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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended June 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34593
OBA Financial Services, Inc.
(Name of Registrant as Specified in its Charter)
Maryland | 27-1898270 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
20300 Seneca Meadows Parkway, Germantown, Maryland | 20876 | |
(Address of Principal Executive Office) | (Zip Code) |
(301) 916-0742
(Registrant’s Telephone Number including area code)
Securities Registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
The NASDAQ Stock Market LLC
(Name of exchange on which registered)
Securities Registered Under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file reports), and (2) has been subject to such requirements for the past 90 days.
(1) YES x NO ¨
(2) YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES x NO
The aggregate value of the voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price of the Registrant’s shares of common stock as of December 31, 2012 ($17.59) was $69.2 million.
As of September 20, 2013, there were 4,038,006 shares outstanding of the Registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2013 Annual Meeting of Stockholders (Part II and III)
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OBA FINANCIAL SERVICES, INC.
FORM 10-K
PART I | ||||
1 | ||||
3 | ||||
18 | ||||
25 | ||||
25 | ||||
25 | ||||
25 | ||||
PART II | ||||
26 | ||||
28 | ||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | |||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 53 | |||
54 | ||||
Item 9. Changes in And Disagreements With Accountants on Accounting and Financial Disclosure | 96 | |||
96 | ||||
96 | ||||
PART III | ||||
Item 10. Directors, Executive Officers, and Corporate Governance | 97 | |||
97 | ||||
97 | ||||
Item 13. Certain Relationships and Related Transactions and Director Independence | 97 | |||
97 | ||||
PART IV | ||||
98 | ||||
100 |
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This report, as well as other written communications made from time to time by OBA Financial Services, Inc., and its subsidiary, OBA Bank, (collectively, the “Company”) and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “potential,” and words of similar meaning. These forward-looking statements include, but are not limited to:
• | possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth determined using accounting principles generally accepted in the United States of America (“U.S. GAAP”); |
• | estimates of revenue growth in retail banking, lending, and other areas and origination volume in the Company’s commercial, residential, consumer and other lending businesses; |
• | statements regarding the asset quality and levels of non-performing assets and impairment charges with respect to the Company’s investment portfolio; |
• | statements regarding current and future capital management programs, tangible capital generation, and market share; |
• | estimates of non-interest income levels, including fees from services and product sales, and expense levels; |
• | statements of the Company’s goals, intentions, and expectations; |
• | statements regarding the Company’s business plans, prospects, growth, and operating strategies; and |
• | estimates of the Company’s risks and future costs and benefits. |
The Company cautions that a number of important factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to:
• | prevailing general economic conditions, either nationally or locally in some or all areas in which the Company conducts business; |
• | changes in the securities market, the banking industry, or competition among depository and other financial institutions; |
• | inflation and changes in interest rates, deposit flows, loan demand, real estate values, consumer spending, savings, and borrowing habits which can materially affect, among other things, consumer banking revenues, origination levels in the Company’s lending businesses and the level of defaults, losses, and prepayments on loans made by the Company, whether held in portfolio or sold in the secondary markets, and the Company’s margin and fair value of financial instruments; |
• | changes in any applicable law, rule, government regulation, policy, or practice with respect to tax or legal issues affecting financial institutions, including changes in regulatory fees and capital requirements; |
• | risks and uncertainties related to the Company’s ability to successfully integrate any assets, liabilities, customers, systems, and management personnel the Company may acquire, if any, into its operations and its ability to realize related revenue synergies and cost savings within the expected time frame; |
• | the Company’s timely development of new and competitive products or services in a changing environment, and the acceptance of such products or services by the Company’s customers so the Company is able to enter new markets successfully and capitalize on growth opportunities; |
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• | operational issues and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems, on which it is highly dependent; |
• | changes in accounting principles, policies, guidelines, and practices, as may be adopted by the Company’s regulatory agencies, the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (“SEC”), and the Public Company Accounting Oversight Board (“PCAOB”), or changes to the Company’s primary banking regulator; |
• | litigation liability, including costs, expenses, settlements, and judgments, or the outcome of other matters before regulatory agencies, whether pending or commencing in the future; |
• | changes in the quality or composition of the investment and loan portfolios; |
• | changes in the Company’s organization, compensation, and benefit plans; |
• | changes in other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products, and services; and |
• | the timing and occurrence or non-occurrence of events that may be subject to circumstances beyond the Company’s control. |
These forward-looking statements are based on the Company’s current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Readers are cautioned not to place undue reliance on these forward-looking statements which are made as of the date of this report, and except as may be required by applicable law or regulation, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.
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PART I
ITEM 1. | Business |
OBA Financial Services, Inc.
OBA Financial Services, Inc. is a Maryland corporation that owns 100% of the common stock of OBA Bank (“Bank”). On January 21, 2010, the Company completed its initial public offering of common stock in connection with the mutual-to-stock conversion of OBA Bancorp, MHC, selling 4,628,750 shares of common stock at $10.00 per share and raising $46.3 million of gross proceeds. Since the completion of the initial public offering, the Company has not engaged in any significant business activity other than owning the common stock of and having deposits in the Bank. At June 30, 2013 the Company had consolidated assets of $381.6 million, consolidated deposits of $283.3 million, and consolidated stockholders’ equity of $71.3 million.
The Company’s executive offices are located at 20300 Seneca Meadows Parkway, Germantown, Maryland 20876. The Company’s telephone number at this address is (301) 916-0742.
OBA Bank
The Bank is a federally chartered savings bank headquartered in Germantown, Maryland. The Bank was organized in 1861 and reorganized into the mutual holding company structure in 2007. The Bank is a wholly-owned subsidiary of OBA Financial Services, Inc. The Bank provides financial services to individuals, families, and businesses through six banking offices located in the Maryland counties of Montgomery, Howard, and Anne Arundel.
The Bank’s executive offices are located at 20300 Seneca Meadows Parkway, Germantown, Maryland 20876. The Bank’s telephone number at this address is (301) 916-0742.
Available Information
OBA Financial Services, Inc. is a public company and files interim, quarterly, and annual reports with the SEC. These respective reports are on file and a matter of public record with the SEC and may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).
The Company’s website address iswww.obabank.com. Information on this website should not be considered a part of this annual report.
General
The Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in commercial real estate, commercial business, construction, and residential mortgage loans, home equity loans and lines of credit, and investment securities. To a lesser extent, the Bank also originates other consumer loans. The Bank offers a variety of deposit accounts, including commercial and consumer checking, money market, savings, individual retirement accounts, and certificates of deposit.
Market Area
The Bank’s operations are conducted from four full-service branch offices located in Montgomery County, Maryland, which is on the northwest border of Washington, D.C., a full-service branch office located in Howard
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County, Maryland, and a full-service branch office in Anne Arundel County, Maryland. Government, professional and business services, and education and health services are the leading industries in the local economy. Maryland has a larger share of professional, technical, and government jobs and a smaller share of manufacturing jobs as compared to the United States.
The national unemployment rate dropped from 8.2% to 7.4% from July 2012 to July 2013. The state of Maryland unemployment rate increased from at 7.2% in July 2012 to 7.5% in July 2013. Maryland’s labor force, at approximately 3.1 million for June 2013, remained essentially unchanged from June 2012. Unemployment rates for Montgomery and Howard Counties were 5.5% for July 2013, down from 6.0% and 5.7%, respectively. Anne Arundel County was down slightly from 6.8% in July 2012 to 6.7% for July 2013.
While rates have risen from their historic lows, total housing starts in the United States increased on an annualized basis by 20.9% in July 2013 as compared to July 2012. In Maryland, housing starts were up approximately 18% in the first quarter of 2013 compared to the first quarter of 2012. Existing home sales in Maryland were up approximately 7.5% during the twelve months ended March 31, 2013 as compared to March 31, 2012. In Maryland, the average sales price of existing homes in July 2013 was approximately $293 thousand higher, or 6.1%, than July 2012 when the average sale price of existing homes was $276 thousand. The average sales price of homes in Howard County increased by approximately 4.8% in April 2013, to approximately $434 thousand, as compared to April 2012. In Montgomery County, the median sales price increased to $435 thousand in July 2013 as compared to July 2012, an increase of approximately 11%. Median home prices in Anne Arundel County increased to $325 thousand in July 2013 as compared to July 2012, an increase of 8%.
Competition
The Bank faces intense competition in making loans and attracting deposits in the market areas served by the Bank. The Bank competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and investment banking firms. Some competitors have greater name recognition and market presence that benefit them in attracting business and offer certain services that the Bank does not or cannot provide.
Lending Activities
The Bank’s primary lending activities are the origination of commercial real estate, commercial business, construction, and residential mortgage loans, and home equity loans and lines of credit. To a lesser extent, the Bank also originates other consumer loans.
Commercial Real Estate Loans. Properties securing the Bank’s commercial real estate loans generally include small office buildings, office/warehouse space, and other general use commercial structures. The Bank is seeking to originate more loans for business owner-occupied properties and select investment properties. The Bank typically seeks to originate commercial real estate loans with initial principal balances of $2.5 million or less. All of the Bank’s commercial real estate loans are secured by properties located in the Bank’s primary market area.
In the underwriting of commercial real estate loans, the Bank generally lends up to the lesser of 80% of the property’s appraised value or purchase price. The credit decision is based primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, the ratio of the property’s projected net cash flow to the loan’s debt service requirement, generally requiring a minimum ratio of 125%, is emphasized and is computed after deductions for a vacancy factor and property expenses, as deemed appropriate. Personal guarantees are usually obtained from commercial real estate borrowers. The Bank requires title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect the Bank’s security interest in the underlying property. Almost all of the Bank’s commercial real estate loans are generated internally by the Bank’s loan officers.
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Commercial Business Loans. The Bank makes secured and unsecured commercial business loans primarily to small and medium sized businesses primarily located in Montgomery, Howard, and Anne Arundel Counties, Maryland. The Bank is well diversified from an industry perspective with no major concentrations in any industry. Commercial business loans, both fixed and adjustable rate, consist of term loans, as well as, closed and open-end lines of credit for the purpose of current asset financing, equipment purchase, working capital, and other general business purposes. The adjustable-rate is generally indexed to a short-term market rate. The Bank seeks to originate loans with principal balances between $100 thousand and $2.5 million. Generally, the maximum term of a commercial business loan is ten years.
Construction Loans. The Bank makes construction loans for rental properties, commercial buildings, and homes built by developers on speculative, undeveloped property. The terms of commercial construction loans are made in accordance with the Bank’s commercial loan policy. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to an 80% loan-to-completed-appraised-value ratio. Generally, before making a commitment to fund a construction loan, the Bank requires an appraisal of the property by a state-certified or state-licensed appraiser. The Bank reviews and inspects all properties before disbursement of funds during the term of the construction loan. Repayment of construction loans on residential properties is normally expected from the property’s eventual rental income, income from the borrower’s operating entity, or the sale of the subject property. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. Construction loans are interest-only loans during the construction period, which generally will not exceed twelve months, and convert to permanent, fully amortizing financing following the completion of construction. The Bank typically provides the permanent mortgage financing on the Bank’s construction loans on income-producing property.
Residential Mortgage Loans. The Bank offers fixed-rate and adjustable-rate residential mortgage loans with maturities up to 30 years. Residential mortgage loans are generally underwritten according to Freddie Mac guidelines. The Bank refers to loans that conform to such guidelines as Conforming Loans. The Bank generally originates both fixed and adjustable rate mortgage loans in amounts up to the maximum Conforming Loan limits as established by the Federal Housing Finance Agency; which is, generally, $417 thousand for single-family homes, but is $626 thousand for single-family homes located in the Washington, DC metropolitan area. The Bank also originates loans above the amounts for Conforming Loans, which are referred to as Jumbo Loans. The Bank’s maximum loan amount for Jumbo Loans is generally $1.0 million. The Bank generally underwrites Jumbo Loans in a manner similar to Conforming Loans. Jumbo Loans are not uncommon in the Bank’s market area. Loans in excess of $417 thousand are generally originated for retention in the Bank’s loan portfolio.
The Bank’s loan policies allow for the origination of loans with loan-to-value ratios up to 95%. The Bank generally requires private mortgage insurance for loans with loan-to-value ratios in excess of 80%. During the year ended June 30, 2013, the Bank did not originate any residential mortgage loans with loan-to-value ratios in excess of 80%.
The Bank offers a first-time home buyer program. Through this program, the borrower could potentially qualify for a credit towards closing costs.
Other than construction loans and home equity lines of credit, the Bank does not offer interest only mortgage loans on residential properties. An interest only loan is defined as the borrower paying interest only for an initial period, after which the loan converts to a fully amortizing loan. Additionally, the Bank does not offer loans that provide for negative amortization of principal. These loans allow the borrower to pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. The Bank does not offer subprime loans, loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios, or Alt-A loans, traditionally defined as loans having less than full documentation.
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Home Equity Loans and Lines of Credit. Home equity loans and lines of credit are secured by the borrower’s primary residence or secondary residence. The Bank’s home equity loans are originated with fixed rates of interest and with terms of up to fifteen years. Home equity lines of credit have a maximum term of 25 years. The borrower is permitted to draw against the line during the first ten years of the line of credit. During this draw period, repayments are made on an interest-only basis. After this initial ten-year draw period, the borrower is required to make payments to principal based on a fifteen year amortization.
The home equity lines of credit are currently originated with adjustable rates of interest. Home equity loans and lines of credit are generally underwritten with the same criteria that are used to underwrite residential mortgage loans. For a borrower’s primary residence, home equity loans and lines of credit may be underwritten with a maximum loan-to-value ratio of 75% when combined with the principal balance of the existing mortgage loan, while the maximum loan-to-value ratio on secondary residences and investment properties is 70% when combined with the principal balance of the existing mortgage loan.
The Bank requires appraisals on home equity loans and lines of credit. At the time of closing a home equity loan or line of credit, the Bank records the mortgage to perfect the security interest in the underlying collateral. At June 30, 2013, the Bank’s self-imposed maximum limit for a home equity loan or a line of credit was generally $200 thousand.
Loan Originations, Purchases, Sales, Participations and Servicing.All loans originated are underwritten pursuant to the Bank’s policies and procedures, which incorporate standard underwriting guidelines, including those of Freddie Mac, to the extent applicable. The Bank originates both adjustable-rate and fixed-rate loans. Most of the Bank’s residential mortgage loan originations are generated by the Bank’s employees located in the Bank’s branch offices and corporate headquarters.
The Bank intends to sell most of the residential mortgage loans it originates servicing released, but will retain many of its originated jumbo residential mortgage loans. Loans sold by the Bank are sold without recourse, except for normal representations and warranties provided in sale transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of un-remedied defaults, making certain insurance and tax payments are paid on behalf of the borrowers, and generally administering the loans. The Bank retains a portion of the interest paid by the borrower on the loans serviced as consideration for the servicing activities.
During the fiscal years ended June 30, 2013 and 2012, the Bank did not have to repurchase any loans or provide loss reimbursement on loans sold.
From time to time, the Bank enters into participations in commercial loans with other banks. In these circumstances, the Bank will generally follow the Bank’s customary loan underwriting and approval policies.
Loan Approval Procedures and Authority. The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Bank’s Board of Directors (“Board”). The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure the loan. To assess the borrower’s ability to repay, the Bank reviews the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. The Bank requires full documentation on all loan applications.
Management establishes the Bank’s policies and loan approval limits; which are approved by the Board. Consumer loans in amounts up to $100 thousand, residential real estate loans up to the Freddie Mac conforming loan limit, and commercial loans up to $2.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority. Relationships in excess of these amounts require the approval of the Board or its loan committee.
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The Bank requires appraisals for all real property securing residential mortgage and commercial real estate loans and home equity loans and lines of credit. All appraisals are performed by state-licensed or state-certified appraisers. The Bank’s practice is to have local appraisers approved annually by the Board.
Investments
The Bank’s securities portfolio consists primarily of mortgage-backed securities issued by U.S. Government agencies or U.S. Government-sponsored enterprises that are backed by the full faith and credit of the U.S. government.
The Bank’s Investment Committee, which is comprised of the Board’s Executive Committee and the Bank’s Chief Financial Officer, has primary responsibility for establishing and overseeing the investment policy. The general investment strategies are developed by the Chief Financial Officer and approved by the Management Asset Liability Committee and the Investment Committee or Board. The Bank’s President and the Chief Financial Officer are responsible for the execution of specific investment actions. These officers are authorized to execute investment transactions of up to $1.0 million per transaction without the Investment Committee or Board’s prior approval of the investment strategy provided the transactions are within the scope of the established investment policy. The investment policy is reviewed and approved annually by the Management Asset Liability Committee and changes to the policy are subject to approval by the Investment Committee or Board. Investment policy objectives include, but are not limited to, providing liquidity necessary to conduct business activities of the Bank, collateral for pledging, a portfolio of high credit quality assets, and enhancing profitability within the overall asset/liability management objectives of the Bank. All gains and losses on securities transactions are reported to the Board on a monthly basis.
The Bank’s current investment policy permits, among other securities, investments in securities issued by the U.S. Government as well as mortgage-backed securities and direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae. The Bank’s current investment policy does not permit investment derivatives as defined in federal banking regulations or in other high-risk securities. The investment policy permits, among other assets and with certain limitations, investments in certificates of deposit, collateralized mortgage obligations, auction rate/money market preferred securities, and mutual funds, limited to adjustable rate mortgage funds. The policy also permits investments in equity securities, generally limited to agency and Federal Home Loan Bank of Atlanta (“FHLB”) common and preferred stock. The Bank’s investment in equity securities outside the policy’s general limitation totaled $50 thousand at June 30, 2013 and is not considered material.
The Bank’s investment policy expressly prohibits the use of the investment portfolio for market-oriented trading activities or speculative purposes unless otherwise approved by the Board. The Bank does not intend to profit in the investment account from short-term securities price movements. Accordingly, the Bank does not currently have a trading account for investment securities.
Accounting guidance requires that, at the time of purchase, the Bank designate a security as either held to maturity, available-for-sale, or trading based upon the Bank’s ability and intent to hold the security. Securities available-for-sale and trading securities are reported at fair value and securities held to maturity are reported at amortized cost. A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary. The fair values of mortgage-backed securities are based on quoted market prices or, when quoted prices in active markets for identical assets are not available, are based on matrix pricing, which is a mathematical technique that relies on the securities’ relationship to other benchmark quoted prices.
Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as pass-through certificates
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because the principal and interest of the underlying loans are passed through to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of residential mortgages. Issuers of such securities pool the loans and resell the participation interests in the form of securities to investors. The interest rate on the security is lower than the interest rates on the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, Fannie Mae, and Freddie Mac, either guarantee the payments or guarantee the timely payment of principal and interest to investors. Mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize borrowings. Investments in mortgage-backed securities include a risk that actual principal payments will be greater or less than the prepayment rate estimated at the time of purchase, or prepayment risk. The difference in expected cash flow may require adjustments to the amortization of premium or accretion of discount relating to the security, thereby affecting the net yield on the security.
Sources of Funds
General. Deposits traditionally have been the primary source of funds for investment and lending activities. The Bank also borrows from the Federal Home Loan Bank of Atlanta and from securities dealers to supplement cash flow needs, change the maturity of liabilities for interest rate risk management purposes, and manage the Bank’s cost of funds. Additional sources of funds are scheduled loan payments, maturing investments, loan repayments, customer repurchase agreements, retained earnings, income on other earning assets, and the proceeds of loan sales.
Deposits. The Bank accepts deposits primarily from the areas in which the Bank’s offices are located. The Bank relies on competitive pricing and products, convenient locations, and quality customer service to attract and retain deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The deposit accounts consist of commercial and consumer checking, money market, savings, individual retirement accounts, and certificates of deposit. The Bank accepts deposits through the Certificate of Deposit Account Registry Service (“CDARS”) program, which are classified as brokered deposits for regulatory purposes and can accept brokered deposits.
Interest rates paid, maturity terms, service fees, and withdrawal penalties are reviewed and adjusted on a periodic basis by Management and approved by the Bank’s Asset Liability Committee. Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements, and the Bank’s deposit growth goals.
Borrowings. The Bank’s borrowings consist of advances from the Federal Home Loan Bank of Atlanta and funds borrowed from securities dealers and customers under repurchase agreements. Advances from the Federal Home Loan Bank of Atlanta are secured by pledged mortgage-backed securities, as well as, a blanket pledge on various categories of assets. Repurchase agreements are generally secured by mortgage-backed securities.
Personnel
As of June 30, 2013, the Company had 63 full-time employees and nine part-time employees. The Company’s employees are not represented by any collective bargaining group. Management believes that there is a good working relationship with the Company’s employees.
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FEDERAL AND STATE TAXATION
Federal Taxation
General. OBA Financial Services, Inc. and OBA Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company.
Method of Accounting. For federal income tax purposes, the Bank files a consolidated tax return with OBA Financial Services, Inc., reports its income and expenses on the accrual method of accounting, and uses a tax year ending June 30th for filing their consolidated federal income tax returns.
Corporate Dividends. OBA Financial Services, Inc. can exclude from its income 100.0% of dividends received from OBA Bank as a member of the same affiliated group of corporations.
Audit of Tax Returns. The Company’s federal income tax returns, as applicable, have not been audited in the most recent five-year period.
State Taxation
The State of Maryland imposes an income tax of approximately 8.25% on income measured substantially the same as federally taxable income, except that U.S. Government interest is not fully taxable. The Company’s state income tax returns have not been audited in the most recent five-year period.
SUPERVISION AND REGULATION
General
The Bank is supervised and examined by the Office of the Comptroller of the Currency (“OCC”) and is subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance funds and depositors, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and, sensitivity to market interest rates. The OCC examines the Bank and prepares reports on any operating deficiencies for the consideration of its Board of Directors. The Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System (the “FRB”), governing reserves to be maintained against deposits and other matters. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents.
Any change in these laws or regulations, whether by the FDIC, the OCC, or Congress, could have a material adverse impact on the Company, and its operations.
OBA Financial Services, Inc., as a savings and loan holding company, is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Federal Reserve Board. The Company is also subject to the rules and regulations of the SEC under the federal securities laws.
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Certain of the regulatory requirements that are applicable to OBA Bank and OBA Financial Services, Inc. are described below. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on OBA Bank and OBA Financial Services, Inc., and is qualified in its entirety by reference to the actual statutes and regulations.
Dodd-Frank Act
The Dodd-Frank Act has changed bank regulatory structure and is affecting the lending, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated the Company’s former primary federal regulator, the Office of Thrift Supervision (“OTS”) and required the Bank to be regulated by the OCC, the primary federal regulator for national banks, as of July 21, 2011. The Dodd-Frank Act also authorizes the FRB to supervise and regulate all savings and loan holding companies in addition to the bank holding companies that it previously regulated. The Dodd-Frank Act also requires the FRB to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries. Additionally, the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets continue to be examined for compliance by their applicable bank regulators. The legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The legislation also broadened the base for FDIC insurance assessments. Assessments are now based on an institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250 thousand per depositor. The legislation also required rules governing retention of a portion of credit risk by originators of certain securitized loans, stipulated regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related to mortgage originations. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit votes for their own candidates using a company’s proxy materials. The legislation directed the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. The Dodd-Frank Act provided for originators of certain securitized loans to retain a percentage of the risk for transferred loans, directed the FRB to regulate pricing of certain debit card interchange fees and contained a number of reforms related to mortgage origination.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended and federal regulations. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities, and certain other assets, subject to applicable limits. The Bank also may invest specified amounts in subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.
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Capital Requirements. Federal regulations require savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.
The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the purchaser’s recourse against the savings bank. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.
In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.
At June 30, 2013, the Bank’s capital exceeded all applicable requirements.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.
Qualified Thrift Lender Test. As a federal savings bank, the Bank must satisfy the qualified thrift lender test (“QTL”). Under the QTL, the Bank must maintain at least 65% of its portfolio assets in qualified thrift investments, primarily residential mortgages and related investments, including mortgage-backed securities, in at least nine months of the most recent 12-month period. Portfolio assets generally mean total assets of a savings
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bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the Bank’s business. The Bank also may satisfy the QTL by qualifying as a domestic building and loan association as defined in the Internal Revenue Code. A savings bank that fails the QTL is subject to certain operating restrictions. In addition, the Dodd-Frank Act made noncompliance with the QTL potentially subject to agency enforcement action for violation of laws.
Capital Distributions.Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A savings bank must file an application for approval of a capital distribution if:
• | the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years; |
• | the savings bank would not be at least adequately capitalized following the distribution; |
• | the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition; or |
• | the savings bank is not eligible for expedited treatment of its filings. |
Even if an application is not otherwise required, every savings bank that is a subsidiary of a holding company must still file a regulatory notice at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.
Such a notice or application may be disapproved if:
• | the savings bank would be undercapitalized following the distribution; |
• | the proposed capital distribution raises safety and soundness concerns; or |
• | the capital distribution would violate a prohibition contained in any statute, regulation or agreement. |
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.
Liquidity. A federal savings bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. The Bank’s primary source of liquidity to meet short- and long-term funding needs are cash balances at the Federal Reserve Bank, deposits, loan repayments, repurchase agreements with security dealers, and borrowing lines at the Federal Home Loan Bank of Atlanta.
Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related federal regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings bank, the OCC is required to assess the savings bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by regulators and the Department of Justice. The Bank received an “outstanding” Community Reinvestment Act rating in its most recent federal examination. The Community Reinvestment Act requires all Federal Deposit Insurance-insured institutions to publicly disclose their rating.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act and its
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implementation of Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is generally a company that controls, is controlled by, or is under common control with an insured depository institution such as the Bank. OBA Financial Services, Inc. is an affiliate of OBA Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings banks to maintain detailed records of all transactions with affiliates.
The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:
(i) | be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and |
(ii) | not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. |
In addition, extensions of credit in excess of certain limits must be approved by the Bank’s Board of Directors. Extensions of credit to executive officers are also subject to additional restrictions.
Enforcement. The OCC has primary enforcement responsibility over federal savings banks and has the authority to bring enforcement action against all institution-affiliated parties, including directors, officers, stockholders, attorneys, appraisers, and/or accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25 thousand per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations. Under prompt corrective action regulations, the OCC is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank is placed in one of the following five categories based on the savings bank’s capital:
• | well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital); |
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• | adequately capitalized (at least 4% leverage capital (3% for savings banks with a composite examination rating of 1), 4% Tier 1 risk-based capital and 8% total risk-based capital); |
• | undercapitalized (less than 4% leverage capital (3% for savings banks with a composite examination rating of 1), 4% Tier 1 risk-based capital or 3% leverage capital); |
• | significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); or |
• | critically undercapitalized (less than 2% tangible capital). |
Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is critically undercapitalized within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings bank receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Any holding company of the savings bank that is required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings bank’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors. The final rule discussed above that increases regulatory capital requirements will revise the prompt corrective action categories accordingly.
At June 30, 2013, the Bank met the criteria for being considered “well-capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund (“DIF”) of the FDIC insures deposits at FDIC-insured depository institutions, such as the Bank. Deposit accounts in the Bank are insured by the FDIC; generally up to a maximum of $250 thousand per separately insured depositor and up to a maximum of $250 thousand for self-directed retirement accounts.
The FDIC charges insured depository institutions premiums to maintain the DIF. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels, and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates. Assessment rates range from 2.5 to 45 basis points of an institution’s total assets less tangible capital.
The Dodd-Frank Act increased the minimum target ratio for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-term fund ratio of 2%.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs, and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2013, the annualized FICO assessment was equal to 64 basis points of an institution’s total assets less tangible capital.
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Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. The Bank does not know of any practice, condition, or violation that could lead to termination of its deposit insurance.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
• | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
• | Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services; |
• | Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
• | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit; |
• | Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; |
• | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; |
• | Truth in Savings Act; and |
• | Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The operations of the Bank also are subject to the:
• | Right to Financial Privacy Act which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
• | Electronic Funds Transfer Act and Regulation E promulgated there under, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; |
• | Check Clearing for the 21st Century Act (“Check 21”), which gives substitute checks, such as digital check images and copies made from that image, the same legal standing as the original paper check; |
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• | The USA PATRIOT Act, which requires savings banks to, among other things, establish broadened anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and |
• | The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to opt out of the sharing of certain personal financial information with unaffiliated third parties. |
Holding Company Regulation
General . OBA Financial Services, Inc. is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, the Company is registered with the FRB and subject to FRB regulations, examinations, supervision, and reporting requirements. In addition, the FRB has enforcement authority over the Company and its subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
The functions of the OTS relating to savings and loan holding companies and their subsidiaries, as well as rulemaking and supervision authority over savings and holding companies, were transferred to the FRB on July 21, 2011, as required by the Dodd-Frank Act.
Permissible Activities. The business activities of the Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to prior regulatory approval and certain additional activities authorized by federal regulations.
Federal law prohibits a savings and loan holding company, including the Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company, without prior written approval of the Federal Reserve Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the FRB must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The FRB is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
(i) | the approval of interstate supervisory acquisitions by savings and loan holding companies; and |
(ii) | the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition. |
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
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Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital, which is currently permitted for bank holding companies. The final capital rule discussed above implements the consolidated capital requirements for savings and loan holding companies effective January 1, 2015, with the capital conservation buffer phased in between 2016 and 2019.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Dividends and Repurchases. The FRB has issued a supervisory letter regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the supervisory letter provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality, and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the Company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the Company’s overall rate of earnings retention is inconsistent with the Company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The supervisory letter also provides for regulatory review prior to a holding Company redeeming or repurchasing its stock in certain circumstances. These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions.
Acquisition. Under the Federal Change in Control Act, a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire direct or indirect control of a savings and loan holding company. Under certain circumstances, such as where the company involved has securities registered with the SEC under the Securities Exchange Act of 1934, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the FRB has found that the acquisition will not result in control of the company. That rebuttable presumption applies to the Company. A change in control is defined under federal law to occur upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Control Act, the FRB generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Federal Securities Laws
The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934. The Company is subject to the information, proxy solicitation, insider trading restrictions and, other requirements under the Securities Exchange Act of 1934.
OBA Financial Services, Inc. common stock held by persons who are affiliates (generally officers, directors and principal shareholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period.
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Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal control over financial reporting; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the Company’s internal control over financial reporting; and they have included information in the Company’s quarterly and annual reports about their evaluation and whether there have been changes in the Company’s internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. The Company was subject to further reporting requirements beginning with the fiscal year ended June 30, 2011 under the requirements of the Sarbanes-Oxley Act. The Company has prepared policies, procedures and systems designed to ensure compliance with these regulations.
ITEM 1A. | Risk Factors |
Readers should carefully consider the following risks prior to making an investment decision regarding OBA Financial Services, Inc. The following risk factors may cause future earnings to be lower or the financial condition less favorable than Management expects. In addition, other risks of which Management is not currently aware or which Management does not believe to be material, may cause earnings to be lower or may cause the financial condition to be worse than expected. Please consider all information contained within this Annual Report on Form 10-K, as well as, the documents incorporated by reference.
The Company intends to continue its emphasis on commercial real estate and commercial business loan originations. Credit risk will increase and a continued downturn in the local real estate market or the local or national economy could adversely affect earnings.
The Company intends to continue its recent emphasis on originating commercial real estate and commercial business loans. Commercial real estate and commercial business loans generally have more risk than residential mortgage loans that the Bank originates. Because the repayment of commercial real estate and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As the Company’s commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. This increasing risk has contributed to the Company’s need to increase the allowance for loan losses through charges to earnings. Future increases in commercial real estate loans and commercial loans may require additional increases in the Company’s allowance for loan losses through charges to earnings.
The Company has begun to focus on construction loan originations. Credit risk will increase and a continued downturn in the local real estate market and economy could adversely affect earnings.
The Company began to focus on originating commercial and residential construction loans. Construction loans generally have more risk than residential mortgage loans that the Bank originates. The repayment of construction loans depends on the successful management and completion of the construction project and the ability of the borrower to acquire permanent financing or sell the property. The Company typically originates construction loans that, when the project is complete, the Company will extend permanent financing to the
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borrower and/or the property is considered owner occupied. The repayment of such loans can be affected by adverse conditions in the local real estate market or economy. As the Company’s construction loan portfolio increases, the corresponding risks and potential for losses from these loans may also increase. This increasing risk has contributed to the Company’s need to increase the allowance for loan losses through charges to earnings. Future increases in construction loans may require additional increases in the Company’s allowance for loan losses through charges to earnings.
The Company continues to originate and retain in its portfolio some residential mortgage loans. A continued downturn in the local real estate market and economy could adversely affect earnings.
The Company has continued its origination and retention of certain residential mortgage loans. Although the local real estate market and economy have performed better than many other markets, a downturn could cause higher unemployment, more delinquencies, and could adversely affect the value of properties securing loans. In addition, the real estate market may take longer to recover or not recover to previous levels. These risks increase the probability of an adverse impact on the Company’s financial results as fewer borrowers would be eligible to borrow and property values could be below necessary levels required for adequate coverage on the requested loan.
A portion of the commercial business and construction loan portfolios are unseasoned.
The Company has grown its commercial business and construction loan portfolios over the past several years. The future performance of this portion of the loan portfolio is difficult to assess due to the general unseasoned nature of the portfolio. These loans may have delinquency or charge-off levels above the Company’s historical experience, which could adversely affect future performance.
If the Company’s allowance for loan losses is not sufficient to cover actual loan losses, earnings could be adversely affected.
The Company makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of the Company’s borrowers and the value of the real estate and other assets serving as collateral for the repayment of the Company’s loans. In determining the amount of the allowance for loan losses, Management reviews the loans and the loss and delinquency experience, and evaluates economic conditions. If the assumptions are incorrect, the allowance for loan losses may not be sufficient to cover probable incurred losses in the Company’s loan portfolio, resulting in additions to the allowance through charges to earnings. Material additions to the allowance could materially decrease the Company’s net income. In addition, bank regulators periodically review the Company’s allowance for loan losses and may require the Company to increase the allowance for loan losses or recognize further loan charge-offs. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s branch network expansion strategy may negatively affect the Company’s financial performance.
The Company intends to expand its branch network over the next five years. This strategy may not generate earnings, or may not generate earnings within a reasonable period of time. Numerous factors contribute to the performance of a new branch, such as a suitable location, qualified personnel, and an effective marketing strategy. Additionally, a new branch takes time to originate sufficient loans and generate sufficient deposits to produce enough income to offset expenses, some of which, like salaries and occupancy expense, are relatively fixed costs.
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Concentration of loans in the Company’s primary market area, which has recently experienced an economic downturn, may increase risk.
The Company’s success depends primarily on the general economic conditions in Montgomery, Howard, and Anne Arundel Counties, Maryland as most of the Company’s loans are to customers in these markets. Accordingly, the local economic conditions in these markets have a significant impact on the ability of borrowers to repay loans as well as the Company’s ability to originate new loans. As such, a decline in real estate values in these markets would lower the value of the collateral securing loans on properties in these markets. In addition, a continued weakening in general economic conditions, such as; inflation, recession, unemployment, or other factors beyond the Company’s control could negatively affect financial results.
A continuation or worsening of economic conditions could adversely affect our financial condition and results of operations.
Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and uneven, and unemployment levels remain high. Recovery by many businesses has been impaired by lower consumer spending. A return to prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in sales volumes and continued elevated unemployment levels may result in higher than expected loan delinquencies, increases in our nonperforming and criticized classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.
The Company’s 2011 Equity Incentive Plan will increase expenses and reduce income.
In May 2011, the Company’s stockholders approved the OBA Financial Services, Inc. 2011 Equity Incentive Plan. Stockholders approved the issuance of a total of 648,025 shares under the plan. Grants under the plan were issued on July 21, 2011 as described in the Company’s Current Report on Form 8-K as filed with the SEC on May 17, 2011. Subsequent periods included expenses for the 2011 equity incentive plan which reduced income.
The implementation of the 2011 Equity Incentive Plan may dilute stockholders’ ownership interest.
The Company’s 2011 Equity Incentive Plan was funded from the issuance of authorized but unissued shares of common stock. The ability to repurchase shares of common stock to fund the plan will be subject to many factors, including, but not limited to, applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, alternative uses for the capital, and the Company’s capital levels and financial performance. Although the Company’s current intention is to fund the plan with stock repurchases, the Company may not be able to conduct such repurchases. If the Company does not repurchase shares of common stock to fund the plan, then stockholders would experience a reduction in their ownership interest, which would total 12.3% in the event newly issued shares are used to fund stock options or awards of shares of common stock under the plan.
If the Company’s investment in the common stock of the Federal Home Loan Bank of Atlanta is classified as other-than-temporarily impaired, the Company’s earnings and stockholders’ equity could decrease.
The Company owns stock of the Federal Home Loan Bank of Atlanta, which is part of the Federal Home Loan Bank system. The FHLB common stock is held to qualify for membership in the FHLB and to be eligible to borrow funds under the FHLB’s advance programs. There is no market for FHLB common stock.
Although the FHLB is not reporting current operating difficulties, it is possible that the capital of the Federal Home Loan Bank system, including the FHLB, could be substantially diminished. This could occur with respect to an individual Federal Home Loan Bank due to the requirement that each Federal Home Loan Bank is
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jointly and severally liable along with the other Federal Home Loan Banks for the consolidated obligations issued through the Office of Finance, a joint office of the Federal Home Loan Banks, or due to the merger of a Federal Home Loan Bank experiencing operating difficulties into a stronger Federal Home Loan Bank. Consequently, there continues to be a risk that the Company’s investment in FHLB common stock could be deemed other-than-temporarily impaired at some time in the future, and if this occurs, it would cause the Company’s earnings and stockholders’ equity to decrease by the impairment charge.
Strong competition within the Company’s market areas may limit the Company’s growth and profitability.
Competition in the banking and financial services industry is intense. In the Company’s market areas, the Company competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that the Company does not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively, which could affect the Company’s ability to grow and remain profitable on a long-term basis. The Company’s profitability depends upon the continued ability to successfully compete in the Company’s market areas. If interest rates paid on deposits increase or interest rates charged on loans decrease, net interest margin and profitability could be adversely affected. For additional information see “Item 1. Business—Competition.”
Future changes in interest rates could reduce profits.
The Company’s ability to make a profit largely depends on net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:
• | the interest income earned on interest-earning assets, such as loans and securities; and |
• | the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. |
Net interest income is affected by changes in market interest rates because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. In a period of rising interest rates, the interest income earned on assets, such as loans and investments, may not increase as rapidly as the interest paid on liabilities, such as deposits, causing a reduction in net interest income. In a period of declining interest rates, the interest income earned on assets may decrease more rapidly than the interest paid on liabilities; causing a reduction in net interest income.
Changes in market interest rates create reinvestment or prepayment risk, which is the risk that the Bank receives an amount of cashflows inconsistent with original estimates. In a declining rate environment, the risk is that Management may not be able to reinvest additional prepayments at interest rates that are comparable to the interest rates earned on the prepaid loans or securities. In an increasing rate environment, loan demand may decrease, the repayment of adjustable-rate loans may be more difficult for borrowers, and a decrease in prepayments may result in a lost opportunity to reinvest those additional cash flows at higher yields.
Changes in interest rates also affect the current fair value of interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”
Government responses to economic conditions may adversely affect operations, financial condition and earnings.
The Dodd-Frank Wall Street Reform and Consumer Protection Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for
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banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect the Company’s operations by restricting its business activities, including the ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of the Bank’s loan and investment securities portfolios, which also would negatively affect financial performance. In addition, the Dodd-Frank Act and implementing regulations are likely to have a significant effect on the financial services industry, which are likely to increase operating costs and reduce profitability. Regulatory or legislative changes could make regulatory compliance more difficult or expensive, and could cause changes to or limits on some products and services, or the way business is operated.
If the Board of Governors of the Federal Reserve System increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering the Bank’s operating costs, could have a significant negative effect on the Bank’s borrowers, especially business borrowers, and the values of underlying collateral securing loans, which could negatively affect the Bank’s financial performance.
The Company is subject to extensive regulatory oversight.
The Company is subject to extensive regulation and supervision. Regulators have intensified their focus on bank lending criteria and controls, and on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. There also is increased scrutiny of compliance practices generally and particularly with the rules enforced by the Office of Foreign Assets Control. The Company’s failure to comply with these and other regulatory requirements could lead to, among other remedies, administrative enforcement actions and legal proceedings.
Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as the Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
Proposed and final regulations could restrict the Company’s ability to originate and sell loans.
The Consumer Financial Protection Bureau has issued a rule, effective January 10, 2014, designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would otherwise hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:
• | excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans); |
• | interest-only payments; |
• | negative-amortization; and |
• | terms of longer than 30 years. |
The final rule also established general underwriting criteria for qualified mortgages, including that the consumer has a total (or “back end”) debt-to-income ratio that is less than or equal to 43%. Lenders must also
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verify and document the income and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit the Company’s ability or desire to make certain types of loans or loans to certain borrowers, or could make it more costly/and or time consuming to make these loans, which could limit the Company’s growth or profitability.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies initially issued a proposed rule to implement this requirement in April 2011. A revised proposed rule was issued in August 2013. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations. Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict the Company’s ability to make loans.
The corporate governance provisions in the Company’s articles of incorporation and bylaws, the Bank’s Charter, and the corporate governance provisions under Maryland law, may prevent or impede the holders of the Company’s common stock from obtaining representation on the Company’s Board of Directors and may impede takeovers of the company that the board might conclude are not in the best interest of the Company or its stockholders.
Provisions in the Company’s articles of incorporation and bylaws may prevent or impede holders of the Company’s common stock from obtaining representation on the Company’s Board of Directors and may make takeovers of the Company more difficult. For example, the Company’s Board of Directors is divided into three staggered classes. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. The Company’s articles of incorporation include a provision that no person will be entitled to vote any shares of the Company’s common stock in excess of 10% of the Company’s outstanding shares of common stock. This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by the Company. In addition, the Company’s articles of incorporation and bylaws restrict who may call special meetings of stockholders and how directors may be removed from office. The charter of the Bank generally provides that for a period of five years from the closing of the stock offering, no person other than the Company may directly or indirectly acquire or offer to acquire the beneficial ownership of more than 10% of any class of equity security of the Bank. In addition, during this five-year period, all shares owned over the 10% limit may not be voted on any matter submitted to stockholders for a vote. Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority vote of stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of the Company’s Board of Directors.
The requirement to account for certain assets at estimated fair value may adversely affect results of operations.
The Company reports certain assets, including securities, at fair value. Generally, for securities that are reported at fair value, the Company uses quoted market prices or valuation models that utilize observable market inputs to estimate fair value. Because these assets are carried on the Company’s books at their estimated fair value, the Company may record losses even if the asset in question presents minimal credit risk.
Changes in the Company’s accounting policies or in accounting standards could materially affect how the Company reports its financial condition and results of operations.
The Company’s accounting policies are essential to understanding financial condition and results of operations of the Company. Some of these policies require the use of estimates and assumptions that may affect
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the value of the Company’s assets or liabilities and financial results. Some of the Company’s accounting policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying the financial statements are incorrect, the Company may experience material losses.
From time to time, the Financial Accounting Standards Board and the Securities and Exchange Commission change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of the Company’s financial statements. These changes are beyond the control of the Company, can be hard to predict and could materially affect how the Company reports its financial condition and results of operations. The Company could also be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements in material amounts.
Because the nature of the financial services business involves a high volume of transactions, the Bank may face significant operational risks.
The Company operates in diverse markets and relies on the ability of its employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from the Company’s operations, including but not limited to, the risk of fraud by employees or persons outside the company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action, and suffer damage to the Company’s reputation.
Risks associated with system failures, interruptions, or breaches of security could negatively affect the Company’s earnings.
Information technology systems are critical to the Company’s business. The Bank uses various technology systems to manage customer relationships, the general ledger, securities, deposits, and loans. The Bank has established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of the Bank’s systems could deter customers from using the Bank’s products and services. Although the Bank relies on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect the Bank’s systems from compromises or breaches of security.
In addition, the Bank outsources a majority of the data processing to certain third-party providers. If these third-party providers encounter difficulties, or if the Bank has difficulty communicating with them, the Bank’s ability to adequately process and account for transactions could be affected, and the Bank’s business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage the Bank’s reputation and result in a loss of customers and business thereby subjecting the Bank to additional regulatory scrutiny, or could expose the Bank to litigation and possible financial liability. Any of these events could have a material adverse effect on the Bank’s financial condition and results of operations.
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The Company’s risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.
The Company’s risk management framework is designed to minimize risk and loss. The Company seeks to identify, measure, monitor, report and control exposure to risk, including, but not limited to, strategic, market, liquidity, compliance and operational risks. While the Company uses a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased the Company’s level of risk. Accordingly, the Company could suffer losses as a result of its failure to properly anticipate and manage these risks.
Historically low interest rates may adversely affect the Company’s net interest income and profitability.
The Federal Reserve Board has recently maintained interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a general matter, the Company’s interest-bearing liabilities reprice or mature more quickly than its interest-earning assets. This has resulted in increases in net interest income in the short term. The Company’s ability to lower its interest expense is limited at these interest rate levels while the average yield on its interest-earning assets may continue to decrease. The FRB has indicated its intention to maintain low interest rates for an extended period. Accordingly, the Company’s net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may decrease, which may have an adverse affect on its profitability.
ITEM 1B. | Unresolved Staff Concerns |
Not applicable.
ITEM 2. | Properties |
The Bank operates from a main office and three full-service branches located in Montgomery County, a full-service branch located in Howard County, Maryland, and a full-service branch located in Anne Arundel County, Maryland. The following table sets forth information with respect to the Company’s full-service banking offices, including the expiration date of leases with respect to leased facilities.
CORPORATE HEADQUARTERS - 20300 Seneca Meadows Parkway | BETHESDA 5229 River Road Bethesda, MD 20816 2/28/2021 | GAITHERSBURG 201 N. Frederick Avenue Suite 100 Gaithersburg, MD 20877 11/30/2018 | ||
COLUMBIA 10840 Little Patuxent Parkway 2/28/2013 | ROCKVILLE 451 Hungerford Drive Suite 101 Rockville, MD 20850 9/30/2020 | ARUNDEL MILLS 7556 Teague Road Suite 108 Hanover, MD 21076 11/30/2021 |
ITEM 3. | Legal Proceedings |
At June 30, 2013, the Company was not involved in any legal proceedings the outcome of which the Company believes would be material to its financial condition or results of operations.
ITEM 4. | Mine Safety Disclosures |
Not Applicable.
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PART II
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
(a)Market, Holder and Dividend Information. The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “OBAF.” The approximate number of holders of record of OBA Financial Services, Inc.’s common stock as of September 20, 2013 was 835. Certain shares of OBA Financial Services, Inc. are held in nominee or street name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The following table presents quarterly market information for OBA Financial Services, Inc.’s common stock for the past two fiscal years. The following information with respect to trading prices was provided by the NASDAQ Capital Market.
Year ended June 30, 2013 | High | Low | Dividends Declared | |||||||||
Quarter ended September 30, 2012 | $ | 15.29 | $ | 14.50 | — | |||||||
Quarter ended December 31, 2012 | $ | 18.25 | $ | 15.06 | — | |||||||
Quarter ended March 31, 2013 | $ | 19.50 | $ | 17.50 | — | |||||||
Quarter ended June 30, 2013 | $ | 19.00 | $ | 18.06 | — |
Year ended June 30, 2012 | High | Low | Dividends Declared | |||||||||
Quarter ended September 30, 2011 | $ | 15.00 | $ | 13.50 | — | |||||||
Quarter ended December 31, 2011 | $ | 14.61 | $ | 13.55 | — | |||||||
Quarter ended March 31, 2012 | $ | 14.98 | $ | 14.00 | — | |||||||
Quarter ended June 30, 2012 | $ | 15.25 | $ | 14.04 | — |
Dividend payments by OBA Financial Services, Inc. are dependent on dividends it receives from OBA Bank, because OBA Financial Services, Inc. has no source of income other than dividends from OBA Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by OBA Financial Services, Inc. and interest payments with respect to OBA Financial Services, Inc.’s loan to the Employee Stock Ownership Plan. See “Item 1. Business—Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”
(b)Sales of Unregistered Securities. Not applicable.
(c)Use of Proceeds. Not applicable.
(d)Securities Authorized for Issuance Under Equity Compensation Plans. The following table sets forth the information as of June 30, 2013 with respect to compensation plans (other than the Company’s employee stock ownership plan) under which equity securities of the registrant are authorized for issuance.
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise prices of outstanding options, warrants and rights | Number of common stock remaining available for future issuance under stock based compensation plans (excluding securities reflected in first column) | ||||||||||
Equity compensation plans approved by stockholders | 531,103 | (1) | $ | 14.88 | (2) | 116,922 | ||||||
Equity compensation plans not approved by stockholders | N/A | N/A | N/A | |||||||||
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Total | 531,103 | $ | 14.88 | 116,922 | ||||||||
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(1) | Grants under the plan were issued on July 21, 2011, December 19, 2011, and March 1, 2013. |
(2) | Reflects exercise price of options only. |
(e)Stock Repurchases. The following table sets forth information in connection with repurchases of the Company’s shares of common stock during the periods listed. On April 29, 2013, the Board of Directors authorized the repurchase of up to approximately 210 thousand shares, or 5% of the Company’s common stock outstanding at the completion of the Company’s repurchase program approved on March 16, 2012. The repurchase authorization has no expiration date.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May yet be Purchased Under the Plans or Programs | ||||||||||||
April 1, 2013 through April 30, 2013 | 110,861 | $ | 18.54 | 110,861 | 146,277 | |||||||||||
May 1, 2013 through May 31, 2013 | 2,998 | 18.49 | 2,998 | 143,279 | ||||||||||||
June 1, 2013 through June 30, 2013 | 92,000 | 18.50 | 92,000 | 51,279 | ||||||||||||
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Total | 205,859 | 18.52 | 205,859 | 51,279 | ||||||||||||
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(f)Stock Performance Graph. Not applicable.
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ITEM 6. | Selected Financial Data |
The following selected consolidated financial and other data have been derived, in part, from the consolidated financial statements and notes appearing elsewhere in this annual report.
At June 30, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Selected Financial Condition Data: | ||||||||||||||||||||
Total assets | $ | 381,611 | $ | 392,086 | $ | 386,445 | $ | 374,095 | $ | 362,361 | ||||||||||
Cash and cash equivalents | 16,173 | 31,525 | 37,968 | 36,046 | 33,657 | |||||||||||||||
Interest bearing deposits with other banks | 6,692 | 9,490 | 7,058 | 5,072 | — | |||||||||||||||
Securities available for sale | 37,174 | 34,454 | 35,828 | 29,346 | 25,909 | |||||||||||||||
Securities held to maturity | 1,445 | 2,396 | 3,623 | 4,637 | — | |||||||||||||||
Federal Home Loan Bank stock, at cost | 1,160 | 2,169 | 2,987 | 3,883 | 3,883 | |||||||||||||||
Loans receivable, net | 299,803 | 293,206 | 279,620 | 276,098 | 283,459 | |||||||||||||||
Bank owned life insurance | 9,182 | 8,898 | 8,601 | 8,297 | 5,455 | |||||||||||||||
Deposits | 283,263 | 269,572 | 257,031 | 233,441 | 244,536 | |||||||||||||||
Securities sold under agreements to repurchase | 8,544 | 16,434 | 15,566 | 20,292 | 18,779 | |||||||||||||||
Federal Home Loan Bank advances | 15,623 | 26,997 | 29,618 | 36,834 | 56,400 | |||||||||||||||
Stockholders’ equity | 71,304 | 75,715 | 80,860 | 80,222 | 38,502 | |||||||||||||||
For The Years Ended June 30, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Selected Operating Data: | ||||||||||||||||||||
Interest and dividend income | $ | 16,066 | $ | 15,908 | $ | 16,248 | $ | 16,050 | $ | 17,398 | ||||||||||
Interest expense | 2,282 | 3,599 | 4,201 | 5,921 | 8,880 | |||||||||||||||
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Net interest income | 13,784 | 12,309 | 12,047 | 10,129 | 8,518 | |||||||||||||||
Provision for loan losses | 503 | 1,085 | 739 | 1,278 | 877 | |||||||||||||||
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Net interest and dividend income after provision for loan losses | 13,281 | 11,224 | 11,308 | 8,851 | 7,641 | |||||||||||||||
Noninterest income, excluding net gains (losses) | 738 | 819 | 876 | 950 | 878 | |||||||||||||||
Net gains (losses) | 58 | (85 | ) | 91 | (1,819 | ) | (967 | ) | ||||||||||||
Noninterest expense | 12,251 | 11,505 | 11,035 | 9,331 | 8,764 | |||||||||||||||
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Income (loss) before income taxes | 1,826 | 453 | 1,240 | (1,349 | ) | (1,212 | ) | |||||||||||||
Income tax expense (benefit) | 704 | 185 | 383 | (639 | ) | (552 | ) | |||||||||||||
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Net income (loss) | $ | 1,122 | $ | 268 | $ | 857 | $ | (710 | ) | $ | (660 | ) | ||||||||
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At or For The Years Ended June 30, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Selected Operating Data: | ||||||||||||||||||||
Performance Ratios: | ||||||||||||||||||||
Return on average assets | 0.29 | % | 0.07 | % | 0.23 | % | (0.19 | )% | (0.19 | )% | ||||||||||
Return on average equity | 1.49 | 0.35 | 1.06 | (1.24 | ) | (1.70 | ) | |||||||||||||
Interest rate spread (1) | 3.68 | 3.35 | 3.36 | 2.82 | 2.21 | |||||||||||||||
Net interest margin (2) | 3.89 | 3.59 | 3.70 | 3.09 | 2.52 | |||||||||||||||
Efficiency ratio (3) | 81.00 | 87.64 | 85.39 | 84.22 | 93.27 | |||||||||||||||
Non-interest expense to average total assets | 3.18 | 2.97 | 3.02 | 2.48 | 2.48 | |||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 132.11 | 123.48 | 125.92 | 114.80 | 111.72 | |||||||||||||||
Average equity to average total assets | 19.54 | 19.93 | 22.15 | 15.23 | 11.01 | |||||||||||||||
Basic earnings (loss) per share | $ | 0.28 | $ | 0.07 | $ | 0.20 | $ | (0.17 | ) | na | ||||||||||
Diluted earnings (loss) per share | $ | 0.28 | $ | 0.07 | $ | 0.20 | $ | (0.17 | ) | na | ||||||||||
Asset Quality Ratios: | ||||||||||||||||||||
Non-performing loans to total loans | 0.23 | % | 2.04 | % | 1.88 | % | 0.16 | % | 0.86 | % | ||||||||||
Non-performing assets to total assets | 0.18 | 1.55 | 1.40 | 0.17 | 0.73 | |||||||||||||||
Allowance for loan losses to non-performing loans | 498.28 | 50.20 | 42.44 | 389.46 | 47.46 | |||||||||||||||
Allowance for loan losses to total loans | 1.15 | 1.02 | 0.80 | 0.63 | 0.41 | |||||||||||||||
Capital Ratios (bank-level only): | ||||||||||||||||||||
Total capital (to risk-weighted assets) | 22.53 | % | 23.42 | % | 24.40 | % | 25.54 | % | 17.34 | % | ||||||||||
Tier I capital (to risk-weighted assets) | 21.34 | 22.29 | 23.49 | 24.69 | 16.84 | |||||||||||||||
Tier I capital (to average assets) | 16.14 | 15.41 | 15.98 | 15.22 | 11.03 | |||||||||||||||
Other Data: | ||||||||||||||||||||
Number of full service offices | 6 | 6 | 5 | 5 | 5 | |||||||||||||||
Full time equivalent employees | 68 | 67 | 67 | 61 | 59 |
(1) | The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year. |
(2) | The net interest margin represents net interest income as a percent of average interest-earning assets for the year. |
(3) | The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. |
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ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The principal objective of this financial review is to provide an overview of the consolidated financial condition and results of operations of OBA Financial Services, Inc. and its subsidiary, OBA Bank. This discussion and tabular presentations should be read in conjunction with the accompanying Consolidated Financial Statements and Notes, as well as, other information contained herein.
Overview of Income and Expenses
Income
The Company has two primary sources of pre-tax income. Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.
Non-interest income is the compensation received from providing products and services and from other income. Non-interest income is primarily earned from service charges on deposit accounts, loan servicing fees, and bank owned life insurance income. The Company also earns income from the sale of residential mortgage loans and other fees and charges.
The Company recognizes gains or losses as a result of the sale of investment securities, foreclosed property, and premises and equipment. In addition, the Company recognizes losses on its investment securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Company’s primary sources of income.
Expenses
The expenses the Company incurs in operating its business consist of salaries and employee benefits, occupancy and equipment expense, external processing fees, FDIC assessments, Director fees, and other non-interest expenses.
Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees, expenses for health care, retirement, and other employee benefits, stock based compensation, and payroll taxes
Occupancy expenses, which are fixed or variable costs associated with premises and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and cost of utilities.
Equipment expense includes expenses and depreciation charges related to office and banking equipment.
External processing fees are paid to third parties primarily for data processing services.
Other expenses include expenses for professional services, including, but not limited to, legal, accounting, and consulting services, the early repayment of certain borrowings, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.
Critical Accounting Policies and Estimates
The Notes to the Consolidated Financial Statements contain a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as, estimates made by Management, are integral to the presentation of the Company’s operations and financial condition. These accounting policies require that Management make highly difficult, complex, or subjective judgments and estimates at times regarding matters that are inherently uncertain or susceptible to change. Management has discussed these significant accounting policies, the related estimates, and its judgments with the Audit Committee of the Board. Additional information regarding these policies can be found in the Notes to the Consolidated Financial Statements.
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Discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of the Company, which are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis and bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Management believes the following critical accounting policies require the most significant judgments and estimates used in preparation of the financial statements:
Allowance for Loan Losses. Management maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the statement of condition date. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss rates for each loan group and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, or an estimate of the value of collateral. Based on the estimate of the level of allowance for loan losses required, Management records a provision for loan losses to maintain the allowance for loan losses at an appropriate level.
The determination of the allowance for loan losses is based on Management’s current judgments about the loan portfolio credit quality and Management’s consideration of all known relevant internal and external factors that affect loan collectability, as of the reporting date. Management cannot predict with certainty the amount of loan charge-offs that will be incurred. Management does not currently determine a range of loss with respect to the allowance for loan losses. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Such agencies may require that Management recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Accordingly, actual results could differ from those estimates.
Deferred Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be used. The recoverability of deferred tax assets is dependent upon future taxable income.
Other-Than-Temporary Impairment. In estimating other-than-temporary impairment of investment securities, securities are evaluated periodically, and at least quarterly, to determine whether a decline in their value is other than temporary.
Management considers numerous factors when determining whether potential other-than-temporary impairment exists and the period over which a debt security is expected to recover. The principal factors considered are the length of time and the extent to which the fair value has been less than the amortized cost basis, the financial condition of the issuer (and guarantor, if any), any adverse conditions specifically related to the security, industry, or geographic area, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of a security by a rating agency, and the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.
For debt securities, other-than-temporary impairment is considered to have occurred if Management intends to sell the security, Management will, more likely than not, be required to sell the security before recovery of its amortized cost basis, or the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. In determining the present value of expected cash flows, Management discounts the expected cash flows at the effective interest rate implicit in the security at the date of acquisition or, for debt securities that are
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beneficial interests in securitized financial assets, at the current rate used to accrete the beneficial interest. In estimating cash flows expected to be collected, Management uses available information with respect to security prepayment speeds, expected deferral rates and severity, whether subordinated interests, if any, are capable of absorbing estimated losses and the value of any underlying collateral.
Overview
Total assets decreased $10.5 million, or 2.7%, to $381.6 million at June 30, 2013 from $392.1 million at June 30, 2012. For the fiscal year ended June 30, 2013, the Company had net income of $1.1 million, or $0.28 basic and diluted earnings per share, compared to net income of $268 thousand, or $0.07 basic and diluted earnings per share, for the fiscal year ended June 30, 2012. Net interest margin, the percentage of net interest income to average interest-earning assets, increased to 3.89% for the fiscal year ended June 30, 2013 from 3.59% for the fiscal year ended June 30, 2012. Net interest income, the difference between interest income and interest expense, increased $1.5 million to $13.8 million for the fiscal year ended June 30, 2013 from $12.3 million for the fiscal year ended June 30, 2012.
Non-performing assets totaled $697 thousand, or 0.18% of total assets, at June 30, 2013, compared to $6.1 million, or 1.55% of total assets, at June 30, 2012. The Bank had $779 thousand of loans delinquent 30 days or greater at June 30, 2013, compared to $6.1 million of such delinquencies at June 30, 2012. In addition, the Bank provided $503 thousand for loan losses during the fiscal year ended June 30, 2013 compared to a provision for loan losses of $1.1 million during the fiscal year ended June 30, 2012, or a decrease of $582 thousand.
Balance Sheet Analysis
Cash and Cash Equivalents. At June 30, 2013 and 2012, the Company had $16.2 million and $31.5 million of cash and cash equivalents, respectively. The reduction in cash and cash equivalents was primarily due to an increase in loans and securities and a decrease in borrowings partially offset by an increase in total deposits.
Loans. At June 30, 2013, total loans were $303.3 million, or 79.5% of total assets, as compared to $296.2 million, or 75.6% of total assets at June 30, 2012. During the year ended June 30, 2013, the loan portfolio increased $7.0 million, or 2.4%. The increase in loans was primarily due to an increase in commercial business, commercial real estate, and construction loans partially offset by decreases in residential mortgage loans and home equity loans and lines of credit.
Loan Portfolio Composition. The following table sets forth the composition of the Company’s loan portfolio at the dates indicated.
At June 30, | ||||||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage | $ | 80,529 | 26.6 | % | $ | 93,266 | 31.5 | % | $ | 97,285 | 34.5 | % | $ | 123,452 | 44.5 | % | $ | 151,468 | 53.3 | % | ||||||||||||||||||||
Commercial real estate | 140,104 | 46.2 | 136,036 | 45.9 | 108,756 | 38.6 | 85,423 | 30.7 | 64,930 | 22.8 | ||||||||||||||||||||||||||||||
Construction | 13,044 | 4.3 | 1,850 | 0.6 | 1,180 | 0.4 | 1,071 | 0.4 | 4,935 | 1.7 | ||||||||||||||||||||||||||||||
Home equity loans and lines of credit | 27,598 | 9.1 | 33,110 | 11.2 | 38,785 | 13.8 | 41,655 | 15.0 | 40,812 | 14.3 | ||||||||||||||||||||||||||||||
Commercial business | 42,001 | 13.8 | 31,979 | 10.8 | 35,860 | 12.7 | 26,234 | 9.4 | 22,481 | 7.9 | ||||||||||||||||||||||||||||||
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Total loans | 303,276 | 100.0 | % | 296,241 | 100.0 | % | 281,866 | 100.0 | % | 277,835 | 100.0 | % | 284,626 | 100.0 | % | |||||||||||||||||||||||||
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Allowance for loan losses | (3,473 | ) | (3,035 | ) | (2,246 | ) | (1,737 | ) | (1,167 | ) | ||||||||||||||||||||||||||||||
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Total loans, net | $ | 299,803 | $ | 293,206 | $ | 279,620 | $ | 276,098 | $ | 283,459 | ||||||||||||||||||||||||||||||
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Loan Portfolio Maturities. The following table summarizes the scheduled repayments of the loan portfolio at the dates indicated. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
Residential Mortgage | Commercial Real Estate | Construction | Home Equity Loans and Lines of Credit | Commercial Business | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Due during the Years Ending | ||||||||||||||||||||||||
2014 | $ | 5,079 | $ | 10,964 | $ | 3,123 | $ | 506 | $ | 4,669 | $ | 24,341 | ||||||||||||
2015 | 4,436 | 12,750 | 9,921 | 117 | 3,799 | 31,023 | ||||||||||||||||||
2016 | 4,450 | 20,180 | — | 119 | 3,657 | 28,406 | ||||||||||||||||||
2017 to 2018 | 8,477 | 41,083 | — | 227 | 5,938 | 55,725 | ||||||||||||||||||
2019 to 2023 | 16,880 | 44,318 | — | 551 | 2,570 | 64,319 | ||||||||||||||||||
2024 to 2028 | 14,822 | 6,840 | — | 3,460 | 69 | 25,191 | ||||||||||||||||||
2029 and beyond | 26,385 | 3,969 | — | 22,618 | 21,299 | 74,271 | ||||||||||||||||||
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Total | $ | 80,529 | $ | 140,104 | $ | 13,044 | $ | 27,598 | $ | 42,001 | $ | 303,276 | ||||||||||||
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The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at the date indicated:
Due after June 30, 2013 | ||||||||||||
Fixed | Adjustable | Total | ||||||||||
(In thousands) | ||||||||||||
Real estate loans: | ||||||||||||
Residential mortgages | $ | 57,657 | $ | 17,793 | $ | 75,450 | ||||||
Commercial real estate | 90,925 | 38,215 | 129,140 | |||||||||
Construction | — | 9,921 | 9,921 | |||||||||
Home equity loans and lines of credit | 1,508 | 25,584 | 27,092 | |||||||||
Commercial business | 16,950 | 20,382 | 37,332 | |||||||||
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Loans contractually due after one year | 167,040 | 111,895 | 278,935 | |||||||||
Loans contractually due one year or less | 17,867 | 6,474 | 24,341 | |||||||||
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Total loans | $ | 184,907 | $ | 118,369 | $ | 303,276 | ||||||
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Securities. The following table sets forth the amortized cost and estimated fair value of the available for sale and held to maturity securities portfolios, excluding Federal Home Loan Bank of Atlanta common stock, at the dates indicated.
At June 30, | ||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 38,426 | $ | 38,604 | $ | 35,406 | $ | 36,899 | $ | 38,170 | $ | 39,458 | ||||||||||||
Trust preferred securities | 41 | 40 | 70 | 54 | 117 | 115 | ||||||||||||||||||
Other securities | 50 | 50 | 50 | 50 | 50 | 50 | ||||||||||||||||||
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Total securities | $ | 38,517 | $ | 38,694 | $ | 35,526 | $ | 37,003 | $ | 38,337 | $ | 39,623 | ||||||||||||
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The Company’s mortgage-backed securities are guaranteed by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. Total residential mortgage-backed securities increased $1.8 million to $38.6 million, or 10.1% of total assets, at June 30, 2013 from $36.9 million, or 9.4% of total assets, at June 30, 2012. The reduction in the unrealized gain in the securities portfolio as of June 30, 2013 was the result of an increase in long term market interest rates as compared to the original purchase yield of the securities.
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The Company currently owns one immaterial position in an insurance company-backed pooled trust preferred security that is performing as contractually obligated.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2013 are summarized in the following table. Maturities are based on the final contractual maturity dates and do not reflect the impact of repayments or early redemptions that may occur. No tax-equivalent adjustments have been made, as the Company did not hold any tax-advantaged investment securities at June 30, 2013.
One Year or Less | More than One Year through Five Years | More than Five Years through Ten Years | More than Ten Years | Total Securities | ||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Fair Value | Weighted Average Yield | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | $ | — | — | % | $ | — | — | % | $ | 5,967 | 3.20 | % | $ | 32,459 | 2.56 | % | $ | 38,426 | $ | 38,604 | 2.66 | % | ||||||||||||||||||||||
Trust preferred securities | — | — | — | — | — | — | 41 | 1.53 | 41 | 40 | 1.53 | |||||||||||||||||||||||||||||||||
Other securities | — | — | — | — | — | — | 50 | — | 50 | 50 | — | |||||||||||||||||||||||||||||||||
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Total | $ | — | — | % | $ | — | — | % | $ | 5,967 | 3.20 | % | $ | 32,550 | 2.55 | % | $ | 38,517 | $ | 38,694 | 2.65 | % | ||||||||||||||||||||||
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Deposits. The Bank accepts deposits primarily from the areas in which the Bank’s offices are located. Management’s focus is building broader customer relationships and targeting small business customers to increase core deposits. The Bank also relies on enhanced technology and customer service to attract and retain deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s deposit accounts consist of commercial and retail checking accounts, money market deposit accounts, savings accounts, certificates of deposit, and individual retirement accounts. The Bank accepts deposits through the CDARS program, which are classified as brokered deposits for regulatory purposes, and can accept other brokered deposits.
Interest rates paid, maturity terms, service fees, and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements, and the Bank’s deposit growth goals.
During the fiscal year ended June 30, 2013, deposits increased $13.7 million, or 5.1%, to $283.3 million from $269.6 million at June 30, 2012. The increase primarily resulted from an increase in time certificates of deposit of $11.1 million and a $2.4 million increase in non-interest bearing demand accounts. The Bank issued, at historically low long-term interest rates, longer-term brokered certificates of deposit to match the interest rate risk characteristics of the commercial loan portfolios.
The following tables set forth the distribution of the average total deposit accounts by account type, for the years indicated.
For the Fiscal Years Ended June 30, | ||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Average Balance | Percent | Weighted Average Rate | Average Balance | Percent | Weighted Average Rate | Average Balance | Percent | Weighted Average Rate | ||||||||||||||||||||||||||||
Non-interest bearing | $ | 40,306 | 14.8 | % | — | % | $ | 32,736 | 12.6 | % | — | % | $ | 25,761 | 11.1 | % | — | % | ||||||||||||||||||
Interest bearing checking | 72,414 | 26.5 | 0.43 | 63,684 | 24.4 | 0.58 | 59,917 | 25.9 | 0.57 | |||||||||||||||||||||||||||
Savings and escrow | 7,402 | 2.7 | 0.12 | 7,181 | 2.8 | 0.32 | 7,134 | 3.1 | 0.43 | |||||||||||||||||||||||||||
Money Market | 91,237 | 33.4 | 0.44 | 88,355 | 33.9 | 0.76 | 68,145 | 29.5 | 0.79 | |||||||||||||||||||||||||||
Certificates of deposit | 61,770 | 22.6 | 0.88 | 68,834 | 26.3 | 1.74 | 70,131 | 30.4 | 2.44 | |||||||||||||||||||||||||||
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Total deposits | $ | 273,129 | 100.0 | % | 0.46 | % | $ | 260,790 | 100.0 | % | 0.87 | % | $ | 231,088 | 100.0 | % | 1.14 | % | ||||||||||||||||||
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The following table sets forth the maturities of certificates of deposit in amounts greater than or equal to $100 thousand as of the date indicated.
At June 30, 2013 | ||||
(In thousands) | ||||
Three months or less | $ | 9,866 | ||
Over three months through six months | 6,848 | |||
Over six months through one year | 8,814 | |||
Over one year to three years | 11,928 | |||
Over three years | 2,202 | |||
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Total | $ | 39,658 | ||
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Borrowings. The Company’s borrowings consist primarily of advances from the Federal Home Loan Bank of Atlanta and funds borrowed from depositors; primarily small business customers under repurchase agreements. During the fiscal year ended June 30, 2013, borrowings decreased $19.3 million, or 44.4%, to $24.2 million. At June 30, 2013, Federal Home Loan Bank advances totaled $15.6 million, or 5.0% of total liabilities, and repurchase agreements totaled $8.5 million, or 2.8% of total liabilities. The Company’s sole repurchase agreement with a securities dealer matured during the fiscal year ended June 30, 2013. That matured repurchase agreement was $5.0 million and the rate was 3.23%. The Company had two long term FHLB advances, for a total of $8.0 million, mature during the fiscal year ended June 30, 2013 at an average rate of 3.06%. Also, the Company repaid $3.3 million of a longer term, $10.0 million, Federal Home Loan Bank advance, which carries a rate of 5.15%, incurring a loss of $488 thousand.
At June 30, 2013, the Company had access to additional Federal Home Loan Bank advances of up to $46.6 million. As of June 30, 2013, the Company’s available credit lines and other sources of liquidity had not been reduced compared to levels from June 30, 2012.
The following table sets forth information concerning balances and interest rates on Federal Home Loan Bank advances at the dates and for the fiscal years indicated.
At or for the Years Ended June 30, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance at end of year | $ | 15,623 | $ | 26,997 | $ | 29,618 | ||||||
Average balance during the year | $ | 22,658 | $ | 34,082 | $ | 35,845 | ||||||
Maximum outstanding at any month end | $ | 29,426 | $ | 42,058 | $ | 43,166 | ||||||
Weighted average interest rate at end of year | 4.26 | % | 4.00 | % | 3.90 | % | ||||||
Weighted average interest rate during year | 3.89 | % | 3.30 | % | 3.72 | % |
The following table sets forth information concerning balances and interest rates on securities dealer repurchase agreements at the dates and for the years indicated.
At or for the Years Ended June 30, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance at end of year | $ | — | $ | 5,000 | $ | 5,000 | ||||||
Average balance during the year | $ | 3,562 | $ | 5,000 | $ | 5,000 | ||||||
Maximum outstanding at any month end | $ | 5,000 | $ | 5,000 | $ | 5,000 | ||||||
Weighted average interest rate at end of year | — | % | 3.23 | % | 3.23 | % | ||||||
Weighted average interest rate during year | 3.23 | % | 3.23 | % | 3.23 | % |
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The following table sets forth information concerning balances and interest rates on customer repurchase agreements at the dates and for the years indicated.
At or for the Years Ended June 30, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(dollars in thousands) | ||||||||||||
Balance at end of year | $ | 8,544 | $ | 11,434 | $ | 10,566 | ||||||
Average balance during the year | $ | 9,273 | $ | 10,196 | $ | 12,300 | ||||||
Maximum outstanding at any month end | $ | 14,132 | $ | 14,291 | $ | 18,361 | ||||||
Weighted average interest rate at end of year | 0.22 | % | 0.20 | % | 0.58 | % | ||||||
Weighted average interest rate during year | 0.20 | % | 0.49 | % | 0.68 | % |
Stockholders’ Equity. At June 30, 2013, stockholders’ equity was $71.3 million, a decrease of $4.4 million, or 5.8%, from $75.7 million at June 30, 2012 primarily due to the Company’s share repurchase program.
Average Balances and Yields
The following tables set forth average balance sheets, average yields and rates, and certain other information for the years indicated. No tax-equivalent yield adjustments were made, as the Company did not hold any tax-advantaged interest-earning assets during the fiscal years indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to interest income.
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(dollars in thousands) | For the Fiscal Years Ended June 30, | |||||||||||||||||||||||||||||||||||
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Average Outstanding Balance | Interest | Yield/ Rate | Average Outstanding Balance | Interest | Yield/ Rate | Average Outstanding Balance | Interest | Yield/ Rate | ||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||
Residential mortgage | $ | 87,675 | $ | 3,773 | 4.30 | % | $ | 94,643 | $ | 4,417 | 4.67 | % | $ | 108,174 | $ | 5,490 | 5.08 | % | ||||||||||||||||||
Commercial real estate | 135,065 | 7,877 | 5.83 | 115,935 | 7,079 | 6.11 | 100,047 | 6,273 | 6.27 | |||||||||||||||||||||||||||
Construction | 4,999 | 245 | 4.90 | 1,170 | 59 | 5.04 | 1,458 | 73 | 5.01 | |||||||||||||||||||||||||||
Home equity & lines of credit | 30,282 | 929 | 3.07 | 36,056 | 1,143 | 3.17 | 40,504 | 1,315 | 3.25 | |||||||||||||||||||||||||||
Commercial business | 39,442 | 2,143 | 5.43 | 34,362 | 1,998 | 5.81 | 30,867 | 1,912 | 6.19 | |||||||||||||||||||||||||||
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Total loans | 297,463 | 14,967 | 5.03 | 282,166 | 14,696 | 5.21 | 281,050 | 15,063 | 5.36 | |||||||||||||||||||||||||||
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Loans held for sale | 260 | 9 | 3.46 | 14 | 1 | 7.14 | — | — | — | |||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 42,301 | 926 | 2.19 | 37,969 | 984 | 2.59 | 27,546 | 1,016 | 3.69 | |||||||||||||||||||||||||||
Trust preferred securities | 57 | 1 | 1.75 | 103 | 2 | 1.94 | 128 | 2 | 1.56 | |||||||||||||||||||||||||||
Other investments & interest bearing deposits with banks | 10,248 | 126 | 1.23 | 11,774 | 131 | 1.11 | 9,207 | 102 | 1.11 | |||||||||||||||||||||||||||
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|
|
|
|
|
| |||||||||||||||||||||||||
Total investments | 52,606 | 1,053 | 2.00 | 49,846 | 1,117 | 2.24 | 36,881 | 1,120 | 3.04 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Other | 4,141 | 37 | 0.89 | 10,424 | 94 | 0.90 | 7,539 | 65 | 0.86 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total interest-earning assets | 354,470 | 16,066 | 4.53 | 342,450 | 15,908 | 4.65 | 325,470 | 16,248 | 4.99 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Allowance for loan losses | (3,269 | ) | (2,590 | ) | (2,078 | ) | ||||||||||||||||||||||||||||||
Cash and due from banks | 14,498 | 28,795 | 22,827 | |||||||||||||||||||||||||||||||||
Other assets | 19,551 | 19,338 | 19,113 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total assets | $ | 385,250 | $ | 387,993 | $ | 365,332 | ||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
Interest-bearing checking | $ | 72,414 | $ | 309 | 0.43 | $ | 63,684 | $ | 369 | 0.58 | $ | 59,917 | $ | 342 | 0.57 | |||||||||||||||||||||
Savings and escrow | 7,402 | 9 | 0.12 | 7,181 | 23 | 0.32 | 7,134 | 31 | 0.43 | |||||||||||||||||||||||||||
Money Market | 91,237 | 402 | 0.44 | 88,355 | 673 | 0.76 | 68,145 | 537 | 0.79 | |||||||||||||||||||||||||||
Certificates of deposit | 61,770 | 546 | 0.88 | 68,834 | 1,197 | 1.74 | 70,131 | 1,713 | 2.44 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total interest bearing deposits | 232,823 | 1,266 | 0.54 | 228,054 | 2,262 | 0.99 | 205,327 | 2,623 | 1.28 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
FHLB advances | 22,658 | 882 | 3.89 | 34,082 | 1,126 | 3.30 | 35,845 | 1,333 | 3.72 | |||||||||||||||||||||||||||
Repurchase agreements | 12,835 | 134 | 1.04 | 15,196 | 211 | 1.39 | 17,300 | 245 | 1.42 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total interest-bearing liabilities | 268,316 | 2,282 | 0.85 | 277,332 | 3,599 | 1.30 | 258,472 | 4,201 | 1.63 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Noninterest-bearing demand deposits | 40,306 | 32,736 | 25,761 | |||||||||||||||||||||||||||||||||
Other liabilities | 1,343 | 600 | 193 | |||||||||||||||||||||||||||||||||
Stockholders’ equity | 75,285 | 77,325 | 80,906 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 385,250 | $ | 387,993 | $ | 365,332 | ||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net interest income | 13,784 | 12,309 | 12,047 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net interest rate spread (1) | 3.68 | % | 3.35 | % | 3.36 | % | ||||||||||||||||||||||||||||||
Net interest-earning assets (2) | $ | 86,154 | $ | 65,118 | $ | 66,998 | ||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net interest margin (3) | 3.89 | % | 3.59 | % | 3.70 | % | ||||||||||||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 132.11 | % | 123.48 | % | 125.92 | % |
(1) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(2) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
(3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
37
Table of Contents
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the Company’s net interest income for the years indicated. The rate column shows the effects attributable to changes in rate, which are changes in rate multiplied by prior volume. The volume column shows the effects attributable to changes in volume, which are changes in volume multiplied by prior rate. The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
(in thousands) | 2013 vs. 2012 | 2012 vs. 2011 | ||||||||||||||||||||||
Increase (Decrease) Due to | Total Increase | Increase (Decrease) Due to | Total Increase | |||||||||||||||||||||
Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Residential mortgage | $ | (325 | ) | $ | (319 | ) | $ | (644 | ) | $ | (687 | ) | $ | (386 | ) | $ | (1,073 | ) | ||||||
Commercial real estate | 1,168 | (370 | ) | 798 | 996 | (190 | ) | 806 | ||||||||||||||||
Construction | 193 | (7 | ) | 186 | (14 | ) | — | (14 | ) | |||||||||||||||
Home equity & lines of credit | (183 | ) | (31 | ) | (214 | ) | (144 | ) | (28 | ) | (172 | ) | ||||||||||||
Commercial business | 295 | (150 | ) | 145 | 216 | (130 | ) | 86 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | 1,148 | (877 | ) | 271 | 367 | (734 | ) | (367 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans held for sale | 18 | (10 | ) | 8 | — | 1 | 1 | |||||||||||||||||
Investments | ||||||||||||||||||||||||
Mortgage-backed securities | 112 | (170 | ) | (58 | ) | 384 | (416 | ) | (32 | ) | ||||||||||||||
Trust preferred securites | (1 | ) | — | (1 | ) | — | — | — | ||||||||||||||||
Other investments & interest bearing deposits with banks | (17 | ) | 12 | (5 | ) | 28 | 1 | 29 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total investments | 94 | (158 | ) | (64 | ) | 412 | (415 | ) | (3 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other | (57 | ) | — | (57 | ) | 25 | 4 | 29 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest-earning assets | 1,203 | (1,045 | ) | 158 | 804 | (1,144 | ) | (340 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities: | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing checking | 51 | (111 | ) | (60 | ) | 22 | 5 | 27 | ||||||||||||||||
Savings and escrow | 1 | (15 | ) | (14 | ) | — | (8 | ) | (8 | ) | ||||||||||||||
Money Market | 22 | (293 | ) | (271 | ) | 159 | (23 | ) | 136 | |||||||||||||||
Certificates of deposit | (123 | ) | (528 | ) | (651 | ) | (32 | ) | (484 | ) | (516 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest bearing deposits | (49 | ) | (947 | ) | (996 | ) | 149 | (510 | ) | (361 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
FHLB advances | (377 | ) | 133 | (244 | ) | (66 | ) | (141 | ) | (207 | ) | |||||||||||||
Repurchase agreements | (33 | ) | (44 | ) | (77 | ) | (30 | ) | (4 | ) | (34 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total interest-bearing liabilities | (459 | ) | (858 | ) | (1,317 | ) | 53 | (655 | ) | (602 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Change in net interest income | $ | 1,662 | $ | (187 | ) | $ | 1,475 | $ | 751 | $ | (489 | ) | $ | 262 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Operating Results for the Fiscal Years Ended June 30, 2013 and 2012
General. For the fiscal year ended June 30, 2013, the Company had net income of $1.1 million, or $0.28 basic and diluted earnings per share, compared to net income of $268 thousand, or $0.07 basic and diluted earnings per share, for the fiscal year ended June 30, 2012. For the fiscal year 2013, net income was positively impacted by an increase in net interest income, an increase in non-interest income and a decrease in the provision for loan losses offset by an increase in non-interest expense. Net interest income increased $1.5 million for the fiscal year ended June 30, 2013 to $13.8 million as total interest and dividend income increased and total interest expense decreased. Non-interest expense increased $746 thousand to $12.3 million for the fiscal year ended
38
Table of Contents
June 30, 2013. The provision for loan losses decreased $582 thousand to $503 thousand for the year ended June 30, 2013. Non-interest income increased $62 thousand to $796 thousand for the fiscal year ended June 30, 2013.
Net Interest Income. Net interest income increased $1.5 million, or 12.0%, to $13.8 million for the fiscal year ended June 30, 2013 compared to $12.3 million for the fiscal year ended June 30, 2012. Interest expense decreased $1.3 million as continued low market interest rates allowed the Company to reduce deposit rates while maintaining a competitive position in its local market. Non-interest bearing deposits increased $2.4 million, or 6.0%, to $42.4 at June 30, 2013. The increase in deposits allowed the Company to pay off, at maturity, two higher costing FHLB borrowings and partially repay another higher costing FHLB borrowing. Interest and dividend income increased $158 thousand as interest and fees on loans increased $279 thousand. Net interest margin was 3.89% for the fiscal year ended June 30, 2013 as compared to 3.59% for fiscal year ended June 30, 2012. The Company also had two non-performing loans to not-for-profit entities pay off with full recovery on both loans during the fiscal year ended June 30, 2013.
Interest and Dividend Income. Interest and dividend income increased $158 thousand to $16.1 million for the fiscal year ended June 30, 2013 from $15.9 million for the fiscal year ended June 30, 2012. Interest income on loans increased $279 thousand to $15.0 million for the fiscal year ended June 30, 2013 from $14.7 million for the fiscal year ended June 30, 2012. The Company had two loans to not-for profit entities pay off with full recovery of principal, interest, and fees on both loans during the fiscal year ended June 30, 2013. During the fiscal year ended June 30, 2013, interest and dividend income on investments decreased $64 thousand to $1.1 million and income on fed funds sold decreased $57 thousand to $37 thousand. The decreases were the result of increased prepayments and lower reinvestment yields on investments due to lower market rates and a smaller fed funds sold position as cash balances were used to fund loan growth and reduce borrowings.
The average yield on loans decreased 18 basis points, to 5.03% for the fiscal year ended June 30, 2013 from 5.21% for the fiscal year ended June 30, 2012. Average loans increased $15.3 million, or 5.4%. Average commercial loans increased $28.0 million offset by decreases in average residential mortgage loans of $7.0 million, to $87.7 million, and in average home equity loans and lines of credit of $5.8 million, to $30.3 million, during the fiscal year ended June 30, 2013. The average balance of commercial loans increased 18.5% to $179.5 million for the fiscal year ended June 30, 2013 from $151.5 million for the fiscal year ended June 30, 2012. The reduction in the residential mortgage portfolio resulted from selling newly-originated residential mortgage loans, as well as, prepayments exceeding other originations that were held in portfolio.
The average yield on securities decreased 24 basis points to 2.00% for the fiscal year ended June 30, 2013 from 2.24% for the fiscal year ended June 30, 2012. The decrease in yield reflects the purchase of mortgage-backed securities at lower yields as market rates declined over the period. Additionally, as market rates declined, prepayment speeds on mortgage-backed securities increased causing the yield to decrease on bonds purchased at a premium.
Interest Expense. Interest expense decreased $1.3 million, or 36.6%, to $2.3 million for the fiscal year ended June 30, 2013 from $3.6 million for the fiscal year ended June 30, 2012. Continued low market interest rates allowed for the reduction of deposit expense by $996 thousand or 44.0%. The average rate paid on deposits decreased 45 basis points to 0.54% for the fiscal year ended June 30, 2013 from 0.99% for the fiscal year ended June 30, 2012. The average balance of interest bearing deposits increased $4.8 million during the fiscal year ended June 30, 2013. Average interest bearing checking deposits increased $8.7 million, or 13.7%, and average money market deposits increased $2.9 million, or 3.3%, for the fiscal year ended June 30, 2013. Average non-interest bearing demand checking accounts increased $7.6 million, or 23.1% to $40.3 million, for the fiscal year ended June 30, 2013.
Interest expense on Federal Home Loan Bank borrowings decreased $244 thousand to $882 thousand for the fiscal year ended June 30, 2013 from $1.1 million for the fiscal year ended June 30, 2012. This change resulted
39
Table of Contents
from an $11.4 million, or 33.5%, decrease in average outstanding borrowings for the fiscal year ended June 30, 2013. For additional information, please see the “Borrowings” section under “Balance Sheet Analysis” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Additionally, interest expense on repurchase agreements decreased $77 thousand, or 36.5%, to $134 thousand for the fiscal year ended June 30, 2013. Average repurchase agreements decreased $2.4 million, or 15.5% for the fiscal year ended June 30, 2013. The average yield on repurchase agreements decreased 35 basis points to 1.04% for the fiscal year ended June 30, 2013 from 1.39% for the fiscal year ended June 30, 2012. The decrease in FHLB borrowings reflects management’s strategy to reduce high cost borrowings facilitated primarily by the inflow of core deposits.
Provision for Loan Losses. Based on an analysis of the factors described in “Allowance for Loan Losses,” the Company recorded a provision for loan losses of $503 thousand for the fiscal year ended June 30, 2013 and a provision for loan losses of $1.1 million for fiscal year ended June 30, 2012. During the fiscal years ended June 30, 2013 and 2012, the Company had net loan charge-offs of $65 thousand and $296 thousand, respectively. Net charge-offs for the fiscal year ended June 30, 2013 and 2012 include recoveries of $4 thousand in commercial loans and $15 thousand in residential mortgage loans. The remaining partial charge-offs include two residential mortgages, one commercial loan, and one consumer loan. Total loans increased by $7.0 million to $303.3 million at June 30, 2013 from $296.2 million at June 30, 2012. Commercial business loans increased $10.1 million, or 31.5%, to $42.3 million, construction loans increased $11.2 million to $13.0 million, and commercial real estate loans increased by $4.1 million to $140.1 million at June 30, 2013 as compared to June 30, 2012. This increase was partially offset by decreases in home equity loans and lines of credit of $5.4 million, or 16.6%, to $27.3 million and residential mortgage loans of $12.7 million, or 13.7%, to $80.5 million at June 30, 2013.
Non-performing loans totaled $697 thousand at June 30, 2013 and $6.0 million at June 30, 2012. The decrease was a result of the payoff of two commercial real estate loans to not-for-profit entities in which the Company had a full recovery on both loans.
The Company’s non-performing loans to total loans ratio decreased to 0.23% from 2.04% at June 30, 2013 and 2012, respectively.
Non-performing assets totaled $697 at June 30, 2013 and $6.1 million at June 30, 2012. In addition to the above-mentioned payoff of two not-for-profit entity loans, the Company sold its lone real estate owned property during the fiscal year ended June 30, 2013. The Company’s non-performing assets to total assets ratio decreased to 0.18% from 1.55% at June 30, 2013 and 2012, respectively.
There were $157 thousand in loans delinquent less than 90 days and $622 thousand in loans delinquent 90 days or more with total delinquencies of $779 thousand at June 30, 2013. This represents a decrease in total delinquent loans of $5.3 million from June 30, 2012. Total delinquent loans were $6.1 million at June 30, 2012. Loans delinquent less than 90 days were $1.7 million and loans delinquent 90 days or more were $4.4 million at June 30, 2012.
The allowance for loan losses to total loans was 1.15% and 1.02% at June 30, 2013 and 2012, respectively. The Company has provided for all losses that are both probable and reasonably estimable at June 30, 2013 and 2012.
40
Table of Contents
Non-Interest Income. The following table summarizes changes in non-interest income for the fiscal years indicated.
For the Years Ended June 30, | Change | |||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
(In thousands) | ||||||||||||||||
Customer service fees | $ | 349 | $ | 372 | $ | (23 | ) | (6.2 | )% | |||||||
Loan servicing fees | (23 | ) | 28 | (51 | ) | (182.1 | ) | |||||||||
Bank owned life insurance income | 283 | 297 | (14 | ) | (4.7 | ) | ||||||||||
Other non-interest income | 129 | 122 | 7 | 5.7 | ||||||||||||
|
|
|
|
|
| |||||||||||
Non-interest income before net gains (losses) | 738 | 819 | (81 | ) | (9.9 | ) | ||||||||||
Net gain on sale of loans | 65 | 6 | 59 | 983.3 | ||||||||||||
Net loss on disposal of assets | — | (26 | ) | 26 | (100.0 | ) | ||||||||||
Write-down of other real estate property | (7 | ) | (65 | ) | 58 | (89.2 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Net gains (losses) | 58 | (85 | ) | 143 | (168.2 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total non-interest income | $ | 796 | $ | 734 | $ | 62 | 8.4 | |||||||||
|
|
|
|
|
|
The Company’s non-interest income increased $62 thousand for the fiscal year ended June 30, 2013 to $796 thousand from $734 thousand for fiscal year end June 30, 2012. Net gains (losses) increased $143 thousand during the year ended June 30, 2013 to $58 thousand. The Company had an increase in net gains on sale of loans of $59 thousand, to $65 thousand, for the fiscal year ended June 30, 2013. The Company sold its sole other real estate owned property. Non-interest income before net gains (losses) decreased $81 thousand, or 9.9%, to $738 thousand for the year ended June 30, 2013 as compared to $819 thousand for the year ended June 30, 2012. Loan servicing fees decreased $51 thousand from $28 thousand during the year ended June 30, 2013 as the Company accelerated the amortization of servicing rights due to the repayment of underlying residential mortgages. Customer service and loan servicing fees decreased $23 thousand and $51 thousand, respectively, for the fiscal year end June 30, 2013. Bank owned life insurance income decreased $14 thousand, to $283 thousand, for the fiscal year ended June 30, 2013.
Non-Interest Expense. The following table summarizes changes in non-interest expense at the date and years indicated.
For the Years Ended June 30, | Change | |||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
(In thousands) | ||||||||||||||||
Salaries and employee benefits | $ | 7,055 | $ | 6,726 | $ | 329 | 4.9 | % | ||||||||
Occupancy and equipment | 1,540 | 1,591 | (51 | ) | (3.2 | ) | ||||||||||
Data processing | 819 | 780 | 39 | 5.0 | ||||||||||||
Directors’ fees | 371 | 356 | 15 | 4.2 | ||||||||||||
FDIC assessments | 268 | 284 | (16 | ) | (5.6 | ) | ||||||||||
Other non-interest expense | 2,198 | 1,768 | 430 | 24.3 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total non-interest expense | $ | 12,251 | $ | 11,505 | $ | 746 | 6.5 | |||||||||
|
|
|
|
|
|
The Company’s non-interest expense increased to $12.3 million for the fiscal year ended June 30, 2013 from $11.5 million for the fiscal year ended June 30, 2012. Other non-interest expense increased $430 thousand, to $2.2 million, for the fiscal year ended June 30, 2013 from $1.8 million for the fiscal year ended June 30, 2012. The Company partially closed a higher costing Federal Home Loan Bank borrowing during the fiscal year ended June 30, 2013. The Company completed an early repayment of $3.25 million of a $10.0 million borrowing causing a loss on repayment of $488 thousand. Salaries and employee benefits increased 4.9%, or $329 thousand, to $7.1 million in the period ended June 30, 2013 primarily due to additions to staff and higher employee benefits costs. Data processing and director’s fees increased slightly, $39 thousand and $15 thousand, respectively.
Income Tax Expense. The Company recorded income tax expense of $704 thousand for the fiscal year ended June 30, 2013, compared to income tax expense of $185 thousand for the fiscal year ended June 30, 2012. The effective tax rate for fiscal 2013 was 38.6%, while the effective tax rate for fiscal 2012 was 40.8%.
41
Table of Contents
Non-performing and Problem Assets
When a residential mortgage loan or home equity line of credit is fifteen calendar days past due, a notice is mailed informing the borrower that the loan is past due. When the loan is twenty days past due, an additional notice is mailed and Company personnel attempt to achieve direct contact with the borrower as an additional reminder of the delinquency. When a loan is 30 days or more past due, a default notice is mailed and additional attempts at direct contact with the borrower are made. Company personnel attempt to determine the reason(s) for the delinquency and establish a course of action by which the borrower will bring the loan current. When the loan is 45 days past due, Company personnel investigate the issues surrounding the delinquency and repayment options and issue an additional demand letter. In addition, Management determines whether to initiate foreclosure proceedings and, if so, obtains Board approval. Foreclosure proceedings are initiated by counsel if the loan is not brought current by the end of the calendar month. Procedures for avoiding foreclosure can include restructuring the loan in a manner that provides concessions to the borrower to facilitate repayment.
Commercial business, commercial real estate, and construction loans and consumer loans are generally handled in the same manner as residential mortgage loans or home equity lines of credit.
A loan is placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. If a loan is well secured and in the process of collection, exceptions to the non-accrual policy may be made. Loans may also be placed on non-accrual status if collection of principal or interest, in full, is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed and further income is recognized only when full repayment of the loan is complete or the loan returns to accrual status, at which point income is recognized to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally six months), and full payment of principal and interest is expected.
Non-Performing Assets. The table below sets forth the amounts and categories of non-performing assets at the dates indicated.
At June 30, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Residential Mortgage | $ | 622 | $ | 891 | $ | — | $ | 446 | $ | 1,155 | ||||||||||
Commercial real estate | — | 5,080 | 5,292 | — | — | |||||||||||||||
Construction | — | — | — | — | 1,304 | |||||||||||||||
Home equity loans and lines of credit | 75 | 75 | — | — | — | |||||||||||||||
Commercial business | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total non-accrual loans | 697 | 6,046 | 5,292 | 446 | 2,459 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Loan delinquent 90 days or greater and still accruing | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total non-performing loans | 697 | 6,046 | 5,292 | 446 | 2,459 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Real estate owned: | ||||||||||||||||||||
Residential mortgage | — | 40 | 105 | 193 | 193 | |||||||||||||||
Commercial real estate | — | — | — | — | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Home equity loans and lines of credit | — | — | — | — | — | |||||||||||||||
Commercial business | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||
Total real estate owned | — | 40 | 105 | 193 | 193 | |||||||||||||||
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|
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|
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| |||||||||||
Total non-performing assets | $ | 697 | $ | 6,086 | $ | 5,397 | $ | 639 | $ | 2,652 | ||||||||||
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Ratios: | ||||||||||||||||||||
Non-performing loans to total loans | 0.23 | % | 2.04 | % | 1.88 | % | 0.16 | % | 0.86 | % | ||||||||||
Non-performing assets to total assets | 0.18 | % | 1.55 | % | 1.40 | % | 0.17 | % | 0.73 | % |
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For the year ended June 30, 2013, gross interest income that would have been recorded had non-accruing loans been current in accordance with their original terms was $33 thousand. The Company recognized $2 thousand of interest income on such non-accruing loans on a cash basis during the fiscal year including interest recovered from prior periods.
Troubled Debt Restructurings. Loans are periodically modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. Generally, the Company does not forgive principal or interest on loans or modify the interest rate on loans to a rate that is below market rates. At June 30, 2013 and 2012, the Company had $3.5 million and $5.8 million of these modified loans, respectively. At June 30, 2013, the Company had $1.9 million in residential mortgage loans and home equity loans and lines of credit that were considered troubled debt restructures. At June 30, 2013, the Company had $1.6 million commercial real estate loans that were considered troubled debt restructures. At June 30, 2012, the Company had $1.1 million in residential mortgage loans and home equity loans and lines of credit and $4.7 million in commercial real estate loans that were considered troubled debt restructures. At June 30, 2011, the Company had $731 thousand in residential mortgage loans and home equity loans and lines of credit and $2.0 million in commercial real estate loans that were considered troubled debt restructures. At June 30, 2010, the Company had $1.9 million in residential mortgage loans and home equity loans and lines of credit and $1.5 million in commercial real estate loans that were considered troubled debt restructures. At June 30, 2009, the Company had $1.0 million in residential mortgage loans that were considered trouble debt restructures.
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Delinquent Loans. The following table sets forth loan delinquencies by type and by amount at the dates indicated.
(in thousands) | Loans Delinquent For | |||||||||||
31-90 Days | Over 90 Days | Total | ||||||||||
Amount | Amount | Amount | ||||||||||
At June 30, 2013 | ||||||||||||
Real estate loans: | ||||||||||||
Residential mortgage | $ | — | $ | 622 | $ | 622 | ||||||
Commercial real estate | 82 | — | 82 | |||||||||
Construction | — | — | — | |||||||||
Home equity loans and lines of credit | 75 | — | 75 | |||||||||
Commercial business | — | — | — | |||||||||
Consumer | — | — | — | |||||||||
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Total loans | $ | 157 | $ | 622 | $ | 779 | ||||||
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At June 30, 2012 | ||||||||||||
Real estate loans: | ||||||||||||
Residential mortgage | $ | — | $ | 894 | $ | 894 | ||||||
Commercial real estate | 1,520 | 3,560 | 5,080 | |||||||||
Construction | — | — | — | |||||||||
Home equity loans and lines of credit | 139 | — | 139 | |||||||||
Commercial business | — | — | — | |||||||||
Consumer | — | — | — | |||||||||
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Total loans | $ | 1,659 | $ | 4,454 | $ | 6,113 | ||||||
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At June 30, 2011 | ||||||||||||
Real estate loans: | ||||||||||||
Residential mortgage | $ | — | $ | — | $ | — | ||||||
Commercial real estate | 327 | 2,094 | 2,421 | |||||||||
Construction | — | — | — | |||||||||
Home equity loans and lines of credit | 273 | — | 273 | |||||||||
Commercial business | — | — | — | |||||||||
Consumer | — | — | — | |||||||||
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Total loans | $ | 600 | $ | 2,094 | $ | 2,694 | ||||||
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At June 30, 2010 | ||||||||||||
Real estate loans: | ||||||||||||
Residential mortgage | — | $ | 446 | $ | 446 | |||||||
Commercial real estate | 1,290 | — | 1,290 | |||||||||
Construction | — | — | — | |||||||||
Home equity loans and lines of credit | — | — | — | |||||||||
Commercial business | — | — | — | |||||||||
Consumer | — | — | — | |||||||||
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Total loans | $ | 1,290 | $ | 446 | $ | 1,736 | ||||||
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At June 30, 2009 | ||||||||||||
Real estate loans: | ||||||||||||
Residential mortgage | $ | 677 | 483 | 1,160 | ||||||||
Commercial real estate | — | — | — | |||||||||
Construction | — | — | — | |||||||||
Home equity loans and lines of credit | — | — | — | |||||||||
Commercial business | — | — | — | |||||||||
Consumer | — | — | — | |||||||||
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Total loans | $ | 677 | $ | 483 | $ | 1,160 | ||||||
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Real Estate Owned. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. When property is acquired it is recorded at estimated fair value at the date of foreclosure less the cost to sell, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions. Holding costs are expensed after acquisition. At June 30, 2013, the Company has no real estate owned. At June 30, 2012 the Company had $40 thousand of real estate owned. At June 30, 2011, 2010, and 2009, the same property was held at $105 thousand, $193 thousand, and $193 thousand, respectively, in real estate owned.
Classification of Assets. Various Company policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets, or portions of assets, classified as loss are those considered uncollectible and of such little value that their continuance as an asset is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as Special Mention.
The Bank maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the statement of condition date. The Bank’s determination as to the classification of assets is subject to review by the Bank’s principal federal regulator, the OCC. The Company regularly reviews the asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
The following table details classified assets, assets designated as special mention, and criticized assets at the dates indicated.
At June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Classified assets: | ||||||||
Substandard | $ | 8,249 | $ | 11,820 | ||||
Doubtful | — | — | ||||||
Loss | — | — | ||||||
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Total classified assets | 8,249 | 11,820 | ||||||
Special mention | 4,955 | 259 | ||||||
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Total criticized assets | $ | 13,204 | $ | 12,079 | ||||
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The Company had $8.2 million in loans classified as substandard at June 30, 2013 as compared to $11.8 million at June 30, 2012. At June 30, 2013, $2.1 million of the loans classified as substandard were residential mortgage or commercial real estate loans that were collateral-dependent. Management reviewed these loans for impairment on an individual loan or relationship basis.
At June 30, 2013, Management determined that 11 of the loans listed as substandard, for a total of $3.5 million, were both considered impaired and troubled debt restructures. Accordingly, a specific allowance for loan losses for these loans was provided or the loans were written down to current market value. An analysis was completed for each of the loans listed as substandard according to the methodology described in “Allowance for Loan Losses.” Based on this analysis, the Company provided specific reserves of $148 thousand for these loans.
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Allowance for Loan Losses
The Company provides for loan losses based upon the consistent application of the documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to the same. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in Management’s judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. The Company considers residential mortgage loans and home equity loans and lines of credit as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience. Commercial real estate, construction, and commercial business loans are viewed individually and considered impaired if the probability exists that the Company will be unable to collect contractually obligated principal and interest cash flows. The allowance for loan losses consists primarily of three components:
(1) | specific allowances established for impaired loans (as defined by U.S. GAAP). For a non-collateral dependent loan, the amount of impairment, if any, is estimated as the difference between the estimated present value based on Management’s assumptions regarding future cash flows and discounted at the loans original yield, and the carrying value of the loan. Impaired loans for which the estimated present value of the loan exceeds the carrying value of the loan do not reduce specific allowances; |
(2) | general allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type. The Company applies an estimated loss rate to each loan group. The loss rates applied are based upon loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions; and |
(3) | unallocated allowances established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance. |
Actual loan losses may be significantly more than the allowance for loan losses established, which could have a material negative effect on financial results.
The adjustments to historical loss experience are based on Management’s evaluation of several qualitative and environmental factors, including:
• | changes in any concentration of credit (including, but not limited to, concentrations by geography, industry, or collateral type); |
• | changes in the number and amount of non-accrual loans, watch list loans, and past due loans; |
• | changes in national, state, and local economic trends; |
• | changes to other external influences including, but not limited to, legal, accounting, peer, and regulatory changes; |
• | changes in the types of loans in the loan portfolio; |
• | changes in the experience and ability of personnel and management in the loan origination and loan servicing departments; |
• | changes in the value of underlying collateral for collateral dependent loans; |
• | changes in lending strategies; and |
• | changes in lending policies and procedures. |
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Historically, the Company experienced limited loan losses. As the Company experiences additional loan losses, Management utilizes the Company’s historical loss experience in determining applicable portions of the allowance for loan losses. Periodically, the Company adjusts its historical loss experience to reflect current economic conditions.
Management evaluates the allowance for loan losses based upon the combined total of the specific, general, and unallocated components. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Generally, the Company underwrites commercial real estate and residential real estate loans at a loan-to-value ratio of 75% or less. Accordingly, in the event that a loan becomes past due, Management will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to ascertain property values. The Company may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrower’s condition. For loans initially determined to be impaired loans, the Company utilizes the ascertained or appraised property value in determining the appropriate specific allowance for loan losses attributable to a loan as described above. In addition, changes in the appraised value of properties securing loans can result in an increase or decrease in the general allowance for loan losses as an adjustment to the historical loss experience due to qualitative and environmental factors, as described above.
The loan portfolio is evaluated on a quarterly basis and the allowance is adjusted accordingly. While the best information available is used to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the OCC will periodically review the allowance for loan losses. The OCC may require the Company to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.
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The following table sets forth activity in the Company’s allowance for loan losses for the fiscal years indicated.
At or for the Fiscal Years Ended June 30, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Balance at beginning of the year | $ | 3,035 | $ | 2,246 | $ | 1,737 | $ | 1,167 | $ | 483 | ||||||||||
Charge-offs: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Residential mortgage | 63 | 3 | 15 | 1 | 39 | |||||||||||||||
Commercial real estate | 6 | 218 | 166 | 136 | 164 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Home equity loans and lines of credit | — | 90 | 79 | 571 | — | |||||||||||||||
Commercial business | — | — | — | — | — | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
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Total charge-offs | 69 | 311 | 260 | 708 | 203 | |||||||||||||||
Recoveries: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Residential mortgage | — | 15 | — | — | — | |||||||||||||||
Commercial real estate | 4 | — | — | — | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Home equity loans and lines of credit | — | — | 30 | — | — | |||||||||||||||
Commercial business | — | — | — | — | 10 | |||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||
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Total recoveries | 4 | 15 | 30 | — | 10 | |||||||||||||||
Net charge-offs | 65 | 296 | 230 | 708 | 193 | |||||||||||||||
Provision | 503 | 1,085 | 739 | 1,278 | 877 | |||||||||||||||
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Balance at end of year | $ | 3,473 | $ | 3,035 | $ | 2,246 | $ | 1,737 | $ | 1,167 | ||||||||||
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Ratios: | ||||||||||||||||||||
Net charge-offs to average loans | 0.02 | % | 0.10 | % | 0.08 | % | 0.26 | % | 0.07 | % | ||||||||||
Allowance for loan losses to non-performing loans | 498.28 | % | 50.20 | % | 42.44 | % | 389.46 | % | 47.46 | % | ||||||||||
Allowance for loan losses to total loans | 1.15 | % | 1.02 | % | 0.80 | % | 0.63 | % | 0.41 | % |
For additional information with respect to the portions of the allowance for loan losses attributable to the Company’s loan classifications see “—Allocation of Allowance for Loan Losses.” For additional information with respect to non-performing loans and delinquent loans, see “—Non-performing and Problem Assets—Non-performing Assets” and “—Non-performing and Problem Assets—Delinquent Loans.”
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Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category.
At June 30, | ||||||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses | Percent of Total Loans | Allowance for Loan Losses | Percent of Total Loans | Allowance for Loan Losses | Percent of Total Loans | Allowance for Loan Losses | Percent of Total Loans | Allowance for Loan Losses | Percent of Total Loans | |||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage | $ | 847 | 26.6 | % | $ | 773 | 31.5 | % | $ | 528 | 34.5 | % | $ | 449 | 44.5 | % | $ | 185 | 53.3 | % | ||||||||||||||||||||
Commercial real estate | 1,573 | 46.2 | 951 | 45.9 | 697 | 38.6 | 820 | 30.7 | 319 | 22.8 | ||||||||||||||||||||||||||||||
Construction | 122 | 4.3 | 7 | 0.6 | 2 | 0.4 | 2 | 0.4 | 285 | 1.7 | ||||||||||||||||||||||||||||||
Home equity loans and lines of credit | 270 | 9.1 | 393 | 11.2 | 440 | 13.8 | 175 | 15.0 | 18 | 14.3 | ||||||||||||||||||||||||||||||
Commercial business | 429 | 13.8 | 670 | 10.8 | 383 | 12.7 | 127 | 9.4 | 360 | 7.9 | ||||||||||||||||||||||||||||||
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Total allocated allowance | 3,241 | 100.0 | 2,794 | 100.0 | 2,050 | 100.0 | 1,573 | 100.0 | 1,167 | 100.0 | ||||||||||||||||||||||||||||||
Unallocated | 232 | — | 241 | — | 196 | — | 164 | — | — | — | ||||||||||||||||||||||||||||||
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Total | $ | 3,473 | 100.0 | % | $ | 3,035 | 100.0 | % | $ | 2,246 | 100.0 | % | $ | 1,737 | 100.0 | % | $ | 1,167 | 100.0 | % | ||||||||||||||||||||
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The Company’s determination of the level of risk in its loan portfolios drives the amount of the provision for loan losses and, as a result, the balance of the allowance for loan losses. This risk is attributable to several factors, as discussed in “Allowance for Loan Losses.” The Company determined there is lower risk in the residential mortgage portfolio; which consists primarily of conventionally underwritten mortgages that generally conform to Fannie Mae and Freddie Mac guidelines. The Company believes its commercial real estate, commercial business, and construction loans, and home equity loans and lines of credit have greater risk than residential mortgage loans. Commercial real estate loans comprise the largest component of total loans. Commercial real estate loans increased to 46.2% of the loan portfolio at June 30, 2013 from 45.9% and 22.8% of the total loan portfolio at June 30, 2012 and 2009, respectively. Commercial business loans increased to 13.8% of total loans from 10.8% of total loans at June 30, 2012 and increased from 7.9% of total loans at June 30, 2009. Construction loans increased to 4.3% of total loans at June 30, 2013 from 0.6% of total loans at June 30, 2012 and increased from 1.7% of total loans at June 30, 2009. The increases over time in the portfolios are a continuation of Management’s strategic plan to grow the commercial loan portfolios. The allowance for loan losses associated with commercial real estate loans increased to $1.6 million at June 30, 2013 from $951 thousand and $319 thousand at June 30, 2012 and 2009, respectively, as commercial real estate loans continued to grow as a percentage of total loans. The allowance for loan losses associated with construction loans increased to $122 thousand at June 30, 2013 from $7 thousand at June 30, 2012. Home equity loans and lines of credit decreased to 9.1% from 11.2% of total loans at June 30, 2013 and 2012 respectively and the allowance allocated to home equity loans and lines of credit also decreased. During the quarter ended March 31, 2013, the Bank changed its methodology for calculating the allowance for loan losses. In accordance with U.S. GAAP the change in methodology constitutes a change in accounting estimate and, accordingly, has been accounted for on a prospective basis. In an effort to more precisely calculate the allowance for loan losses, the Company began including its own historical loan losses along with estimated industry loss percentages based on loan risk
ratings. Due to the limited loss history of the Company, the inclusion of its historical losses did not have a material impact on the allowance for loan loss calculation. The primary impact of this change was on the allowance for loan losses at the loan portfolio class level.
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Management of Market Risk
General. The Company’s most significant form of market risk is interest rate risk because, as a financial institution, the majority of the Company’s assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of the Company’s operations is to manage interest rate risk and limit the exposure of the net interest income to changes in market interest rates. The Company’s Board of Directors has established an Asset/Liability Management Committee (“ALCO”), which is responsible for evaluating the interest rate risk inherent in the Company’s assets and liabilities, for determining the level of risk that is appropriate, given the Company’s business strategy, operating environment, capital, liquidity, and performance objectives, and for managing this risk consistent with the guidelines approved by the Board.
Historically, the Bank operated as a traditional thrift institution. Therefore, the significant portion of the Bank’s assets consisted of longer-term, fixed rate residential mortgage loans and mortgage-backed securities, which were funded primarily with checking and savings accounts and short-term borrowings. In recent years, in an effort to decrease the Bank’s exposure to interest rate risk, the Bank sold newly originated long term (primarily 30 year), residential mortgage loans and shifted the Bank’s focus to originating commercial real estate, construction, and commercial business loans, which generally have shorter maturities than residential mortgage loans and are primarily originated with an adjustable interest rate.
In addition to the above strategies with respect to the Bank’s lending activities, the Bank used the following strategies to reduce interest rate risk:
• | increasing personal and business checking accounts, which are less rate-sensitive than certificates of deposit and which provide a stable, low-cost source of funds; |
• | repaying short-term borrowings; and |
• | maintaining relatively high levels of capital. |
In addition, changes in interest rates can affect the fair values of financial instruments. For additional information, see the Fair Value note in the accompanying Notes to the Consolidated Financial Statements.
Net Portfolio Value
The table below sets forth, as of June 30, 2013, the Bank’s internal calculation of the estimated changes in Net Portfolio Value (“NPV”), the difference between the present value of an institution’s assets and liabilities, that would result from the designated instantaneous changes in the interest rate yield curve.
Change in Interest Rates (bp) (1) | Estimated NPV (2) | Estimated Increase (Decrease) in NPV | Percentage Change in NPV | NPV Ratio as a Percent of Present Value of Assets (3) (4) | Increase (Decrease) in NPV Ratio as a Percent of Present Value of Assets (bp) (3) (4) | |||||||||||||||
+300 | $ | 77,643 | $ | (4,351 | ) | (5.3 | )% | 21.46 | % | 0.20 | % | |||||||||
+200 | 79,133 | (2,861 | ) | (3.5 | ) | 21.42 | 0.17 | |||||||||||||
+100 | 81,130 | (864 | ) | (1.1 | ) | 21.47 | 0.21 | |||||||||||||
0 | 81,994 | — | — | 21.26 | — | |||||||||||||||
(100) | 79,667 | (2,327 | ) | (2.8 | ) | 20.40 | (0.86 | ) |
(1) | Assumes an instantaneous uniform change in interest rates at all maturities. |
(2) | NPV is the difference between the present value of an institution’s assets and liabilities. |
(3) | Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. |
(4) | NPV Ratio represents NPV divided by the present value of assets. |
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Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs, or loan repayments and deposit decay, respond to changes in market interest rates. In this regard, the net portfolio value tables presented assume that the composition of interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value tables provide an indication of the Bank’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. The Bank’s primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Atlanta, borrowings from the Federal Reserve Bank of Richmond, repurchase agreements, and maturities, principal repayments, the sale of available-for-sale securities, and the Bank’s capital. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Bank’s ALCO, under the direction of the Company’s Chief Financial Officer, is responsible for establishing and monitoring liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of the Bank’s customers, as well as, unanticipated contingencies. Management believes that the Bank has enough sources of liquidity to satisfy short- and long-term liquidity needs as of the current fiscal year end.
The Bank regularly monitors and adjusts the amounts of liquid assets based upon the assessment of:
(i) | expected loan demand; |
(ii) | expected deposit flows and borrowing maturities; |
(iii) | yields available on interest-earning deposits and securities; and |
(iv) | the objectives of the Bank’s asset/liability management program. |
Excess liquid assets are invested generally in interest-earning deposits and short-term securities and are also used to pay off short-term borrowings.
The most liquid assets are cash and cash equivalents. The level of these assets is dependent on the operating, financing, lending, and investing activities during any given period. At June 30, 2013, cash and cash equivalents totaled $16.2 million as compared to $31.5 million at June 30, 2012.
Cash flows are derived from operating activities, investing activities, and financing activities as reported in the Company’s Consolidated Statements of Cash Flows included in the Company’s Consolidated Financial Statements.
At June 30, 2013, the Bank had $74.5 million in loan commitments outstanding. At June 30, 2013 unfunded commitments under lines of credit, including letters of credit, were $40.5 million and commitments to grant loans were $34.0 million. Certificates of deposit due within one year of June 30, 2013 totaled $38.3 million. If these deposits do not remain with the Bank, the Bank may be required to seek other sources of funds, including loan sales, brokered deposits, repurchase agreements, Federal Home Loan Bank advances, and Federal Reserve Bank borrowings. However, the Bank continues to hold cash in excess of funding needs because of continued inflows of new deposits and prepayments on longer-term, residential mortgage loans, resulting from refinancings with other financial institutions, and repayments on the Bank’s securities investments. This has enabled the Bank to lower deposit pricing and allow higher-cost FHLB borrowings to run off. Depending on market conditions, the
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Bank may be required to pay higher rates on such deposits or other borrowings than it currently pays on certificates of deposit due on or before June 30, 2014. Management believes, however, based on historical experience and current market interest rates that the Bank will retain, upon maturity, a large portion of the certificates of deposit with maturities of one year or less as of June 30, 2013.
The Bank’s primary investing activities are loan originations and security purchases. During the fiscal years ended June 30, 2013 and 2012, the Bank’s originations, net of principal collections, were $7.0 million and $14.7 million of loans, respectively. During these years, the Bank also purchased $18.0 million and $10.1 million of securities, respectively. Security purchases were offset by principal collections of $14.6 million and $12.5 million, respectively.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank borrowings. The Bank experienced net increases in deposits of $13.7 million for the year ended June 30, 2013 and $12.5 million for the fiscal year ended June 30, 2012. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Bank and the Bank’s local competition, and by other factors.
Liquidity management is both a daily and long-term function of business management. If the Bank requires funds beyond the Bank’s ability to generate funds internally, borrowing agreements exist with the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Richmond, which provide an additional source of funds. The Bank also utilizes securities sold under agreements to repurchase as another borrowing source. Federal Home Loan Bank advances decreased by $11.4 million for the fiscal year ended June 30, 2013, compared to a decrease of $2.6 million for the fiscal year ended June 30, 2012. At June 30, 2013, the Bank had the ability to borrow up to an additional $46.6 million from the Federal Home Loan Bank of Atlanta and the ability to borrow from the Federal Reserve Bank based upon pledging of securities; the Bank has less than $1.0 million in securities pledged to the Federal Reserve Discount Window. Securities sold under agreements to repurchase decreased $7.9 million for the fiscal year ended June 30, 2013, compared to an increase of $868 thousand for the fiscal year ended June 30, 2012. At June 30, 2013, the Bank had the ability to borrow a total of approximately $87.8 million from the FHLBA, the Federal Reserve Bank, and in the securities sold under the agreement to repurchase market.
The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2013, The Bank exceeded all regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines. See “Supervision and Regulation,” “Federal Banking Regulation,” “Capital Requirements,” and the Regulatory Matters and Capital Requirements note in the accompanying Notes to the Consolidated Financial Statements.
The Company’s initial share repurchase program was completed as of May 3, 2012, having repurchased the 462,875 shares approved in that initial program. The Company’s second share repurchase program was completed on April 17, 2013, having repurchased 208,294 shares. The Company’s Board of Directors adopted a third share repurchase program, previously disclosed in the Company’s Form 8-K filed on April 29, 2013. The Company has repurchased approximately 159,000 shares, of the approximately 210,000 shares approved in the third program, as of July 31, 2013.
The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The repurchase program may be suspended, terminated, or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.
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The net proceeds from the stock offering have significantly increased the Company’s liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. The Company’s financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, the Company’s return on equity will continue to be adversely affected.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, the Bank routinely is a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent the Company’s potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Bank. In addition, the Bank enters into commitments to sell mortgage loans. For additional information, see the Off Balance Sheet Activities note in the accompanying Notes to the Consolidated Financial Statements.
Contractual Obligations. In the ordinary course of the Company’s operations, the Bank enters into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments. The following table summarizes the Company’s significant fixed and determinable contractual obligations and other funding needs by payment date at the date listed. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
Contractual Obligations at June 30, 2013 | One year or less | More than one year to three years | More than three years to five years | More than five years | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long-term debt | $ | — | $ | 3,873 | $ | 11,750 | $ | — | $ | 15,623 | ||||||||||
Operating leases | 395 | 838 | 858 | 899 | 2,990 | |||||||||||||||
Certificates of deposit | 38,277 | 20,883 | 12,699 | — | 71,859 | |||||||||||||||
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| |||||||||||
Total | $ | 38,672 | $ | 25,594 | $ | 25,307 | $ | 899 | $ | 90,472 | ||||||||||
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| |||||||||||
Commitments to extend credit | $ | 74,478 | $ | — | $ | — | $ | — | $ | 74,478 | ||||||||||
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|
|
Impact of Inflation and Changing Prices
The Company’s consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, the Company’s assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Information required by this item is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation,” above.
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ITEM 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
OBA FINANCIAL SERVICES, INC.
54
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
OBA Financial Services, Inc.
Germantown, Maryland
We have audited the accompanying consolidated statement of condition of OBA Financial Services, Inc. and subsidiary (the “Company”) as of June 30, 2013 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OBA Financial Services, Inc. and subsidiary at June 30, 2013, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
September 27, 2013
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Report of Independent Registered Public Accounting Firm
To the Board of Directors
OBA Financial Services, Inc.
Germantown, Maryland
We have audited the accompanying consolidated statement of condition of OBA Financial Services, Inc. and subsidiary (the “Company”) as of June 30, 2012, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OBA Financial Services, Inc. and subsidiary as of June 30, 2012, and the results of their operations and their cash flows the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ ParenteBeard LLC
Harrisburg, Pennsylvania
September 28, 2012
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OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Condition
(In thousands, except share data) | June 30, 2013 | June 30, 2012 | ||||||
Assets: | ||||||||
Cash and due from banks | $ | 16,006 | $ | 14,916 | ||||
Federal funds sold | 167 | 16,609 | ||||||
|
|
|
| |||||
Cash and cash equivalents | 16,173 | 31,525 | ||||||
Interest bearing deposits with other banks | 6,692 | 9,490 | ||||||
Securities available for sale | 37,174 | 34,454 | ||||||
Securities held to maturity (fair value of $1,520 and $2,549) | 1,445 | 2,396 | ||||||
Federal Home Loan Bank stock, at cost | 1,160 | 2,169 | ||||||
Loans held for sale | 414 | — | ||||||
Loans | 303,276 | 296,241 | ||||||
Less: allowance for loan losses | 3,473 | 3,035 | ||||||
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| |||||
Net loans | 299,803 | 293,206 | ||||||
Premises and equipment, net | 5,624 | 6,186 | ||||||
Bank owned life insurance | 9,182 | 8,898 | ||||||
Other assets | 3,944 | 3,762 | ||||||
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| |||||
Total assets | $ | 381,611 | $ | 392,086 | ||||
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| |||||
Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 42,422 | $ | 40,003 | ||||
Interest-bearing | 240,841 | 229,569 | ||||||
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|
| |||||
Total deposits | 283,263 | 269,572 | ||||||
Securities sold under agreements to repurchase | 8,544 | 16,434 | ||||||
Federal Home Loan Bank advances | 15,623 | 26,997 | ||||||
Advance payments from borrowers for taxes and insurance | 1,324 | 1,707 | ||||||
Other liabilities | 1,553 | 1,661 | ||||||
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| |||||
Total liabilities | 310,307 | 316,371 | ||||||
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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 4,048,436 and 4,387,050 shares at June 30, 2013 and June 30, 2012, respectively | 40 | 43 | ||||||
Additional paid-in capital | 33,726 | 38,695 | ||||||
Unearned ESOP shares | (3,055 | ) | (3,240 | ) | ||||
Retained earnings | 40,531 | 39,409 | ||||||
Accumulated other comprehensive income | 62 | 808 | ||||||
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| |||||
Total stockholders’ equity | 71,304 | 75,715 | ||||||
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| |||||
Total liabilities and stockholders’ equity | $ | 381,611 | $ | 392,086 | ||||
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|
|
See notes to consolidated financial statements.
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Table of Contents
OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended June 30, | ||||||||
(In thousands, except per share data) | 2013 | 2012 | ||||||
Interest and Dividend Income: | ||||||||
Loans receivable, including fees | $ | 14,976 | $ | 14,697 | ||||
Investment securities: | ||||||||
Interest—taxable | 1,015 | 1,086 | ||||||
Dividends | 38 | 31 | ||||||
Federal funds sold | 37 | 94 | ||||||
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| |||||
Total interest and dividend income | 16,066 | 15,908 | ||||||
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| |||||
Interest Expense: | ||||||||
Deposits | 1,266 | 2,262 | ||||||
Federal Home Loan Bank advances | 882 | 1,126 | ||||||
Securities sold under agreements to repurchase | 134 | 211 | ||||||
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| |||||
Total interest expense | 2,282 | 3,599 | ||||||
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| |||||
Net interest income | 13,784 | 12,309 | ||||||
Less provision for loan losses | 503 | 1,085 | ||||||
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| |||||
Net interest income after provision for loan losses | 13,281 | 11,224 | ||||||
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| |||||
Non-Interest Income: | ||||||||
Customer service fees | 349 | 372 | ||||||
Loan servicing fees | (23 | ) | 28 | |||||
Bank owned life insurance income | 283 | 297 | ||||||
Net gains (losses) | 58 | (85 | ) | |||||
Other non-interest income | 129 | 122 | ||||||
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| |||||
Total non-interest income | 796 | 734 | ||||||
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| |||||
Non-Interest Expense: | ||||||||
Salaries and employee benefits | 7,055 | 6,726 | ||||||
Occupancy and equipment | 1,540 | 1,591 | ||||||
Data processing | 819 | 780 | ||||||
Directors’ fees | 371 | 356 | ||||||
FDIC assessments | 268 | 284 | ||||||
Other non-interest expense | 2,198 | 1,768 | ||||||
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| |||||
Total non-interest expense | 12,251 | 11,505 | ||||||
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| |||||
Income before income taxes | 1,826 | 453 | ||||||
Income tax expense | 704 | 185 | ||||||
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Net income | $ | 1,122 | $ | 268 | ||||
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| |||||
Basic earnings per share | $ | 0.28 | $ | 0.07 | ||||
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| |||||
Diluted earnings per share | $ | 0.28 | $ | 0.07 | ||||
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| |||||
Basic weighted average shares outstanding | 3,958,451 | 3,952,585 | ||||||
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| |||||
Diluted weighted average shares outstanding | 3,996,588 | 3,971,102 | ||||||
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|
|
See notes to consolidated financial statements.
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OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Net income | $ | 1,122 | $ | 268 | ||||
Other comprehensive income (loss): | ||||||||
Net unrealized gains (losses) on available for sale securities, net of tax expense (benefit) of ($476) and $81 | (746 | ) | 129 | |||||
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Total comprehensive income | $ | 376 | $ | 397 | ||||
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OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity
Years Ended June 30, 2013 and 2012
(In thousands, except share data) | Common Stock | Additional Paid-in Capital | Unearned ESOP Shares | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||
Balances, June 30, 2011 | $ | 46 | $ | 44,419 | $ | (3,425 | ) | $ | 39,141 | $ | 679 | $ | 80,860 | |||||||||||
Net income | 268 | 268 | ||||||||||||||||||||||
Other comprehensive income, net of tax | 129 | 129 | ||||||||||||||||||||||
Purchase and retirement of 462,453 shares of Company stock | (5 | ) | (6,665 | ) | (6,670 | ) | ||||||||||||||||||
Share Based Compensation | 860 | 860 | ||||||||||||||||||||||
Restricted share grant | 2 | (2 | ) | — | ||||||||||||||||||||
ESOP shares committed to be released (18,515 shares) | 83 | 185 | 268 | |||||||||||||||||||||
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Balances, June 30, 2012 | $ | 43 | $ | 38,695 | $ | (3,240 | ) | $ | 39,409 | $ | 808 | $ | 75,715 | |||||||||||
Net income | 1,122 | 1,122 | ||||||||||||||||||||||
Other comprehensive loss, net of tax | (746 | ) | (746 | ) | ||||||||||||||||||||
Purchase and retirement of 341,114 shares of Company stock | (3 | ) | (6,061 | ) | (6,064 | ) | ||||||||||||||||||
Share Based Compensation | 937 | 937 | ||||||||||||||||||||||
Tax benefit of 49,485 restricted shares vesting | 21 | 21 | ||||||||||||||||||||||
ESOP shares committed to be released (18,515 shares) | 134 | 185 | 319 | |||||||||||||||||||||
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Balances, June 30, 2013 | $ | 40 | $ | 33,726 | $ | (3,055 | ) | $ | 40,531 | $ | 62 | $ | 71,304 | |||||||||||
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See notes to consolidated financial statements.
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OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended June 30, | ||||||||
(in thousands) | 2013 | 2012 | ||||||
Operating Activities: | ||||||||
Net income | $ | 1,122 | $ | 268 | ||||
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| |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 503 | 1,085 | ||||||
Depreciation and amortization of premises and equipment | 654 | 719 | ||||||
Net amortization of securities premiums and discounts | 382 | 450 | ||||||
Proceeds from sales of loans held for sale | 4,474 | 307 | ||||||
Originated loans held for sale | (4,823 | ) | (301 | ) | ||||
Net gains on sales of loans | (65 | ) | (6 | ) | ||||
Net loss on disposal of fixed assets | — | 26 | ||||||
Amortization of net deferred loan costs (fees) | (82 | ) | 9 | |||||
Loss on other real estate owned | 7 | 65 | ||||||
Bank owned life insurance income | (283 | ) | (297 | ) | ||||
ESOP expense | 319 | 268 | ||||||
Share-based compensation expense | 937 | 860 | ||||||
Amortization of mortgage servicing rights | 50 | 10 | ||||||
Amortization of brokered deposit premiums | 2 | 13 | ||||||
Deferred income tax benefit | (357 | ) | (395 | ) | ||||
Tax benefit from vesting of restricted shares | (21 | ) | — | |||||
Changes in other assets and liabilities, net | 504 | 1,151 | ||||||
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| |||||
Total adjustments | 2,201 | 3,964 | ||||||
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| |||||
Net cash provided by operating activities | 3,323 | 4,232 | ||||||
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| |||||
Investing Activities: | ||||||||
Principal collections and maturities of securities available for sale | 13,659 | 11,281 | ||||||
Principal collections and maturities of securities held to maturity | 947 | 1,220 | ||||||
Purchases of securities available for sale | (17,979 | ) | (10,140 | ) | ||||
Redemption of Federal Home Loan Bank stock, net | 1,009 | 818 | ||||||
Decrease (increase) in interest bearing deposits with other banks, net | 2,798 | (2,432 | ) | |||||
Loan originations less principal collections, net | (7,018 | ) | (14,680 | ) | ||||
Purchases of premises and equipment | (92 | ) | (646 | ) | ||||
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| |||||
Net cash used in investing activities | (6,676 | ) | (14,579 | ) | ||||
|
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| |||||
Financing Activities: | ||||||||
Increase in deposits | 13,691 | 12,541 | ||||||
Increase (decrease) in securities sold under agreements to repurchase | (7,890 | ) | 868 | |||||
Proceeds from FHLB advances | 35,400 | 80,000 | ||||||
Repayment of FHLB advances | (46,774 | ) | (82,621 | ) | ||||
Net decrease in advance payments from borrowers for taxes and insurance | (383 | ) | (214 | ) | ||||
Tax benefit from vesting of restricted shares | 21 | — | ||||||
Purchase and retirement of Company stock | (6,064 | ) | (6,670 | ) | ||||
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| |||||
Net cash (used in) provided by financing activities | (11,999 | ) | 3,904 | |||||
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| |||||
Decrease in cash and cash equivalents | (15,352 | ) | (6,443 | ) | ||||
Cash and cash equivalents at beginning of period | 31,525 | 37,968 | ||||||
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| |||||
Cash and cash equivalents at end of period | $ | 16,173 | $ | 31,525 | ||||
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|
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| |||||
Supplemental Disclosures: | ||||||||
Interest paid | $ | 2,325 | $ | 3,721 | ||||
Income taxes paid (refunded), net | 819 | (129 | ) |
See notes to consolidated financial statements.
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OBA Financial Services, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
Note 1—Organization and Nature of Operations
In December 2007, OBA Bank (“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 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 as separate legal entities and a 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.
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. The Bank’s primary deposits are checking, money market, and time certificate accounts and its primary lending products are commercial real estate, commercial business, and construction loans, as well as, residential mortgage loans.
Note 2—Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of OBA Financial Services, Inc. and OBA Bank (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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, other than temporary impairment of investment securities, and the evaluation of deferred tax assets for recoverability.
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Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within the Washington/Baltimore metropolitan region. The Securities note contained within the Notes to the Consolidated Financial Statements discusses the types of securities in which the Company has invested. The Credit Quality of Loans and Allowance for Loan Losses note contained within the Notes to the Consolidated Financial Statements discusses the types of lending engaged in by the Company. The Company does not have any significant concentrations in any one industry or customer.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, cash and cash equivalents include cash on hand, balances due from banks and federal funds sold, all of which mature within 90 days. The Company may invest in certain debt securities with original maturities of 90 days or less which are generally used to secure securities sold under agreements to repurchase. Such securities are classified as investments in the accompanying Statements of Condition.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.
When the fair value of a held to maturity or available for sale security is less than its amortized cost basis, an assessment is made at the statement of financial condition date as to whether other-than-temporary impairment (“OTTI”) is present.
The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are the length of time and the extent to which the fair value has been less than the amortized cost basis, the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, the failure of the issuer of the security to make scheduled interest or principal payments, changes to the rating of the security by a rating agency, and the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.
For debt securities, OTTI is considered to have occurred if the Company intends to sell the security, it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. In determining the present value of expected cash flows, the Company discounts the expected cash flows at the effective interest rate implicit in the security at the date of acquisition or, for debt securities that are beneficial interests in securitized financial assets, at the current rate used to accrete the beneficial interest. In estimating cash flows expected to be collected, the Company uses available information with respect to security prepayment speeds, expected default rates and severity, whether subordinated interests, if any, are capable of absorbing estimated losses and the value of any underlying collateral.
In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
For debt securities, credit related OTTI is recognized in income while non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive income / (loss) (“OCI”). Credit related OTTI is measured as the difference between the present value of an impaired security’s expected cash flows and its
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amortized cost basis. Non-credit related OTTI is measured as the difference between the fair value of the security and its amortized cost less any credit related losses recognized. For securities classified as held to maturity, the amount of OTTI recognized in OCI is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods. For equity securities, the entire amount of OTTI is recognized in income.
Interest and dividend income is recognized when earned. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank to hold stock of its district FHLB according to a defined formula. FHLB stock represents the required investment in the common stock of the FHLB and is carried at cost. FHLB stock ownership is restricted and the stock can be sold only to the FHLB or to another member institution at its par value per share.
The Company evaluates the FHLB stock for impairment. The Company’s determination of whether this investment is impaired is based on an assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value. The determination of whether a decline in value affects the ultimate recoverability of its cost is influenced by criteria such as, but not limited to, the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.
For additional information, see the Federal Home Loan Bank stock note in the accompanying Notes to the Consolidated Financial Statements.
Loans Held for Sale
Loans held for sale are stated at the lower of aggregate cost or fair value. Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans. There were $414 thousand of loans held for sale at June 30, 2013 and no loans held for sale at June 30, 2012.
Loans Receivable
The Company originates commercial real estate, commercial business, and construction loans, residential mortgage loans, and consumer loans. All loans are originated in the Company’s primary business area, the Washington/Baltimore metropolitan region. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate market and general economic conditions in this area.
Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity orpay-off generally are reported at their outstanding unpaid principal balances net of the allowance for loan losses, and net deferred costs on originated loans. Interest income is accrued on the unpaid principal balance as earned. Direct loan origination costs, net of certain origination fees, are deferred and recognized as an adjustment of the related loan yield using the interest method over the contractual term of the loan, adjusted for actual prepayments. Net unamortized costs on loans paid in full are recognized as a component of interest income.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due. Consumer loans are typically charged-off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
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All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until the loan returns to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged to income based on estimated losses. Loan losses are charged against the allowance when the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis and is based upon periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general, and unallocated components. Specific allowances are established for impaired loans. 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 based on the expected cash flows, 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 a specific allowance.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. Generally, the Company does not separately identify individual consumer and residential loans for impairment disclosures unless the loan has been subject to a troubled debt restructure.
General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The portfolio is grouped into similar risk characteristics, primarily loan type. The Company applies an estimated loss rate to each loan group. The loss rates applied are based upon its loss experience adjusted, as appropriate, for environmental factors.
The unallocated component represents the margin of imprecision inherent in the underlying assumptions used in estimating specific and general allowances.
The Company maintains the allowance for loan losses at a level considered adequate to provide for losses inherent in the loan portfolio. While the Company utilizes available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions, particularly in the Washington/Baltimore region including surrounding counties in the states of Maryland and Virginia. In addition, regulatory agencies, as an integral part of their examination process, periodically review the
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Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.
Actual loan losses may be significantly more than the allowance for loan losses the Company has established, which could have a material negative effect on its consolidated financial statements.
Servicing
Servicing assets are recognized when rights are acquired through sale of financial assets. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded when they are funded.
Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosures are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by the Company and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net gains/losses from foreclosed assets.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements, and equipment are carried at cost, less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. Estimated useful lives are 20 to 40 years for buildings, 5 to 10 years for leasehold improvements and 5 years for equipment.
Common Stock Repurchase Program
The Company adopted a common stock repurchase program in which shares repurchased reduce the amount of shares issued and outstanding. The repurchased shares may be reissued in connection with share-based compensations plans and for general corporate purposes. Under this plan, the Company approved the repurchase of a specific amount of shares without any specific expiration date. Total shares subject to repurchase under the current share repurchase program is 210,377 shares.
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Share-based Compensation
The Company accounts for its Share-based compensation awards in accordance with FASB ASC Topic 718, which requires public companies to recognize compensation expense related to Share-based compensation awards in their statements of income. Compensation expense is equal to the fair value of the Share-based compensation awards on the date of the grant and is recognized over the vesting period of such awards. More information is provided in the “Share Based Compensation” note in the notes of the consolidated financial statements.
Bank Owned Life Insurance
The Company invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner and beneficiary of the life insurance policies, and as such, the investment is carried at the cash surrender value of the underlying policies. Income from the increase in cash surrender value of the policies is included in non-interest income in the consolidated statements of income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended June 30, 2013 and 2012, advertising expense was $129 thousand and $175 thousand, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. The liability method gives current recognition to changes in tax rates and laws.
OBA Financial Services, Inc. has entered into a tax sharing agreement with OBA Bank. The agreement provides that OBA Financial Services, Inc. will file a consolidated federal tax return and that the tax liability shall be apportioned among the entities as would be computed if each entity had filed a separate return. According to Maryland tax law, OBA Financial Services, Inc. and OBA Bank file separate Maryland state tax returns.
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 consolidated statement of condition, such items, along with net income, are components of comprehensive income.
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The components of accumulated other comprehensive income and related tax effects are as follows:
June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Net unrealized gains on available for sale securities | $ | 102 | $ | 1,324 | ||||
Tax effect | 40 | 516 | ||||||
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Total | $ | 62 | $ | 808 | ||||
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Subsequent Events
In accordance with FASB ASC Topic 855, the Company evaluated the events and transactions that occurred after the statement of position date of June 30, 2013 through the date these consolidated statements were issued.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that have had or are expected to have a material impact to the Company’s consolidated financial statements that have not been previously disclosed.
Reclassifications
Certain amounts in the 2012 financial statements have been reclassified to conform with the 2013 presentation. Such reclassifications had no impact on net income.
Note 3—Restrictions on Cash and Amounts Due From Banks
The Company is required to maintain average reserve balances on hand or with the Federal Reserve Bank. At June 30, 2013 and 2012, these reserve balances amounted to $5.6 million and $5.5 million, respectively.
Note 4—Federal Home Loan Bank Stock
The FHLB, during the years ended 2008, 2009, and 2010, experienced higher levels of OTTI in its investment portfolio, primarily on private label mortgage-backed securities, which had adversely impacted its operating results and capital and raised concerns about whether its capital levels could be reduced below regulatory requirements.
As of June 30, 2013, the FHLB was in compliance with all of its regulatory capital requirements. The Company believes the FHLB’s operating results and capital levels will continue to improve as conditions in the housing industry and economy improve. In addition, the Company believes that the FHLB has met all payment commitments required by law or regulation and that there has been no significant legislative and regulatory changes impacting its customer base.
The Company has the intent and ability to hold the FHLB stock for the amount of time necessary to recover its investment and, based on its evaluation, there was no impairment recorded on FHLB stock in 2013 or 2012.
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Note 5—Securities
The amortized cost and fair value of securities, with gross unrealized gains and losses follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2013 | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities (1) | $ | 36,981 | $ | 616 | $ | (513 | ) | $ | 37,084 | |||||||
Trust preferred securities | 41 | — | (1 | ) | 40 | |||||||||||
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| |||||||||
Total debt securities available for sale | 37,022 | 616 | (514 | ) | 37,124 | |||||||||||
Equity Securities | 50 | — | — | 50 | ||||||||||||
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| |||||||||
Total securities available for sale | 37,072 | 616 | (514 | ) | 37,174 | |||||||||||
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Securities held to maturity: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities (1) | 1,445 | 75 | — | 1,520 | ||||||||||||
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Total debt securities held to maturity | 1,445 | 75 | — | 1,520 | ||||||||||||
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| |||||||||
Total investment securities | $ | 38,517 | $ | 691 | $ | (514 | ) | $ | 38,694 | |||||||
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| |||||||||
June 30, 2012 | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities (1) | $ | 33,010 | $ | 1,340 | $ | — | $ | 34,350 | ||||||||
Trust preferred securities | 70 | — | (16 | ) | 54 | |||||||||||
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| |||||||||
Total debt securities available for sale | 33,080 | 1,340 | (16 | ) | 34,404 | |||||||||||
Equity Securities | 50 | — | — | 50 | ||||||||||||
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| |||||||||
Total securities available for sale | 33,130 | 1,340 | (16 | ) | 34,454 | |||||||||||
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| |||||||||
Securities held to maturity: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities (1) | 2,396 | 153 | — | 2,549 | ||||||||||||
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| |||||||||
Total debt securities held to maturity | 2,396 | 153 | — | 2,549 | ||||||||||||
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| |||||||||
Total investment securities | $ | 35,526 | $ | 1,493 | $ | (16 | ) | $ | 37,003 | |||||||
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(1) | Residential mortgage-backed securities are guaranteed by Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or Government National Mortgage Association. |
The amortized cost and fair value of debt securities by contractual payment dates at June 30, 2013 follows:
Available for sale | Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Due after ten years | $ | 41 | $ | 40 | $ | — | $ | — | ||||||||
Residential mortgage-backed securities | 36,981 | 37,084 | 1,445 | 1,520 | ||||||||||||
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Total | $ | 37,022 | $ | 37,124 | $ | 1,445 | $ | 1,520 | ||||||||
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Residential mortgage-backed securities have been aggregated as they have no single maturity date.
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At June 30, 2013 and 2012, the carrying amount of securities pledged to secure repurchase agreements was $12.5 million and $20.8 million, respectively.
Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows for the dates indicated:
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) | ||||||||||||||||||||||||
June 30, 2013 | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 513 | $ | 18,870 | $ | — | $ | — | $ | 513 | $ | 18,870 | ||||||||||||
Trust preferred security | 1 | 40 | — | — | 1 | 40 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 514 | $ | 18,910 | $ | — | $ | — | $ | 514 | $ | 18,910 | ||||||||||||
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June 30, 2012 | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Trust preferred security | — | — | 16 | 54 | 16 | 54 | ||||||||||||||||||
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Total | $ | — | $ | — | $ | 16 | $ | 54 | $ | 16 | $ | 54 | ||||||||||||
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At June 30, 2013, 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 collateral deterioration due to failures and credit concerns across the financial services sector, the widening of credit spreads for asset-backed securities, and general illiquidity and, as a result, inactivity in the market for these securities. The unrealized loss in the table above was not recognized in income as the Company believes the present value of expected cash flows is sufficient to recover the entire amortized cost basis of the trust preferred security. The decline in the fair value of the Company’s residential mortgage-backed securities and resultant unrealized loss at June 30, 2013 is the result of an increase in market rates of interest. The unrealized loss in the table above was not recognized in income as the Company believes the present value of expected cash flows is sufficient to recover the entire amortized cost basis of the residential mortgage-backed securities.
Note 6—Credit Quality of Loans and Allowance for Loan Losses
A summary of the balances of loans receivable follows:
June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Commercial business | $ | 42,321 | $ | 32,183 | ||||
Commercial real estate | 140,104 | 136,036 | ||||||
Construction | 13,044 | 1,850 | ||||||
Residential mortgages | 80,529 | 93,266 | ||||||
Home equity loans and lines of credit | 27,336 | 32,765 | ||||||
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Loans | 303,334 | 296,100 | ||||||
Net deferred commercial loan fees | (320 | ) | (204 | ) | ||||
Net deferred home equity costs | 262 | 345 | ||||||
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Loans net of deferred (fees) costs | 303,276 | 296,241 | ||||||
Allowance for loan losses | (3,473 | ) | (3,035 | ) | ||||
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Total loans, net | $ | 299,803 | $ | 293,206 | ||||
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Various Company policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets, or portions of assets, classified as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as Special Mention.
The Company 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 Company’s determination as to the classification of assets is subject to review by the Company’s principal federal regulator. The Company regularly reviews the loan portfolio to determine whether any assets require classification in accordance with applicable regulations.
Management evaluates the allowance for loan losses based upon the combined total of the specific, general, and unallocated components as discussed below. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Commercial real estate loans generally have greater credit risks compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Commercial business loans generally have greater credit risks compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on commercial business loans typically depends 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 are underwritten 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 ascertain property values. The Company may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrower’s financial 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 specific 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
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part of their examination process, the OCC will periodically review the allowance for loan losses. The OCC may require the Company to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.
The following table presents the classes of the loan portfolio summarized by loan rating within the Company’s internal risk rating system as of the date listed:
As of June 30, 2013 | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial business | $ | 38,149 | $ | 3,302 | $ | 870 | $ | — | $ | 42,321 | ||||||||||
Commercial real estate | 133,711 | 1,578 | 4,815 | — | 140,104 | |||||||||||||||
Construction | 13,044 | — | — | — | 13,044 | |||||||||||||||
Residential mortgage | 78,393 | — | 2,136 | — | 80,529 | |||||||||||||||
Home equity loans and lines of credit | 26,833 | 75 | 428 | — | 27,336 | |||||||||||||||
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Total | $ | 290,130 | $ | 4,955 | $ | 8,249 | $ | — | $ | 303,334 | ||||||||||
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As of June 30, 2012 | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial business | $ | 28,785 | $ | — | $ | 3,398 | $ | — | $ | 32,183 | ||||||||||
Commercial real estate | 129,409 | 184 | 6,443 | — | 136,036 | |||||||||||||||
Construction | 1,850 | — | — | — | 1,850 | |||||||||||||||
Residential mortgage | 91,320 | — | 1,946 | — | 93,266 | |||||||||||||||
Home equity loans and lines of credit | 32,657 | 75 | 33 | — | 32,765 | |||||||||||||||
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Total | $ | 284,021 | $ | 259 | $ | 11,820 | $ | — | $ | 296,100 | ||||||||||
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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 table presents the classes of the loan portfolio summarized by the past due and non-accrual status as of the date listed:
As of June 30, 2013 | 31-60 Days Past Due | 61-90 Days Past Due | Over 90 Days Past Due | Total Past Due | Current | Total Loans Receivable | Total Non-Accrual Loans | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Commercial business | $ | — | $ | — | $ | — | $ | — | $ | 42,321 | $ | 42,321 | $ | — | ||||||||||||||
Commercial real estate | 82 | — | — | 82 | 140,022 | 140,104 | — | |||||||||||||||||||||
Construction | — | — | — | — | 13,044 | 13,044 | — | |||||||||||||||||||||
Residential mortgage | — | — | 622 | 622 | 79,907 | 80,529 | 622 | |||||||||||||||||||||
Home equity loans and lines of credit | 75 | — | — | 75 | 27,261 | 27,336 | 75 | |||||||||||||||||||||
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| |||||||||||||||
Total | $ | 157 | $ | — | $ | 622 | $ | 779 | $ | 302,555 | $ | 303,334 | $ | 697 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As of June 30, 2012 | 31-60 Days Past Due | 61-90 Days Past Due | Over 90 Days Past Due | Total Past Due | Current | Total Loans Receivable | Total Non-Accrual Loans | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Commercial business | $ | — | $ | — | $ | — | $ | — | $ | 32,183 | $ | 32,183 | $ | — | ||||||||||||||
Commercial real estate | 1,520 | — | 3,560 | 5,080 | 130,956 | 136,036 | 5,080 | |||||||||||||||||||||
Construction | — | — | — | — | 1,850 | 1,850 | — | |||||||||||||||||||||
Residential mortgage | — | — | 894 | 894 | 92,372 | 93,266 | 891 | |||||||||||||||||||||
Home equity loans and lines of credit | 139 | — | — | 139 | 32,626 | 32,765 | 75 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 1,659 | $ | — | $ | 4,454 | $ | 6,113 | $ | 289,987 | $ | 296,100 | $ | 6,046 | ||||||||||||||
|
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Table of Contents
The Company had no loans greater than 90 days past due on which interest was still accruing as of June 30, 2013 and 2012. Interest recognized using the cash basis on nonaccrual loans during the years ended June 30, 2013 and 2012 was $2 thousand and $338 thousand, respectively. Interest of $33 thousand and $108 thousand was not recognized as interest income due to non-accrual status of loans during the years ended June 30, 2013 and 2012, respectively, exclusive of loans with interest recovered from prior periods.
During the quarter ended March 31, 2013, the Bank changed its methodology for calculating the allowance for loan losses. In accordance with U.S. GAAP the change in methodology constitutes a change in accounting estimate and accordingly, has been accounted for on a prospective basis. In an effort to more precisely calculate the allowance for loan losses, the Company began including its own historical loan losses along with estimated industry loss percentages based on loan risk ratings. Due to the limited loss history of the Company, the inclusion of its historical losses did not have a material impact on the allowance for loan loss calculation. The primary impact of this change was on the allowance for loan losses at the loan portfolio class level.
A summary analysis of the allowance for loan losses follows:
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Balance at beginning of year | $ | 3,035 | $ | 2,246 | ||||
Provision for loan losses | 503 | 1,085 | ||||||
Charged-offs | (69 | ) | (311 | ) | ||||
Recoveries | 4 | 15 | ||||||
|
|
|
| |||||
Balance at end of year | $ | 3,473 | $ | 3,035 | ||||
|
|
|
|
The following tables set forth the activity in and allocation of the allowance for loan losses by loan portfolio class as of and for the periods listed.
For the year ended June 30, 2013 | Commercial business | Commercial real estate | Construction | Residential mortgage | Home equity loans and lines of credit | Unallocated | Total loans | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 670 | $ | 951 | $ | 7 | $ | 773 | $ | 393 | $ | 241 | $ | 3,035 | ||||||||||||||
Charge-offs | — | (6 | ) | — | (63 | ) | — | — | (69 | ) | ||||||||||||||||||
Recoveries | — | 4 | — | — | — | — | 4 | |||||||||||||||||||||
Provisions | (241 | ) | 624 | 115 | 137 | (123 | ) | (9 | ) | 503 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Ending balance | $ | 429 | $ | 1,573 | $ | 122 | $ | 847 | $ | 270 | $ | 232 | $ | 3,473 | ||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
For the year ended June 30, 2012 | Commercial business | Commercial real estate | Construction | Residential mortgage | Home equity loans and lines of credit | Unallocated | Total loans | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 383 | $ | 706 | $ | 2 | $ | 528 | $ | 440 | $ | 187 | $ | 2,246 | ||||||||||||||
Charge-offs | — | (218 | ) | — | (3 | ) | (90 | ) | — | (311 | ) | |||||||||||||||||
Recoveries | — | — | — | 15 | — | — | 15 | |||||||||||||||||||||
Provisions | 287 | 463 | 5 | 233 | 43 | 54 | 1,085 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Ending balance | $ | 670 | $ | 951 | $ | 7 | $ | 773 | $ | 393 | $ | 241 | $ | 3,035 | ||||||||||||||
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Table of Contents
As of June 30, 2013 | Commercial business | Commercial real estate | Construction | Residential mortgage | Home equity loans and lines of credit | Unallocated | Total loans | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||
Ending allowance balance related to loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | 148 | $ | — | $ | — | $ | 148 | ||||||||||||||
Collectively evaluated for impairment | 429 | 1,573 | 122 | 699 | 270 | 232 | 3,325 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total ending allowance balance | $ | 429 | $ | 1,573 | $ | 122 | $ | 847 | $ | 270 | $ | 232 | $ | 3,473 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Ending loan balance | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 121 | $ | 1,329 | $ | — | $ | 1,515 | $ | 428 | $ | 3,393 | ||||||||||||||||
Collectively evaluated for impairment | 42,200 | 138,775 | 13,044 | 79,014 | 26,908 | 299,941 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total ending loan balance | $ | 42,321 | $ | 140,104 | $ | 13,044 | $ | 80,529 | $ | 27,336 | $ | 303,334 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
As of June 30, 2012 | Commercial business | Commercial real estate | Construction | Residential mortgage | Home equity loans and lines of credit | Unallocated | Total loans | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||
Ending allowance balance related to loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | — | $ | — | $ | 150 | $ | — | $ | — | $ | 150 | ||||||||||||||
Collectively evaluated for impairment | 670 | 951 | 7 | 623 | 393 | 241 | 2,885 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total ending allowance balance | $ | 670 | $ | 951 | $ | 7 | $ | 773 | $ | 393 | $ | 241 | $ | 3,035 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Ending loan balance | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 9 | $ | 6,442 | $ | — | $ | 1,434 | $ | 33 | $ | 7,918 | ||||||||||||||||
Collectively evaluated for impairment | 32,174 | 129,594 | 1,850 | 91,832 | 32,732 | 288,182 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total ending loan balance | $ | 32,183 | $ | 136,036 | $ | 1,850 | $ | 93,266 | $ | 32,765 | $ | 296,100 | ||||||||||||||||
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Table of Contents
The following table summarizes information in regards to impaired loans by loan portfolio class for the period listed:
As of the end of the period | For the year ended | |||||||||||||||||||
As of June 30, 2013 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
(In thousands) | ||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | 121 | $ | 121 | $ | — | $ | 65 | $ | — | ||||||||||
Commercial real estate | 1,329 | 1,418 | — | 3,886 | — | |||||||||||||||
Residential mortgage | 551 | 551 | — | 542 | 33 | |||||||||||||||
Home equity loans and lines of credit | 428 | 428 | — | 230 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total with no allowance recorded | $ | 2,429 | $ | 2,518 | $ | — | $ | 4,723 | $ | 33 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
With an Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial real estate | — | — | — | — | 72 | |||||||||||||||
Residential mortgage | 964 | 964 | 148 | 895 | 13 | |||||||||||||||
Home equity loans and lines of credit | — | — | — | — | �� | 2 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total with allowance recorded | $ | 964 | $ | 964 | $ | 148 | $ | 895 | $ | 87 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total: | ||||||||||||||||||||
Commercial business | $ | 121 | $ | 121 | $ | — | $ | 65 | $ | — | ||||||||||
Commercial real estate | 1,329 | 1,418 | — | 3,886 | 72 | |||||||||||||||
Residential mortgage | 1,515 | 1,515 | 148 | 1,437 | 46 | |||||||||||||||
Home equity loans and lines of credit | 428 | 428 | — | 230 | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 3,393 | $ | 3,482 | $ | 148 | $ | 5,618 | $ | 120 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
As of the end of the period | For the year ended | |||||||||||||||||||
As of June 30, 2012 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
(In thousands) | ||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | 9 | $ | 9 | $ | — | $ | 4 | $ | — | ||||||||||
Commercial real estate | 6,442 | 6,532 | — | 6,807 | 380 | |||||||||||||||
Residential mortgage | 458 | 461 | — | 229 | 10 | |||||||||||||||
Home equity loans and lines of credit | 33 | 33 | — | 17 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total with no allowance recorded | $ | 6,942 | $ | 7,035 | $ | — | $ | 7,057 | $ | 391 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
With an Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial real estate | — | — | — | — | — | |||||||||||||||
Residential mortgage | 976 | 976 | 150 | 792 | 28 | |||||||||||||||
Home equity loans and lines of credit | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total with allowance recorded | $ | 976 | $ | 976 | $ | 150 | $ | 792 | $ | 28 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total: | ||||||||||||||||||||
Commercial business | $ | 9 | $ | 9 | $ | — | $ | 4 | $ | — | ||||||||||
Commercial real estate | 6,442 | 6,532 | — | 6,807 | 380 | |||||||||||||||
Residential mortgage | 1,434 | 1,437 | 150 | 1,021 | 38 | |||||||||||||||
Home equity loans and lines of credit | 33 | 33 | — | 17 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 7,918 | $ | 8,011 | $ | 150 | $ | 7,849 | $ | 419 | ||||||||||
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75
Table of Contents
The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.
The Company identifies loans for potential restructure primarily through direct communications with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in payment default in the future.
The following table reflects information regarding the Company’s TDRs for the periods indicated below:
For the year ended June 30, 2013 | Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | |||||||||
(In thousands) | ||||||||||||
Troubled Debt Restructurings | ||||||||||||
Commercial business | — | $ | — | $ | — | |||||||
Commercial real estate | — | — | — | |||||||||
Residential mortgage | 1 | 477 | 476 | |||||||||
Home equity loans and lines of credit | 1 | 396 | 396 | |||||||||
|
|
|
|
|
| |||||||
Total Troubled Debt Restructurings | 2 | $ | 873 | $ | 872 | |||||||
|
|
|
|
|
| |||||||
For the year ended June 30, 2012 | Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | |||||||||
(In thousands) | ||||||||||||
Troubled Debt Restructurings | ||||||||||||
Commercial business | 1 | $ | 104 | $ | 9 | |||||||
Commercial real estate | 1 | 3,199 | 3,259 | |||||||||
Residential mortgage | 2 | 359 | 360 | |||||||||
Home equity loans and lines of credit | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total Troubled Debt Restructurings | 4 | $ | 3,662 | $ | 3,628 | |||||||
|
|
|
|
|
|
During the years ended June 30, 2013 and 2012, no loans previously classified as TDRs subsequently defaulted.
Note 7—Servicing
Loans serviced for others are not included in the accompanying statement of condition. The unpaid principal balances of loans serviced for others were $7.9 million and $11.5 million at June 30, 2013 and 2012, respectively. Loan servicing fees decreased during the year ended June 30, 2013 as the Company accelerated the amortization of servicing rights due to the repayment of underlying residential mortgages. Advances from borrowers for taxes and insurance related to loans serviced for others amounted to $259 thousand and $354 thousand, respectively, at June 30, 2013 and 2012.
76
Table of Contents
The following summarizes the activity pertaining to mortgage servicing rights:
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Balance at beginning of year | $ | 78 | $ | 88 | ||||
Amounts capitalized on loans sold | — | — | ||||||
Amortization | (50 | ) | (10 | ) | ||||
|
|
|
| |||||
Balance at end of year | $ | 28 | $ | 78 | ||||
|
|
|
|
At June 30, 2013 and 2012, the Company had no valuation allowances related to mortgage servicing rights.
Note 8—Premises and Equipment
A summary of the cost and accumulated depreciation and amortization of premises and equipment follows:
June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Premises: | ||||||||
Land | $ | 971 | $ | 971 | ||||
Office buildings | 5,564 | 5,564 | ||||||
Leasehold improvements | 1,510 | 1,510 | ||||||
Equipment | 2,091 | 1,995 | ||||||
Leasehold improvements and equipment in process | — | 4 | ||||||
|
|
|
| |||||
Total premises and equipment | 10,136 | 10,044 | ||||||
Accumulated depreciation and amortization | (4,512 | ) | (3,858 | ) | ||||
|
|
|
| |||||
Total premises and equipment, net | $ | 5,624 | $ | 6,186 | ||||
|
|
|
|
Pursuant to the terms of non-cancelable lease agreements in effect at June 30, 2013, pertaining to premises and equipment, future minimum rent commitments under various operating leases are as follows (in thousands):
2014 | $ | 395 | ||
2015 | 413 | |||
2016 | 425 | |||
2017 | 438 | |||
2018 | 420 | |||
Thereafter | 899 | |||
|
| |||
Total | $ | 2,990 | ||
|
|
The leases contain options to extend for a period of five years. The cost of such rentals is not included above. Total rent expense for the years ended June 30, 2013 and 2012 amounted to $373 thousand and $299 thousand, respectively.
77
Table of Contents
The Company leases portions of its Germantown, Maryland office building to unrelated parties. Future minimum rental income for these non-cancelable leases in effect at June 30, 2013 is as follows (in thousands):
2014 | $ | 159 | ||
2015 | 101 | |||
2016 | 105 | |||
2017 | 62 | |||
2018 | 48 | |||
Thereafter | 136 | |||
|
| |||
Total | $ | 611 | ||
|
|
Rental income from the leases for the years ended June 30, 2013 and 2012 was $125 thousand and $116 thousand, respectively.
Note 9—Deposits
Deposits were comprised of the following:
June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Non-interest bearing demand | $ | 42,422 | $ | 40,003 | ||||
Interest bearing checking | 71,268 | 72,160 | ||||||
Money Market | 91,281 | 90,412 | ||||||
Savings and escrow | 6,433 | 6,208 | ||||||
Time certificates of deposit | 71,859 | 60,789 | ||||||
|
|
|
| |||||
Total deposits | $ | 283,263 | $ | 269,572 | ||||
|
|
|
|
The aggregate amount of time certificates of deposit in denominations of $100 thousand or more at June 30, 2013 and 2012 was $39.7 million and $41.4 million, respectively.
The scheduled maturities of time deposits are as follows (in thousands):
Years ending June 30: | ||||
2014 | $ | 38,277 | ||
2015 | 10,082 | |||
2016 | 10,801 | |||
2017 | 4,236 | |||
2018 | 8,463 | |||
|
| |||
Total | $ | 71,859 | ||
|
|
78
Table of Contents
A summary of interest expense on deposits is as follows:
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Interest bearing checking | $ | 309 | $ | 369 | ||||
Money Market | 402 | 673 | ||||||
Savings and escrow | 9 | 23 | ||||||
Time certificates of deposit | 546 | 1,197 | ||||||
|
|
|
| |||||
Total | $ | 1,266 | $ | 2,262 | ||||
|
|
|
|
Note 10—Federal Home Loan Bank Advances
The Company has a secured credit facility with the FHLB, with a maximum borrowing limit of 35% of the Bank’s total assets, as determined on a quarterly basis. The maximum borrowing availability is also limited to 70% of the unpaid principal balance of qualifying residential mortgage loans. The FHLB has a blanket floating lien on the Company’s residential mortgage loan portfolio and FHLB stock as collateral for the outstanding advances.
The contractual maturities of advances are as follows (in thousands):
Years ending June 30: | ||||
2014 | $ | — | ||
2015 | 3,873 | |||
2016 | — | |||
2017 | 11,750 | |||
2018 | — | |||
Thereafter | — | |||
|
| |||
Total | $ | 15,623 | ||
|
|
At June 30, 2013 and 2012, interest rates on advances ranged from 0.83% to 5.15%. At June 30, 2013 and 2012, the weighted average interest rate on advances was 4.26% and 4.00%, respectively. At June 30, 2013, the Company had available additional unused Federal Home Loan Bank advances of approximately $46.6 million.
Note 11—Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction. The repurchase agreements are secured by designated investment securities of the Company. The investment securities related to the repurchase agreements are under the control of the Company.
At June 30, 2012, the Company had one term repurchase agreement in the amount of $5.0 million. The repurchase agreement matured on March 17, 2013. At June 30, 2012, the interest rate in effect was 3.23%.
The remaining repurchase agreements, primarily with Bank customers, generally mature within one business day from the transaction date and have a weighted average interest rate of 0.22% and 0.20% at June 30, 2013 and 2012, respectively.
The total balance of repurchase agreements at June 30, 2013 and 2012 was $8.5 million and $16.4 million, respectively. The average balance of repurchase agreements at June 30, 2013 and 2012 was $12.8 million and $15.2 million, respectively. The maximum balance of repurchase agreements at any month end for the years ended June 30, 2013 and 2012 is $19.1 million and $19.3 million respectively.
79
Table of Contents
Note 12—Income Taxes
Income tax expense consisted of the following components:
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Federal: | ||||||||
Current | $ | 852 | $ | 420 | ||||
Deferred benefit | (295 | ) | (274 | ) | ||||
|
|
|
| |||||
Total Federal | 557 | 146 | ||||||
|
|
|
| |||||
State: | ||||||||
Current | 209 | 160 | ||||||
Deferred benefit | (62 | ) | (121 | ) | ||||
|
|
|
| |||||
Total State | 147 | 39 | ||||||
|
|
|
| |||||
Total income tax expense | $ | 704 | $ | 185 | ||||
|
|
|
|
A reconciliation of the statutory income tax at a rate of 34% to the income tax expense included in the consolidated statements of income is as follows:
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
Federal income tax | 34.0 | % | 34.0 | % | ||||
Bank owned life insurance income | (5.3 | ) | (22.3 | ) | ||||
Stock options | 2.3 | 8.9 | ||||||
ESOP expense | 2.5 | 6.7 | ||||||
State tax, net of federal tax effect | 5.3 | 5.6 | ||||||
Other | (0.2 | ) | 7.9 | |||||
|
|
|
| |||||
Effective income tax rate | 38.6 | % | 40.8 | % | ||||
|
|
|
|
The components of the net deferred tax asset are as follows:
June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Deferred tax assets: | ||||||||
Allowance for loan losses | $ | 1,356 | $ | 1,184 | ||||
Restricted stock | 288 | 266 | ||||||
Other | 133 | 148 | ||||||
|
|
|
| |||||
Total deferred tax assets | 1,777 | 1,598 | ||||||
|
|
|
| |||||
Deferred tax liabilities: | ||||||||
Unrealized gains on available for sale securities | (40 | ) | (516 | ) | ||||
Depreciation | (267 | ) | (403 | ) | ||||
Other | (64 | ) | (106 | ) | ||||
|
|
|
| |||||
Total deferred tax liabilities | (371 | ) | (1,025 | ) | ||||
|
|
|
| |||||
Net deferred tax asset | $ | 1,406 | $ | 573 | ||||
|
|
|
|
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In assessing whether the Company will be able to realize the deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not the benefits of these deductible differences will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. There was no valuation allowance for deferred tax assets as of June 30, 2013 and 2012.
As of June 30, 2013, the Company did not have any uncertain tax positions. Interest and penalties associated with tax liabilities would be classified as additional income taxes in the consolidated statement of income. As of June 30, 2013, tax years ended June 30, 2010 through June 30, 2013 remain open and are subject to Federal and State taxing authority examination.
Note 13—Off Balance Sheet Activities
The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to grant loans, unfunded commitments under lines of credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of condition.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contractual amounts represent credit risk:
June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Commitments to grant loans | $ | 33,977 | $ | 20,871 | ||||
Unfunded commitments under lines of credit | 39,664 | 46,082 | ||||||
Letters of credit | 837 | 548 | ||||||
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Total | $ | 74,478 | $ | 67,501 | ||||
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Fixed and variable rate commitments to grant loans were $17.5 million and $16.5 million, respectively, at June 30, 2013.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company, is based on Management’s credit evaluation of the customer. Collateral consists primarily of real estate.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and similar transactions. The terms of the letters of credit vary and may have renewal features. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to
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customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability at June 30, 2013 and 2012 for guarantees under letters of credit issued is not material.
The Company has not been required to perform on any financial guarantees and has not incurred any losses on its commitments, during the past two years.
Note 14—Legal Contingencies
Various legal claims arise from time to time in the normal course of business which, in the opinion of Management, will not have a material effect on the Company’s consolidated financial statements.
Note 15—Regulatory Matters and Capital Requirements
Federal banking regulations place certain restrictions on dividends paid to OBA Financial Services, Inc. by the Bank, and loans or advances made by the Bank to OBA Financial Services, Inc. The total amount of dividends which may be paid at any date is generally limited to retained net income of the Bank for the current and preceding two years. Loans and advances are limited to 10% of the Bank’s capital and surplus on a secured basis.
Based on the Bank’s retained net income, at June 30, 2013, the Bank’s retained earnings available for the payment of dividends was $2.3 million. Funds available for loans or advances amounted to approximately $6.6 million at June 30, 2013.
In addition, the payment of dividends by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below minimum capital requirements or if the dividends would reduce equity capital below the required liquidation account amount previously discussed in the Summary of Significant Accounting Policies note contained within the Notes to the Consolidated Financial Statements.
OBA Financial Services, Inc. ability to pay dividends generally is dependent on the Bank’s ability to pay dividends to OBA Financial Services, Inc.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk weighted assets, core capital to adjusted tangible assets and tangible capital to tangible assets. Management believes, as of June 30, 2013, the Bank met all capital adequacy requirements to which it is subject.
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As of June 30, 2013, the most recent notification from the Bank’s regulators categorized the Bank as Well Capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and ratios at the dates listed are presented in the table below.
(Dollars in thousands) | Actual | For Capital Adequacy Purposes | To be Well Capitalized under Prompt Corrective Action Provisions | |||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of June 30, 2013: | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 65,654 | 22.53 | % | $ | 23,310 | 8.00 | % | $ | 29,137 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) | 62,181 | 21.34 | 11,655 | 4.00 | 17,482 | 6.00 | ||||||||||||||||||
Core capital (to adjusted tangible assets) | 62,181 | 16.30 | 15,261 | 4.00 | 19,076 | 5.00 | ||||||||||||||||||
Tangible capital (to adjusted tangible assets) | 62,181 | 16.30 | 7,630 | 2.00 | NA | NA | ||||||||||||||||||
As of June 30, 2012: | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 62,809 | 23.42 | % | $ | 21,455 | 8.00 | % | $ | 26,819 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) | 59,774 | 22.29 | 10,728 | 4.00 | 16,091 | 6.00 | ||||||||||||||||||
Core capital (to adjusted tangible assets) | 59,774 | 15.30 | 15,630 | 4.00 | 19,538 | 5.00 | ||||||||||||||||||
Tangible capital (to adjusted tangible assets) | 59,774 | 15.30 | 7,815 | 2.00 | NA | NA |
The following table presents a reconciliation of the Company’s consolidated equity as determined using U.S. GAAP and the Bank’s regulatory capital amounts at the dates listed:
June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Consolidated GAAP equity | $ | 71,304 | $ | 75,715 | ||||
Consolidated equity in excess of Bank equity | (9,061 | ) | (15,133 | ) | ||||
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Bank GAAP equity | 62,243 | 60,582 | ||||||
Accumulated other comprehensive income, net of tax | (62 | ) | (808 | ) | ||||
Intangible asset | — | — | ||||||
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Tangible capital, core capital and Tier I risk-based capital | 62,181 | 59,774 | ||||||
Allowance for loan losses | 3,473 | 3,035 | ||||||
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Total risk-based capital | $ | 65,654 | $ | 62,809 | ||||
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Note 16—Related Party Transactions
In the ordinary course of business, the Company has granted loans to executive officers and directors and their affiliates amounting to $96 thousand and $131 thousand at June 30, 2013 and 2012, respectively. During the year ended June 30, 2013, there were principal additions of $65 thousand and total principal payments of $100 thousand.
Deposits from related parties held by the Company at June 30, 2013 and 2012 amounted to $703 thousand and $686 thousand, respectively.
Note 17—Fair Value
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
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realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements 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 year-end. A fair value hierarchy that prioritizes the inputs to valuation methods is 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’s 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.
For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at the dates listed are as follows:
(In thousands) | (Level 1) | |||||||||||||||
Description | June 30, 2013 | Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Residential mortgage-backed securities (1) | $ | 37,084 | $ | — | $ | 37,084 | $ | — | ||||||||
Trust preferred securities | 40 | — | — | 40 | ||||||||||||
Equity securities | 50 | — | 50 | — | ||||||||||||
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Securities available for sale | $ | 37,174 | $ | — | $ | 37,134 | $ | 40 | ||||||||
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Description | June 30, 2012 | (Level 1) Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Residential mortgage-backed securities (1) | $ | 34,350 | $ | — | $ | 34,350 | $ | — | ||||||||
Trust preferred securities | 54 | — | — | 54 | ||||||||||||
Equity securities | 50 | — | 50 | — | ||||||||||||
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Securities available for sale | $ | 34,454 | $ | — | $ | 34,400 | $ | 54 | ||||||||
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(1) | Residential mortgage-backed securities are guaranteed by Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. |
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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) at the dates listed:
For the Years Ended June 30, | ||||||||
(In thousands) | 2013 | 2012 | ||||||
Beginning balance | $ | 54 | $ | 115 | ||||
Principal repayments | (29 | ) | (47 | ) | ||||
Unrealized gains (losses) included in other comprehensive income | 15 | (14 | ) | |||||
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Ending balance | $ | 40 | $ | 54 | ||||
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For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at the dates listed are as follows:
(In thousands) | (Level 1) | |||||||||||||||
Description | June 30, 2013 | Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Impaired loans | $ | 816 | $ | — | $ | — | $ | 816 | ||||||||
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Real estate owned | $ | — | $ | — | $ | — | $ | — | ||||||||
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Description | June 30, 2012 | (Level 1) Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Impaired loans | $ | 826 | $ | — | $ | — | $ | 826 | ||||||||
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Real estate owned | $ | 40 | $ | — | $ | — | $ | 40 | ||||||||
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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 the fair values of certain Company assets and liabilities at June 30, 2013 and 2012:
Cash and Cash Equivalents (Carried at Cost)
The carrying amounts of cash and short-term instruments approximate fair value.
Interest-Bearing Deposits in Banks (Carried at Cost)
The carrying amounts of interest-bearing deposits approximate fair value based on the short term nature of the assets.
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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. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other things.
The market for pooled trust preferred securities is inactive. A significant widening of the bid/ask spreads in the markets in which these securities trade was followed by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and no new pooled trust preferred securities have been issued since 2007. Since there were limited observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using primarily unobservable Level 3 inputs. Fair value estimates for trust preferred securities were based on discounting expected cash flows using a risk-adjusted discount rate. The Company develops the risk-adjusted discount rate by considering the time value of money (risk-free rate) adjusted for an estimated risk premium for bearing the uncertainty in future cash flows and, given current adverse market conditions, a liquidity adjustment based on an estimate of the premium that a market participant would require assuming an orderly transaction.
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 as described above (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 (Generally carried at Cost)
The fair values of loans are estimated using discounted cash flow analyses, using 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 values.
Loans Held for Sale (Carried at lower of cost or market)
The fair values of loans are estimated using discounted cash flow analyses, using 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. Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale.
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Impaired Loans (Generally Carried at Fair Value)
Impaired loans are those 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 consist of loan balances net of valuation allowances and loan balances on impaired loans in which the loan has been charged-off to its fair value.
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 upon 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 and 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 June 30, 2013 and 2012, the Company determined 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.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amounts of accrued interest approximate fair value.
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Off-Balance-Sheet Credit-Related Instruments (Disclosures at Cost)
Fair values for off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.
Quantitative information about Level 3 Fair Value Measurement at date listed is included in the table below:
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||
(In thousands) As of June 30, 2013 | Fair Value Estimate | Valuation Techniques | Unobservable Inputs | Estimated Range | ||||||||
Impaired loans | $ | 816 | Appraisal of collateral | | Appraisal adjustments | | 0.0% to -25.0% (-6.5%) | |||||
| Liquidation expenses | | -3.0% to -5.0% (3.3%) | |||||||||
Real estate owed | — | Appraisal of property | | Appraisal adjustments | | NA | ||||||
| Liquidation expenses | | ||||||||||
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||
(In thousands) As of June 30, 2012 | Fair Value Estimate | Valuation Techniques | Unobservable Inputs | Estimated Range | ||||||||
Impaired loans | $ | 826 | Appraisal of collateral | | Appraisal adjustments | | 0.0% to -25.0% (-6.5%) | |||||
| Liquidation expenses | | -3.0% to -5.0% (3.3%) | |||||||||
Real estate owed | 40 | Appraisal of property | | Appraisal adjustments | | 0.0% to -25.0% (0.0%) | ||||||
| Liquidation expenses | | -3.0% to -5.0% (4.0%) |
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The estimated fair values of the Company’s financial instruments were as follows at the dates listed:
Fair Value Hierarchy at June 30, 2013 | ||||||||||||||||||||
(In thousands) | Carrying Amount | Fair Value | Quoted Prices in Active Markets For Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 16,173 | $ | 16,173 | $ | 16,173 | $ | — | $ | — | ||||||||||
Interest bearing deposits with other banks | 6,692 | 6,692 | 6,692 | — | — | |||||||||||||||
Securities available for sale | 37,174 | 37,174 | — | 37,134 | 40 | |||||||||||||||
Securities held to maturity | 1,445 | 1,520 | — | 1,520 | — | |||||||||||||||
Federal Home Loan Bank stock | 1,160 | 1,160 | — | 1,160 | — | |||||||||||||||
Loans held for sale | 414 | 414 | 414 | |||||||||||||||||
Loans receivable, net | 299,803 | 303,770 | — | — | 303,770 | |||||||||||||||
Accrued interest receivable | 1,111 | 1,111 | — | 1,111 | — | |||||||||||||||
Mortgage servicing rights | 28 | 28 | — | — | 28 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 283,263 | 275,592 | 203,781 | 71,811 | — | |||||||||||||||
Securities sold under agreements to repurchase | 8,544 | 8,543 | — | 8,543 | — | |||||||||||||||
Federal Home Loan Bank Advances | 15,623 | 17,223 | — | 17,223 | — | |||||||||||||||
Accrued interest payable | 111 | 111 | — | 111 | — | |||||||||||||||
Off-Balance sheet financial instruments | — | — | — | — | — | |||||||||||||||
Fair Value Hierarchy at June 30, 2012 | ||||||||||||||||||||
(In thousands) | Carrying Amount | Fair Value | Quoted Prices in Active Markets For Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 31,525 | $ | 31,525 | $ | 31,525 | $ | — | $ | — | ||||||||||
Interest bearing deposits with other banks | 9,490 | 9,490 | 9,490 | — | — | |||||||||||||||
Securities available for sale | 34,454 | 34,454 | — | 34,400 | 54 | |||||||||||||||
Securities held to maturity | 2,396 | 2,549 | — | 2,549 | — | |||||||||||||||
Federal Home Loan Bank stock | 2,169 | 2,169 | — | 2,169 | — | |||||||||||||||
Loans held for sale | — | — | — | |||||||||||||||||
Loans receivable, net | 293,206 | 299,307 | — | — | 299,307 | |||||||||||||||
Accrued interest receivable | 1,039 | 1,039 | — | 1,039 | — | |||||||||||||||
Mortgage servicing rights | 78 | 78 | — | — | 78 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 269,572 | 269,459 | 208,271 | 61,188 | — | |||||||||||||||
Securities sold under agreements to repurchase | 16,434 | 16,543 | — | 16,543 | — | |||||||||||||||
Federal Home Loan Bank Advances | 26,997 | 29,758 | — | 29,758 | — | |||||||||||||||
Accrued interest payable | 154 | 154 | — | 154 | — | |||||||||||||||
Off-Balance sheet financial instruments | — | — | — | — | — |
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Note 18—Employee Benefit Plan
The Company has a 401(k) Plan in which substantially all employees participate. Employees may contribute up to 15% of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions equal to 3% of all eligible employees’ compensation under the Plan’s safe harbor provisions. The Company may also make additional discretionary contributions up to 15% of an employee’s annual compensation. Company contributions vest to the employee over a five-year period. Company contributions are reduced by any forfeitures. For the years ended June 30, 2013 and 2012, expense attributable to the Plan amounted to $128 thousand and $128 thousand, respectively.
Note 19—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% 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 OBA Bank’s contributions to the ESOP and dividends payable on 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 fiscal years ended June 30, 2013 and 2012 was $319 thousand and $268 thousand, respectively.
Shares held by the ESOP trust at the dates listed were as follows:
June 30, | ||||||||
2013 | 2012 | |||||||
Allocated shares | 63,203 | 45,170 | ||||||
Unallocated shares | 305,497 | 324,012 | ||||||
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Total ESOP shares | 368,700 | 369,182 | ||||||
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Fair value of unallocated shares, in thousands | $ | 5,633 | $ | 4,812 | ||||
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NOTE 20—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
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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 are authorized but unissued shares. The maximum number of shares authorized under the plan is 648,025. Total share-based compensation expense for the fiscal years ended June 30, 2013 and 2012 was $937 thousand and $860 thousand, respectively.
Stock Options
The tables below present the stock option activity for the years ended June 30 2013 and 2012:
Options | Weighted average exercise price | Remaining contractual life (years) | ||||||||||
Options outstanding at June 30, 2011 | — | $ | — | |||||||||
Granted | 272,150 | 14.79 | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | — | — | ||||||||||
Expired | — | — | ||||||||||
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Options outstanding at June 30, 2012 | 272,150 | $ | 14.79 | 9.08 | ||||||||
Granted | 9,000 | 18.75 | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | — | — | ||||||||||
Expired | — | — | ||||||||||
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Options outstanding at June 30, 2013 | 281,150 | $ | 14.92 | 8.10 | ||||||||
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At June 30, 2013, the Company had $631 thousand of unrecognized compensation costs related to stock options. The cost of stock options is amortized in equal annual installments over the five-year vesting period. There were 54 thousand options vested in the twelve months ended June 30, 2013. Stock option expense for the twelve months ended June 30, 2013 was $199 thousand. The aggregate grant date fair value of the stock options was $1.0 million. Aggregate intrinsic value of the stock options at June 30, 2013 and 2012 was $993 thousand and zero, respectively.
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 | 1.10 | % | – | 2.11 | % | |||||||
Expected dividends | 1.62 | % | – | 2.08 | % | |||||||
Expected life (in years) | 6.50 | – | 6.50 | |||||||||
Exercise price for the stock options | $ | 14.35 | – | $ | 18.75 | |||||||
Grant date fair value for the stock options | $ | 3.40 | – | $ | 7.63 |
Expected volatility—Based on the historical volatility of a peer group of comparable banks as contained in the Keefe, Bruyette & Woods, Inc. Regional Bank Index (KRX) at the time of grant. Due to the recent initial public offering and issuance of the Company’s common stock, the Company’s shares are not actively traded and its volatility is not reflective of an actively traded institution. Therefore, the Company estimates that the expected volatility will equal the peer group of comparable banks’ volatility over the expected life of the options at the time of grant.
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Risk-free interest rate—Based on the U.S. Treasury yield curve and expected life of the options at the time of grant.
Expected dividend yield—Based on the Company’s peer group of comparable banks, as contained in the Keefe, Bruyette & Woods, Inc. Regional Bank Index (KRX). The Company currently does not pay a dividend; therefore, the expected dividend yield was weighted for the portion of the life of the options that the Company expects to pay a dividend. The Company estimates that the expected dividend yield will equal the peer group of comparable banks’ dividend yield over the expected life of the options at the time of grant.
Expected life—Based on a weighted-average of the five year vesting period and the ten year contractual term of the stock option plan.
Exercise price for the stock options—Based on the closing price of the Company’s stock on the date of grant.
Restricted Stock Awards
Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.
The tables below present the restricted stock award activity for the periods 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 | — | — | — | —�� | — | — | ||||||||||||||||||
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Non-vested at June 30, 2012 | 136,363 | $ | 14.77 | 111,090 | $ | 14.81 | 247,453 | $ | 14.79 | |||||||||||||||
Granted | 2,500 | 18.75 | — | — | 2,500 | 18.75 | ||||||||||||||||||
Vested | 27,267 | 14.77 | 22,218 | 14.81 | 49,485 | 14.79 | ||||||||||||||||||
Forfeited | — | — | — | — | — | — | ||||||||||||||||||
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Non-vested at June 30, 2013 | 111,596 | $ | 14.86 | 88,872 | $ | 14.81 | 200,468 | $ | 14.84 | |||||||||||||||
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At June 30, 2013, the Company had $2.3 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 twelve months ended June 30, 2013 and 2012 was $738 thousand and $681 thousand, respectively.
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Note 21—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. Stock options are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the Treasury Stock method. The table below sets forth the dilutive effect of the stock options.
June 30, | ||||||||
(Dollars in thousands, except share data) | 2013 | 2012 | ||||||
Net income | $ | 1,122 | $ | 268 | ||||
Weighted average number of shares used in: | ||||||||
Basic earnings per share | 3,958,451 | 3,952,585 | ||||||
Dilutive common stock equivalents | 38,137 | 18,517 | ||||||
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Diluted earnings per share | 3,996,588 | 3,971,102 | ||||||
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Net income per common share, basic | $ | 0.28 | $ | 0.07 | ||||
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Net income per common share, diluted | $ | 0.28 | $ | 0.07 | ||||
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Note 22—Parent Company Only Financial Information
Presented below are the condensed balance sheets, statements of operations and statements of cash flows for OBA Financial Services, Inc.
CONDENSED BALANCE SHEETS
June 30, 2013 | June 30, 2012 | |||||||
(In thousands) | ||||||||
Assets: | ||||||||
Cash and due from bank | $ | 5,270 | $ | 11,342 | ||||
Note receivable ESOP | 3,281 | 3,424 | ||||||
Investment in bank subsidiary | 62,243 | 60,582 | ||||||
Other assets | 510 | 367 | ||||||
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Total assets | $ | 71,304 | $ | 75,715 | ||||
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Stockholders’ Equity: | ||||||||
Common stock | $ | 40 | $ | 43 | ||||
Additional paid-in capital | 33,726 | 38,695 | ||||||
Unearned ESOP shares | (3,055 | ) | (3,240 | ) | ||||
Retained earnings | 40,531 | 39,409 | ||||||
Accumulated other comprehensive income | 62 | 808 | ||||||
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Total stockholders’ equity | 71,304 | 75,715 | ||||||
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Total liabilities and stockholders’ equity | $ | 71,304 | $ | 75,715 | ||||
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CONDENSED STATEMENTS OF INCOME
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Interest income on note receivable | $ | 109 | $ | 114 | ||||
Interest income deposit at Bank | 20 | 53 | ||||||
Dividends from bank subsidiary | — | — | ||||||
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Total income | 129 | 167 | ||||||
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Operating expenses | 137 | 154 | ||||||
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Income (loss) before income taxes and equity in net income of bank subsidiary | (8 | ) | 13 | |||||
Income taxes | — | — | ||||||
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Income (loss) before equity in net income of bank subsidiary | (8 | ) | 13 | |||||
Equity in net income of bank subsidiary | 1,130 | 255 | ||||||
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Net income | $ | 1,122 | $ | 268 | ||||
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CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Net income | $ | 1,122 | $ | 268 | ||||
Total other comprehensive income (loss)(1) | (746 | ) | 129 | |||||
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Total comprehensive income | $ | 376 | $ | 397 | ||||
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(1) | See Consolidated Statements of Comprehensive Income for other comprehensive income detail |
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CONDENSED STATEMENTS OF CASH FLOWS
Years Ended June 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Operating activities: | ||||||||
Net income | $ | 1,122 | $ | 268 | ||||
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Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Equity in net income of subsidiary | (1,130 | ) | (255 | ) | ||||
Increase in other assets | (143 | ) | (144 | ) | ||||
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Total adjustments | (1,273 | ) | (399 | ) | ||||
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Net cash used in operating activities | (151 | ) | (131 | ) | ||||
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Investing activities: | ||||||||
ESOP loan principal collections | 143 | 139 | ||||||
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Net cash provided by investing activities | 143 | 139 | ||||||
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Financing activities: | ||||||||
Purchases of Company stock | (6,064 | ) | (6,670 | ) | ||||
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Net cash used in financing activities | (6,064 | ) | (6,670 | ) | ||||
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Decrease in cash equivalents | (6,072 | ) | (6,662 | ) | ||||
Cash and cash equivalents at beginning of year | 11,342 | 18,004 | ||||||
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Cash and cash equivalents at end of year | $ | 5,270 | $ | 11,342 | ||||
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ITEM 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
ITEM 9A. | Controls and Procedures |
(a) 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 Senior Vice President and 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 June 30, 2013. Based on that evaluation, the Company’s management, including the Chairman of the Board, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
(b) Management’s annual report on internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2013, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework.” Based on such assessment, management believes that, as of June 30, 2013, the Company’s internal control over financial reporting is effective, based on those criteria.
During the quarter ended June 30, 2013, there have been 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.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to provisions of the Dodd-Frank Act that permit the Company to provide only management’s report in this annual report.
ITEM 9B. | Other Information |
None.
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PART III
ITEM 10. | Directors, Executive Officers and Corporate Governance |
OBA Financial Services, Inc. has adopted a Code of Ethics that applies to OBA Financial Services, Inc.’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics can be accessed on OBA Financial Services, Inc.’s website at www.obabank.com.
Information concerning directors and executive officers of OBA Financial Services, Inc. is incorporated herein by reference from the Company’s definitive Proxy Statement for the 2013 Annual Meeting of Stockholders (the “Proxy Statement”), specifically the section captioned “Proposal I—Election of Directors.”
ITEM 11. | Executive Compensation |
Information concerning executive compensation is incorporated herein by reference from the Proxy Statement, specifically the section captioned “Proposal I—Election of Directors.”
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information concerning security ownership of certain owners and management is incorporated herein by reference from the Proxy Statement, specifically the sections captioned “Voting Securities and Principal Holders Thereof” and “Proposal I—Election of Directors.”
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
Information concerning relationships and transactions is incorporated herein by reference from the Proxy Statement, specifically the sections captioned “Proposal I—Election of Directors” and “Transactions with Certain Related Persons.”
ITEM 14. | Principal Accountant Fees and Services |
Information concerning principal accountant fees and services is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Proposal II—Ratification of Appointment of Independent Registered Public Accounting Firm.”
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PART IV
ITEM 15. | Exhibits |
3.1 | Articles of Incorporation of OBA Financial Services, Inc.(1) | |||
3.2 | Amended and Restated Bylaws of OBA Financial Services, Inc.(3) | |||
3.3 | Articles of Amendment to Articles of Incorporation of OBA Financial Services, Inc.(1) | |||
4.0 | Form of Common Stock Certificate of OBA Financial Services, Inc.(1) | |||
10.1 | Employment Agreement between OBA Bancorp, Inc., OBA Bank and Charles E. Weller(1) | |||
10.2 | Change in Control Agreement between OBA Bank and David A. Miller(2) | |||
10.3 | OBA Bank Employee Stock Ownership Plan(1) | |||
10.4 | Form of Split Dollar Insurance Agreement(1) | |||
10.5 | Incentive Compensation Program—2009 to 2010(1) | |||
10.6 | Incentive Compensation Program—2010 to 2011(1) | |||
10.7 | Employment Agreement between OBA Financial Services, Inc. and Charles E. Weller(4) | |||
10.8 | OBA Financial Services, Inc. 2011 Equity Incentive Plan(5) | |||
10.9 | Form of stock option agreement with employees(6) | |||
10.10 | Form of stock option agreement with outside directors(6) | |||
10.11 | Form of restricted stock agreement with employees(6) | |||
10.12 | Form of restricted stock agreement with employees – performance-based shares(6) | |||
10.13 | Form of restricted stock agreement with outside directors(6) | |||
10.14 | Incentive Compensation Program—2011 to 2012(7) | |||
10.15 | Incentive Compensation Program—2012 to 2013 | |||
21.0 | Subsidiaries of Registrant(1) | |||
23.1 | Consent of Independent Registered Public Accounting Firm—BDO USA, LLP | |||
23.2 | Consent of Independent Registered Public Accounting Firm – ParenteBeard LLC | |||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2022 | |||
101.0 | The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013, 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 Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements |
(1) | Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-161898), initially filed September 14, 2009. |
(2) | Incorporated by reference to the Current Report on Form 8-K (file no. 1-34593), filed March 19, 2010. |
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(3) | Incorporated by reference to the Current Report on Form 8-K (file no. 1-34593), filed June 23, 2010. |
(4) | Incorporated by reference to the Current Report on Form 8-K (file no. 1-34593), filed September 1, 2010. |
(5) | Incorporated by reference to Appendix A to the Proxy Statement for the Special Meeting of Stockholders (file no. 1-34593), filed April 11, 2011. |
(6) | Incorporated by reference to the Current Report on Form 8-K (file no. 1-34593), filed July 27, 2011. |
(7) | Incorporated by reference to the Annual Report on Form 10-K (file no. 1-34593), filed September 28, 2012. |
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Pursuant to the requirements of Section 13 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. | ||
By: | /s/ CHARLES E. WELLER | |
Charles E. Weller | ||
President and Chief Executive Officer | ||
(Duly Authorized Representative) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures | Title | Date | ||
/s/ CHARLES E. WELLER Charles E. Weller | President and Chief Executive Officer (Principal Executive Officer) | September 27, 2013 | ||
/s/ DAVID A. MILLER David A. Miller | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | September 27, 2013 | ||
/s/ JAMES C. BEADLES James C. Beadles | Chairman of the Board | September 27, 2013 | ||
/s/ DONALD L. MALLOREY Donald L. Mallorey | Director and Corporate Secretary | September 27, 2013 | ||
/s/ WILLIAM R. BELEW, JR. William R. Belew, Jr. | Director | September 27, 2013 | ||
/s/ KATHERINE A. GRICE Katherine A. Grice | Director | September 27, 2013 | ||
/s/ PAUL J. HANGES, Ph.D. Paul J. Hanges, Ph.D. | Director | September 27, 2013 | ||
/s/ EVELYN JACKSON, M.D. Evelyn Jackson, M.D. | Director | September 27, 2013 | ||
/s/ MICHAEL L. REED Michael L. Reed | Director | September 27, 2013 | ||
/s/ STACIE W. ROGERS Stacie W. Rogers | Director | September 27, 2013 |
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