652			$	2			$	711			$	414			$	218			$	2,619

 

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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:

December 31, 2011:

 

		Commerical business loans				Commerical real estate				Construction				One-to four family residential				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			622				652				2				621				414				218				2,529
Total ending allowance balance		$	622			$	652			$	2			$	711			$	414			$	218			$	2,619
Loans receivable:
Ending loan balance
Individually evaluated for impairment		$	—			$	6,396			$	—			$	695			$	—							$	7,091
Collectively evaluated for impairment			34,799				107,433				1,000				95,683				35,314								274,229
Total ending loan balance		$	34,799			$	113,829			$	1,000			$	96,378			$	35,314							$	281,320

June 30, 2011:

 

		Commerical business loans				Commerical real estate				Construction				One-to four family residential				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 receivable:
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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The following tables summarize information in regards to impaired loans by portfolio class as of and for the periods ended December 31, 2011 and June 30, 2011:

 

														December 31, 2011
		At December 31, 2011												Three Months Ended								Six 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 real estate		$	6,396			$	6,441			$	—			$	6,368			$	118			$	6,662			$	379
One-to four family residential			—				—				—				—				—				—				—
Total with no allowance recorded		$	6,396			$	6,441			$	—			$	6,368			$	118			$	6,662			$	379
With an Allowance Recorded:
Commercial real estate		$	—			$	—			$	—			$	—			$	—			$	—			$	—
One-to four family residential			695				695				90				693				8				695				27
Total with allowance recorded		$	695			$	695			$	90			$	693			$	8			$	695			$	27
Total:
Commercial real estate		$	6,396			$	6,441			$	—			$	6,368			$	118			$	6,662			$	379
One-to four family residential			695				695				90				693				8				695				27
Total		$	7,091			$	7,136			$	90			$	7,061			$	126			$	7,357			$	406

 

		At June 30, 2011												For the year ended June 30, 2011
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment
(In thousands)
With No Related Allowance Recorded:
Commercial real estate		$	6,985			$	7,067			$	—			$	4,452
One-to four family residential			—				—				—				—
Total with no allowance recorded		$	6,985			$	7,067			$	—			$	4,452
With an Allowance Recorded:
Commercial real estate		$	—			$	—			$	—			$	—
One-to four family residential			697				697				90				693
Total with allowance recorded		$	697			$	697			$	90			$	693
Total:
Commercial real estate		$	6,985			$	7,067			$	—			$	4,452
One-to four family residential			697				697				90				693
Total		$	7,682			$	7,764			$	90			$	5,145

 

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There were no troubled debt restructurings during the three month period ending December 31, 2011. The following table presents troubled debt restructurings occurring during the six-month period ended December 31, 2011:

 

		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post- Modification Outstanding Recorded Investments
(In thousands)
Troubled debt restructurings:
Commercial real estate			1				3,198				3,198
Total troubled debt restructurings			1			$	3,198			$	3,198

Loans are periodically modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. 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. 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. No loans previously classified as troubled debt restructurings subsequently defaulted. The Company 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 accounting standards update No. 2011- 02.

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.

 

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For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2011 and June 30, 2011 are as follows:

 

(In thousands)						(Level 1)
Description		December 31, 2011				Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Residential mortgage-backed securities (1)		$	40,191			$	—			$	40,191			$	—
Trust preferred securities			97				—				—				97
Equity securities			50				—				50				—
Securities available for sale		$	40,338			$	—			$	40,241			$	97

 

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 December 31, 2011 and June 30, 2011 or during the six month periods then ended.

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 six months ended December 31, 2011:

 

(In thousands)		Three Months Ended				Six Months Ended
Beginning balance		$	107			$	115
Principal repayments			(5	)			(10	)
Unrealized losses included in other comprehensive income			(5	)			(8	)
Ending balance		$	97			$	97

Level 3 securities consist of one trust preferred security at December 31, 2011.

 

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For assets measured at fair value on a nonrecurring basis at December 31, 2011 and June 30, 2011, the fair value measurements by level within the fair value hierarchy are as follows:

 

(In thousands)						(Level 1)
Description		December 31, 2011				Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans		$	605			$	—					$	605
Real estate owned		$	74			$	—					$	74

 

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 December 31, 2011 and June 30, 2011:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts of cash and short-term instruments approximate fair value.

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.

The market for pooled trust preferred securities is inactive. A significant widening of the bid/ask spreads in the markets in which these securities trade was followed by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and no new pooled trust preferred securities have been issued since 2007. Since there were limited observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using primarily unobservable Level 3 inputs. Fair value estimates for trust preferred securities were based on discounting expected cash flows using a risk-adjusted discount rate. The Company develops the risk-adjusted discount rate by considering the time value of money (risk-free rate) adjusted for an estimated risk premium for bearing the uncertainty in future cash flows and, given current adverse market conditions, a liquidity adjustment based on an estimate of the premium that a market participant would require assuming an orderly transaction.

 

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Securities Held to Maturity (Carried at Amortized Cost)

The fair values of securities held to maturity are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or 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.

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.

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.

Foreclosed Assets (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.

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 small size of the balance of mortgage servicing rights at December 31, 2011 and June 30, 2011, 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.

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.

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.

Securities Sold Under Agreements 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.

 

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Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest approximate fair value.

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.

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

 

		December 31, 2011								June 30, 2011
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(In thousands)
Financial assets:
Cash and cash equivalents		$	28,423			$	28,423			$	37,968			$	37,968
Interest bearing deposits with other banks			9,539				9,539				7,058				7,058
Securities available for sale			40,338				40,338				35,828				35,828
Securities held to maturity			3,010				3,175				3,623				3,795
Federal Home Loan Bank stock			2,471				2,471				2,987				2,987
Loans receivable, net			278,941				285,032				279,620				288,282
Accrued interest receivable			1,169				1,169				1,208				1,208
Mortgage servicing rights			83				83				88				88
Financial liabilities:
Deposits			251,873				251,389				257,031				257,981
Securities sold under agreements to repurchase			10,192				10,361				15,566				15,780
Federal Home Loan Bank Advances			42,058				44,980				29,618				32,241
Accrued interest payable			163				163				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 December 31, 2011, 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 December 31, 2011 for guarantees under letters of credit issued is not material.

 

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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 six months ended December 31, 2011 and 2010 amounted to $134 thousand and $107 thousand, respectively. Compensation expense recognized for the three months ended December 31, 2011 and 2010 amounted to $67 thousand and $56 thousand, respectively.

Shares held by the ESOP trust at December 31, 2011 and 2010 were as follows:

 

		December 31,
		2011				2010
Allocated shares			36,076				18,515
Unallocated shares			333,270				351,785
Total ESOP shares			369,346				370,300
Fair value of unallocated shares, in thousands		$	4,779			$	4,862

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 that will be awarded under the plan will be 648,025 shares. Total share-based compensation expense for the six months ended December 31, 2011 was $395 thousand. Total share-based compensation expense for the three months ended December 31, 2011 was $222 thousand.

 

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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 December 31, 2011			272,150			$	14.79				9.6

As of December 31, 2011, the Company had $896 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 six months ended December 31, 2011. Stock option expense for the three and six months ended December 31, 2011 was $45 thousand and $80 thousand, respectively. The aggregate grant date fair value of the stock options was $976 thousand. The weighted average grant date fair value per share of the stock options for the three months ended December 31, 2011 was $7.63. The weighted average grant date fair value per share of the stock options for the six months ended December 31, 2011 was $3.59.

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

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 10-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.

 

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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 December 31, 2011			136,363			$	14.77				111,090			$	14.81				247,453			$	14.79

As of December 31, 2011, the Company had $3.3 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 six months ended December 31, 2011 was $315 thousand. Restricted stock expense for the three months ended December 31, 2011 was $177 thousand.

NOTE 9 — EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period exclusive of unallocated ESOP shares and unvested restricted stock shares. 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 Company had no potentially dilutive common shares for the three and six month periods ended December 31, 2010.

 

		Three Months Ended December 31								Six Months Ended December 31
(Dollars in thousands, except share data)		2011				2010				2011				2010
Net income		$	82			$	283			$	170			$	535
Weighted average number of shares used in:
Basic earnings per share			3,924,869				4,272,387				4,059,359				4,270,072
Diluted common stock equivalents:
Restricted stock units			8,218				—				5,010				—
Diluted earnings per share			3,933,087				4,272,387				4,064,369				4,270,072
Net income per common share, basic		$	0.02			$	0.07			$	0.04			$	0.13
Net income per common share, diluted		$	0.02			$	0.07			$	0.04			$	0.13

 

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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.

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 mainly 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 December 31, 2011 and June 30, 2011

Assets. Total assets decreased $4.4 million, or 1.1%, to $382.0 million at December 31, 2011 from $386.4 million at June 30, 2011. The decrease was primarily due to a decrease in cash and cash equivalents partially offset by an increase in total securities and interest bearing deposits with other banks.

Cash and Cash Equivalents. At December 31, 2011, cash and cash equivalents decreased $9.5 million, or 25.1%, to $28.4 million from $38.0 million at June 30, 2011 primarily due to a decrease in total deposits and the use of cash to repurchase stock and an increase in securities and interest bearing deposits at other banks partially offset by an increase in short-term Federal Home Loan Bank advances.

Loans. At December 31, 2011, total gross loans were $281.6 million, slightly changed from $281.9 million at June 30, 2011. The commercial loan portfolio increased $3.7 million to $149.5 million at December 31, 2011 from $145.8 million at

 

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June 30, 2011. This increase was offset by decreases of $907 thousand and $3.0 million in the one-to four-family residential and home equity loans and lines of credit loan 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 December 31,								Six Months Ended December 31,
(in thousands)		2011				2010				2011				2010
Balance at beginning of period		$	2,408			$	1,925			$	2,246			$	1,737
Provision for loan losses			229				245				376				403
Charge-offs			(18	)			—				(18	)			—
Recoveries			—				—				15				30
Balance at end of period		$	2,619			$	2,170			$	2,619			$	2,170
Ratios:
Net charge-offs (recoveries) to average loans			0.03	%			—	%			—	%			(0.02	)%
Allowance for loan losses to loans			0.93				0.76				0.93				0.76

At December 31, 2011, the allowance for loan losses was $2.6 million compared with $2.2 million at June 30, 2011, and $2.2 million at December 31, 2010. The allowance for loan losses as a percentage of total loans at December 31, 2011 was 0.93% compared to 0.80% at June 30, 2011, and 0.76% at December 31, 2010. Net charge-offs as a percentage of average loans were 0.03% for the three months ended December 31, 2011 and 0.00% for the six months ended December 31, 2011. At December 31, 2011, the Bank had $7.1 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 December 31, 2011 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 December 31, 2011 and June 30, 2011, the Company had $6.6 million and $5.4 million in total non-performing assets, respectively. Primarily, these totals represent commercial real estate and one-to four family residential loans. Of the $6.6 million in non-performing assets the Company reported at December 31, 2011, $3.2 million were also troubled debt restructurings.

 

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The following table summarizes non-performing assets:

 

(dollars in thousands)		December 31, 2011				June 30, 2011
Non-performing assets
Non-accrual loans:
Commerical Real Estate		$	5,515			$	5,292
One-to four family residential			457				—
Home equity loans and lines of credit			603				—
Total non-accrual loans			6,575				5,292
Other real estate owned			74				105
Total non-performing assets		$	6,649			$	5,397
Asset quality ratios:
Non-performing loans to total loans			2.34	%			1.88	%
Non-performing assets to total assets			1.74				1.40

The non-performing loans to total loans ratio increased 46 basis points from 1.88% at June 30, 2011 to 2.34% at December 31, 2011 and the non-performing assets to total assets ratio increased 34 basis points from 1.40% at June 30, 2011 to 1.74% at December 31, 2011. Both ratios increased primarily as a result of a single one- to four-family residential loan and a related home equity line of credit moving to non-accrual status at December 31, 2011. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

Troubled Debt Restructurings. At December 31, 2011 and June 30, 2011, the Bank had $5.4 million and $2.8 million of modified loans, respectively, which were considered troubled debt restructurings. At December 31, 2011, the Bank had $723 thousand in one-to four family residential mortgage loans that were considered troubled debt restructurings and $4.7 million in commercial real estate loans that were considered troubled debt restructurings. At June 30, 2011, the Bank had $731 thousand in one- to four-family residential real estate 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 restructures. Of the $5.4 million in modified loans considered troubled debt restructurings, $3.2 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 December 31, 2011, the securities portfolio totaled $43.3 million, or 11.3% of total assets, as compared to $39.5 million, or 10.2% of total assets, at June 30, 2011.

Deposits. At December 31, 2011, deposits decreased $5.1 million, or 2.0%, to $251.9 million from $257.0 million at June 30, 2011. Total certificates of deposit increased $3.6 million while brokered deposits decreased $9.4 million, total money market accounts decreased $17.8 million, and total checking accounts increased $8.8 million.

Borrowings. At December 31, 2011, total borrowings increased $7.1 million, or 15.6%, to $52.3 million from $45.2 million at June 30, 2011. Repurchase agreements decreased $5.4 million, or 34.5%, to $10.2 million at December 31, 2011. At December 31, 2011, Federal Home Loan Bank advances totaled $42.1 million, an increase of $12.4 million from June 30, 2011 primarily due to an increase in short term advances.

At December 31, 2011, the Company had access to additional Federal Home Loan Bank advances of up to $59.4 million.

Equity. Equity totaled $75.9 million and $80.9 million at December 31, 2011 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.

 

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Capital and Liquidity. The Bank’s goal is to maintain a strong capital position that supports its strategic goals while, at the same time, exceeding regulatory standards. At December 31, 2011, 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
		December 31, 2011				June 30, 2011				“Well- Capitalized” Minimums
Consolidated Capital Ratios:
Total Capital to risk-weighted assets			30.88	%			33.16	%			—
Tier 1 Capital to risk-weighted assets			29.85	%			32.26	%			—
Tier 1 Leverage			19.76	%			20.81	%			—
Bank Capital Ratios:
Total Capital to risk-weighted assets			24.48	%			24.40	%			10.00	%
Tier 1 Capital to risk-weighted assets			23.44	%			23.49	%			6.00	%
Tier 1 Leverage			15.52	%			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.

 

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Comparison of Operating Results for the Three Months Ended December 31, 2011 and 2010

General. Net income decreased $201 thousand to $82 thousand for the three months ended December 31, 2011 from net income of $283 thousand for the three months ended December 31, 2010. The decrease in net income was primarily a result of an increase in non-interest expense of $137 thousand and a decrease in non-interest income of $136 thousand.

Net Interest Income. Net interest income decreased $33 thousand to $3.0 million for the three months ended December 31, 2011 from $3.1 million for the three months ended December 31, 2010. Total interest expense decreased $96 thousand, or 9.1%, to $960 thousand for the three months ended December 31, 2011 as compared to $1.1 million for the three months ended December 31, 2010. The decrease in expense was primarily the result of the Bank paying off several higher costing term Federal Home Loan Bank advances. Deposit interest expense decreased due to lower overall deposit rates and the successful completion of the Bank’s money market deposit promotion. Interest and dividend income decreased by $129 thousand to $4.0 million for the three months ended December 31, 2011. This decrease is primarily due to lower yields in the loan and investment portfolios.

The net interest margin was 3.59% for the three months ended December 31, 2011 compared to 3.76% for the three months ended December 31, 2010. 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 assets average yield of 33 basis points as compared to a decrease in the total interest bearing liability yield of 25 basis points. Average interest-earning assets increased $12.1 million to $336.6 million for the period ended December 31, 2011 compared to $324.5 million for the period ended December 31, 2010. Average interest-bearing liabilities increased $19.3 million to $274.5 million for the period ended December 31, 2011 as compared to $255.2 million for the period ended December 31, 2010 as a result of the recently completed money market promotion.

Interest and Dividend Income. Interest and dividend income decreased $129 thousand to $4.0 million from $4.1 million for the three months ended December 31, 2011 and December 31, 2010, respectively. Interest income on total investments decreased $18 thousand and interest income on total loans decreased $127 thousand for the three months ended December 31, 2011 as compared to December 31, 2010 and was partially offset by an increase in interest income on fed funds sold of $12 thousand.

The average yield on loans decreased 9 basis points, to 5.29% for the three months ended December 31, 2011 from 5.38% for the three months ended December 31, 2010. Total average loans decreased $4.7 million, reflecting an average balance increase in commercial loans of $16.9 million to $147.3 million for the three months ended December 31, 2011 offset by a decrease in average residential mortgage loans of $17.1 million to $95.1 million and a decrease in average consumer loans of $4.5 million to $36.7 million for the three months ended December 31, 2011 as compared to $112.2 million and $41.2 million, respectively, for the three months ended December 31, 2010.

Interest income on securities decreased $18 thousand to $248 thousand for the three months ended December 31, 2011 from $266 thousand for the three months ended December 31, 2010, as the average yield on securities decreased 65 basis points to 2.10% for the three months ended December 31, 2011 from 2.76% for the three months ended December 31, 2010, reflecting continued low market interest rates and prepayments of higher yielding securities within the mortgage backed securities portfolio.

Interest Expense. Interest expense decreased $96 thousand to $960 thousand from $1.1 million for the three months ended December 31, 2011 and December 31, 2010, respectively. The Bank paid off several higher cost term Federal Home Loan Bank borrowings. In addition, average customer repurchase balances decreased $3.1 million to $17.4 million at December 31, 2011 from $20.5 million at December 31, 2010. Deposit expense decreased as the average rate paid on deposits decreased 16 basis points to 1.08% for the three months ended December 31, 2011 from 1.24% for three months ended December 31, 2010.

Interest expense on borrowings decreased $86 thousand to $332 thousand for the three months ended December 31, 2011 from $418 thousand for the three months ended December 31, 2010, due to a $6.7 million, or 12.5%, decrease in the average balance of borrowings, primarily in Federal Home Loan Bank advances, as well as a 27 basis point decrease in the average cost of borrowings to 2.80% for the three months ended December 31, 2011 from 3.07% for the three months ended December 31, 2010, reflecting continued low market interest rates and the repayment of higher cost borrowings.

Provision for Loan Losses. The Company’s provision for loan losses for the three months ended December 31, 2011 was $229 thousand, a decrease of $16 thousand from $245 thousand for the three months ended December 31, 2010. The provision for loan losses for the three months ended December 31, 2011 included a partial charge-off in the disposition of one loan previously listed as sub-standard in the amount $18 thousand. The provision for loan losses also reflected several risk rating upgrades to loans previously listed as classified assets, special mention or substandard. These upgrades were the

 

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result of the Bank’s most recent third party loan review and continued management and analysis of the loans by Management. For further discussion related to the provision for loan losses, see “Allowance for Loan Losses” in the “Comparison of Financial Condition at December 31, 2011 and June 30, 2011.” For further discussions related to loan portfolio performance, see “Non-performing Assets” in the “Comparison of Financial Condition at December 31, 2011 and June 30, 2011” and Note 4 of the notes to the consolidated financial statements.

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

 

		Three Months Ended December 30,								Change
		2011				2010				$				%
		(In thousands)
Customer service fees		$	92			$	104			$	(12	)			(11.5	)%
Loan servicing fees			7				11				(4	)			(36.4	)
Bank owned life insurance income			75				78				(3	)			(3.8	)
Other non-interest income			29				45				(16	)			(35.6	)
Non-interest income before net gains (losses)			203				238				(35	)			(14.7	)
Net gain on sale of loans			—				70				(70	)			(100.0	)
Write-down of other real estate property			(31	)			—				(31	)			—
Net gains (losses)			(31	)			70				(101	)			(144.3	)
Total non-interest income		$	172			$	308			$	(136	)			(44.2	)

Total non-interest income decreased $136 thousand to $172 thousand for the three months ended December 31, 2011 as compared to $308 thousand for the three months ended December 31, 2010. This decrease is primarily the result of the partial write-down of the Bank’s lone other real estate owned property and a decrease in gains on sale of loans as a result of no loan sales in the three months ended December 31, 2011. The decrease in other non-interest income was primarily the result of the reduction of income related to loan sales as the Bank had no loan sales in the three months ended December 31, 2011.

 

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

 

		Three Months Ended December 31,								Change
		2011				2010				$				%
		(In thousands)
Salaries and employee benefits		$	1,667			$	1,449			$	218				15.0	%
Occupancy and equipment			399				470				(71	)			(15.1	)
Data processing			173				179				(6	)			(3.4	)
Directors’ fees			89				79				10				12.7
FDIC assessments			69				71				(2	)			(2.8	)
Other non-interest expense			457				469				(12	)			(2.6	)
Total non-interest expense		$	2,854			$	2,717			$	137				5.0

Total non-interest expense increased $137 thousand to $2.9 million for the three months ended December 31, 2011 from $2.7 million for the three months ended December 31, 2010 primarily due to increased salaries and employee benefits. Salaries and employee benefits increased $218 thousand, or 15.0%, to $1.7 million for the three months ended December 31, 2011 from $1.4 million for the three months ended December 31, 2010. The increase is primarily a result of additions to staff and grants under the approved equity incentive plan as disclosed in Note 8 of the notes to the consolidated financial statements. Salaries and employee benefits include those additional salaries, as well as, the associated benefits and taxes required. Occupancy and equipment decreased $71 thousand from $470 thousand for the three months ended December 31, 2010 to $399 thousand for the three months ended December 31, 2011. The decrease was primarily the result of the sale of the Bank’s Washington D.C. branch which occurred in the three months ended March 31, 2011.

Income Taxes. The Company recorded an income tax expense of $49 thousand for the three months ended December 31, 2011, reflecting an effective tax rate of 37.4%, compared to income tax expense of $138 thousand for the three months ended December 31, 2010, reflecting an effective tax rate of 32.8%. The difference between the effective tax rate and statutory rate is primarily due to the amount of income received from bank-owned life insurance, which is tax-exempt for federal and state tax purposes, relative to total pre-tax income for each period.

 

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Comparison of Operating Results for the Six months ended December 31, 2011 and 2010

General. Net income decreased $365 thousand to $170 thousand for the six months ended December 31, 2011 from $535 thousand for the six months ended December 31, 2010. The decrease in net income was primarily a result of an increase in non-interest expense of $388 thousand, or 7.2%, and decreases in non-interest income of $178 thousand, or 31.7%, and net-interest income of $26 thousand.

Net Interest Income. Net interest income decreased $26 thousand to $6.0 million for the six months ended December 31, 2011. Interest expense decreased $119 thousand, or 5.4%, for the six months ended December 31, 2011 primarily as a result of the repayment of several long-term higher costing Federal Home Loan Bank advances. This was partially offset by an increase in deposit expense due to the Bank’s money market promotion. Interest and dividend income decreased as a result of low market interest rates which reduced the average yields on the loan and investment portfolios.

The net interest margin was 3.55% for the six months ended December 31, 2011, compared to 3.61% for the six months ended December 31, 2010. The reduction in net interest margin was primarily the result of an increase in average interest-bearing liabilities due to the money market promotion and low market interest rates which reduced the average yield on the loan portfolios by 6 basis points and the securities portfolio by 71 basis points.

Interest and Dividend Income. Interest and dividend income decreased $145 thousand, or 1.8%, to $8.1 million for the six months ending December 31, 2011 as compared to $8.2 million for the six months ending December 31, 2010. Interest income on loans decreased $116 thousand, or 1.5%, to $7.5 million for the six months ended December 31, 2011 from $7.6 million for the six months ended December 31, 2010, as the average yield on loans decreased 6 basis points, to 5.31% for the six months ended December 31, 2011 from 5.37% for the six months ended December 31 2010, reflecting decreases in one-to four-family residential real estate and home equity loans and lines of credit partially offset by an increase in commercial loans.

Total average loans decreased $1.1 million to $279.8 million for the six-months ended December 31, 2011. Average balances decreased in residential and consumer loans by $20.3 million and $3.7 million, respectively, for the six months ended December 31, 2011 as compared to the six months ended December 31, 2010. Average commercial loans increased $22.9 million reflecting the continued focus on commercial loan origination. Commercial loans generally carry higher yields and assist in managing interest rate risk. The reduction in the residential mortgage portfolio resulted from management’s previous decision to sell newly-originated, longer-term (primarily 30 year) fixed-rate one-to four-family residential real estate loans, as well as prepayments exceeding other originations that were held in the portfolio. The average balance of one-to four-family residential real estate loans was $95.8 million for the six months ended December 31, 2011.

Interest income on securities decreased $54 thousand to $530 thousand for the six months ended December 31, 2011 from $584 thousand for the six months ended December 31, 2010, as the average yield on securities decreased 71 basis points to 2.24% for the six months ended December 31, 2011 from 2.95% for the six months ended December 31, 2010, reflecting continued low market interest rates and prepayments within the mortgage backed securities portfolio. The average balance of securities increased $8.1 million to $48.4 million for the six months ended December 31, 2011.

Interest Expense. Interest expense decreased $119 thousand, or 5.4%, to $2.1 million for the six months ended December 31, 2011 from $2.2 million for the six months ended December 31, 2010. Interest expense on borrowings decreased $189 thousand, primarily due to the repayment of $12.6 million of long-term higher costing Federal Home Loan Bank advances with an average yield of 3.74%. The average balance of borrowings decreased $8.2 million to $46.6 million for the six month period ended December 31, 2011. The reduction in expense on borrowings was partially offset by an increase in deposit expense due to the money market promotion. Deposit interest expense increased $70 thousand to $1.4 million from $1.3 million for the six months ended December 31, 2011 and 2010, respectively. The average balance of deposits increased $27.1 million to $231.4 million for the six months ended December 31, 2011 due to the money market promotion. Continued low market rates allowed for the reduction of the Bank’s deposit rates while maintaining its competitive position within the local market.

Provision for Loan Losses. The Company’s provision for loan losses for the six months ended December 31, 2011 was $376 thousand, a decrease of $27 thousand from $403 thousand in the six months ended December 31, 2010. For further discussion related to the provision for loan losses, see “Allowance for Loan Losses.” For a further discussion related to loan portfolio performance, see “Non-performing Assets.”

 

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

 

		Six Months Ended December 31,								Change
		2011				2010				$				%
		(In thousands)
Customer service fees		$	183			$	220			$	(37	)			(16.8	)%
Loan servicing fees			16				22				(6	)			(27.3	)
Bank owned life insurance income			150				148				2				1.4
Other non-interest income			59				76				(17	)			(22.4	)
Non-interest income before net gains			408				466				(58	)			(12.4	)
Net gain on sale of loans			6				95				(89	)			(93.7	)
Write-down of other real estate property			(31	)			—				(31	)			—
Net gains (losses)			(25	)			95				(120	)			(126.3	)
Total non-interest income		$	383			$	561			$	(178	)			(31.7	)

Total non-interest income decreased $178 thousand to $383 thousand from $561 thousand for the six months ended December 31, 2011 and 2010, respectively. The decrease is primarily the result of the partial write-down of the Bank’s lone other real estate owned property and a decrease in gains on sale of loans as a result of limited loan sales in the six months ended December 31, 2011. The decrease in other non-interest income was primarily the result of the reduction of income related to loan sales as the Bank had limited loan sales in the six months ended December 31, 2011.

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

 

		Six Months Ended December 31,								Change
		2011				2010				$				%
		(In thousands)
Salaries and employee benefits		$	3,405			$	2,910			$	495				17.0	%
Occupancy and equipment			785				921				(136	)			(14.8	)
Data processing			350				338				12				3.6
Directors’ fees			169				167				2				1.2
FDIC assessments			136				148				(12	)			(8.1	)
Other non-interest expense			945				918				27				2.9
Total non-interest expense		$	5,790			$	5,402			$	388				7.2

Total non-interest expense increased $388 thousand to $5.8 million from $5.4 million for the six months ended December 31, 2011 and 2010, respectively, primarily due to increased salaries and employee benefits. Salaries and benefits increased $495 thousand, or 17.0%, to $3.4 million for the six months ended December 31, 2011 from $2.9 million for the six months ended December 31, 2010. The increase is primarily a result of additions to staff and grants under the approved equity incentive plan as disclosed in Note 8 of the notes to the consolidated financial statements. Salaries and employee benefits include those additional salaries, as well as, the associated benefits and taxes required. Occupancy and equipment decreased $136 thousand, or 14.8%, from $921 thousand for the six months ended December 31, 2010 to $785 thousand for the six months

 

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ended December 31, 2011. The decrease was primarily the result of the sale of the Bank’s Washington D.C. branch in the three months ended March 31, 2011 and the previous inclusion of a one-time charge of $72 thousand primarily to account for escalating lease costs and the opening of one new branch.

Income Taxes. The Company recorded an income tax expense of $63 thousand for the six months ended December 31, 2011, reflecting an effective tax rate of 27.0%, compared to income tax expense of $263 thousand for the six months ended December 31, 2010, reflecting an effective tax rate of 33.0%. The difference between the effective tax rate and statutory rate is primarily due to the amount of income received from bank-owned life insurance, which is tax-exempt for federal and state tax purposes, relative to total pre-tax income for each period.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

ITEM 4.

CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2011. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

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

PART II — OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

As of December 31, 2011, the Company was not subject to any legal actions, the outcome of which was expected to have a material effect on our financial condition or results of operations.

 

ITEM 1A.

RISK FACTORS

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

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information in connection with repurchases of the Company’s shares of common stock for the period of October 1, 2011 through December 31, 2011. On May 19, 2011 the Board of Directors authorized the repurchase of up to 462,875 shares, or 10% of the Company’s common stock. The repurchase authorization has no expiration date.

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares That May yet be Purchased Under the Plans or Programs
October 1, 2011 through October 31, 2011			75,450				14.35				75,450				109,875
November 1, 2011 through November 30, 2011			34,000				14.39				34,000				75,875
December 1, 2011 through December 31, 2011			30,900				14.35				30,900				44,975
Total			140,350				14.36				140,350				44,975

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4.

[Reserved]

 

ITEM 5.

OTHER INFORMATION

None

 

ITEM 6.

EXHIBITS

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

 

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SIGNATURES

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

 

		OBA FINANCIAL SERVICES, INC.
		(Registrant)
Date: February 14, 2012		/S/    CHARLES E. WELLER
		Charles E. Weller
		President and Chief Executive Officer
Date: February 14, 2012		/S/    DAVID A. MILLER
		David A. Miller
		Senior Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number		Description
31.1		Certification of Charles E. Weller, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2		Certification of David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32		Certification of Charles E. Weller, President and Chief Executive Officer, and David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

 

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