UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period ended September 30, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission File Number 001-34593
OBA FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Charter)
Maryland | 27-1898270 | |
(State or Other Jurisdiction of Incorporation) | (I.R.S. Employer Identification No.) | |
20300 Seneca Meadows Parkway, Germantown, Maryland | 20876 | |
(Address of Principal Executive Offices) | (Zip Code) |
(301) 916-0742
Registrant’s telephone number, including area code
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.
4,038,006 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of November 8, 2013.
OBA FINANCIAL SERVICES, INC. AND SUBSIDIARY
Form 10-Q Quarterly Report
Table of Contents
PART I – FINANCIAL INFORMATION | ||||||
Forward-Looking Statements Disclosure | 3 | |||||
Item 1. | Financial Statements | |||||
Consolidated Statements of Condition (Unaudited) as of September 30, 2013 and June 30, 2013 | 5 | |||||
Consolidated Statements of Income (Unaudited) for the three ended September 30, 2013 and 2012 | 6 | |||||
Consolidated Statements Comprehensive Income (Loss) (Unaudited) for the three months ended September 30, 2013 and 2012 | 7 | |||||
Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended September 30, 2013 and 2012 | 8 | |||||
Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 30, 2013 and 2012 | 9 | |||||
Notes to Consolidated Financial Statements (Unaudited) | 10 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | ||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 34 | ||||
Item 4. | Controls and Procedures | 34 | ||||
PART II – OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 35 | ||||
Item 1A. | Risk Factors | 35 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 35 | ||||
Item 3. | Defaults Upon Senior Securities | 35 | ||||
Item 4. | Mine Safety Disclosures | 35 | ||||
Item 5. | Other Information | 35 | ||||
Item 6. | Exhibits | 35 | ||||
Signatures | 36 |
2
Forward-looking Statements
This report, as well as, other written communications made from time to time by OBA Financial Services, Inc., and its subsidiary, OBA Bank (collectively, the “Company”), and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “should,” “will,” “may,” “potential,” and words of similar meaning. These forward-looking statements include, but are not limited to:
• | possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth determined using accounting principles generally accepted in the United States of America (“U.S. GAAP”); |
• | estimates of revenue growth in retail banking, lending and, other areas, and origination volume in the Company’s consumer, commercial, and other lending businesses; |
• | statements regarding the asset quality and levels of non-performing assets and impairment charges with respect to the Company’s investment portfolio; |
• | statements regarding current and future capital management programs, tangible capital generation, and market share; |
• | estimates of non-interest income levels, including fees from services and product sales and expense levels; |
• | statements of the Company’s goals, intentions, and expectations; |
• | statements regarding the Company’s business plans, prospects, growth, and operating strategies; and |
• | estimates of the Company’s risks and future costs and benefits. |
The Company cautions that a number of important factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to:
• | prevailing general economic conditions, either nationally or locally in some or all areas in which the Company conducts business, that are different than expected; |
• | changes in the securities market, the banking industry, or competition among depository and other financial institutions; |
• | inflation and changes in interest rates, deposit flows, loan demand, real estate values, consumer spending, savings, and borrowing habits which can materially affect, among other things, consumer banking revenues, origination levels in the Company’s lending businesses and the level of defaults, losses, and prepayments on loans made by the Company, whether held in portfolio or sold in the secondary markets, and the Company’s net interest margin and fair value of financial instruments; |
• | changes in any applicable law, rule, government regulation, policy, or practice with respect to tax or legal issues affecting financial institutions, including changes in regulatory fees and capital requirements; |
• | risks and uncertainties related to the Company’s ability to successfully integrate any assets, liabilities, customers, systems, and management personnel the Company may acquire, if any, into its operations and its ability to realize related revenue synergies and cost savings within the expected time frame; |
• | the Company’s timely development of new and competitive products or services in a changing environment and the acceptance of such products or services by the Company’s customers so the Company is able to enter new markets successfully and capitalize on growth opportunities; |
• | operational issues and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent; |
• | changes in accounting principles, policies, guidelines, and practices, as may be adopted by the Company’s regulatory agencies, the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (“SEC”), and the Public Company Accounting Oversight Board (the “PCAOB”), or changes to the Company’s primary regulator; |
• | litigation liability, including costs, expenses, settlements, and judgments, or the outcome of other matters before regulatory agencies, whether pending or commencing in the future; |
• | changes in the quality or composition of the investment and loan portfolios; |
• | changes in the Company’s organization, compensation, and benefit plans; |
• | changes in other economic, competitive, governmental, regulatory, and technological factors, including shutdowns of the federal government, 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. |
3
These forward-looking statements are based on the Company’s current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Readers are cautioned not to place undue reliance on these forward-looking statements which are made as of the date of this report, and except as may be required by applicable law or regulation, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.
4
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Condition (Unaudited)
September 30, 2013 | June 30, 2013 | |||||||
(In thousands, except share data) | ||||||||
Assets: | ||||||||
Cash and due from banks | $ | 25,634 | $ | 16,006 | ||||
Federal funds sold | 4,767 | 167 | ||||||
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Cash and cash equivalents | 30,401 | 16,173 | ||||||
Interest bearing deposits with other banks | 6,195 | 6,692 | ||||||
Securities available for sale | 34,676 | 37,174 | ||||||
Securities held to maturity (fair value of $1,377 and $1,520) | 1,288 | 1,445 | ||||||
Federal Home Loan Bank stock, at cost | 1,160 | 1,160 | ||||||
Loans held for sale | — | 414 | ||||||
Loans | 301,459 | 303,276 | ||||||
Less: allowance for loan losses | 3,479 | 3,473 | ||||||
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Net loans | 297,980 | 299,803 | ||||||
Premises and equipment, net | 5,512 | 5,624 | ||||||
Bank owned life insurance | 9,247 | 9,182 | ||||||
Other assets | 3,979 | 3,944 | ||||||
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Total assets | $ | 390,438 | $ | 381,611 | ||||
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Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 40,775 | $ | 42,422 | ||||
Interest-bearing | 249,338 | 240,841 | ||||||
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Total deposits | 290,113 | 283,263 | ||||||
Securities sold under agreements to repurchase | 10,591 | 8,544 | ||||||
Federal Home Loan Bank advances | 15,592 | 15,623 | ||||||
Advance payments from borrowers for taxes and insurance | 676 | 1,324 | ||||||
Other liabilities | 1,656 | 1,553 | ||||||
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Total liabilities | 318,628 | 310,307 | ||||||
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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 4,038,006 and 4,048,436 shares at September 30, 2013 and June 30, 2013, respectively | 40 | 40 | ||||||
Additional paid-in capital | 33,883 | 33,726 | ||||||
Unearned ESOP shares | (3,009 | ) | (3,055 | ) | ||||
Retained earnings | 40,845 | 40,531 | ||||||
Accumulated other comprehensive income | 51 | 62 | ||||||
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Total stockholders’ equity | 71,810 | 71,304 | ||||||
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Total liabilities and stockholders’ equity | $ | 390,438 | $ | 381,611 | ||||
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See notes to consolidated financial statements.
5
OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
(In thousands, except share and per share data) | ||||||||
Interest and Dividend Income: | ||||||||
Loans receivable, including fees | $ | 3,598 | $ | 3,601 | ||||
Investment securities: | ||||||||
Interest - taxable | 226 | 270 | ||||||
Dividends | 8 | 7 | ||||||
Federal funds sold | 15 | 14 | ||||||
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Total interest and dividend income | 3,847 | 3,892 | ||||||
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Interest Expense: | ||||||||
Deposits | 314 | 352 | ||||||
Federal Home Loan Bank advances | 170 | 238 | ||||||
Securities sold under agreements to repurchase | 5 | 47 | ||||||
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Total interest expense | 489 | 637 | ||||||
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Net interest income | 3,358 | 3,255 | ||||||
Provision for loan losses | 5 | 112 | ||||||
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Net interest income after provision for loan losses | 3,353 | 3,143 | ||||||
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Non-Interest Income: | ||||||||
Customer service fees | 93 | 90 | ||||||
Loan servicing fees | 4 | 5 | ||||||
Bank owned life insurance income | 65 | 73 | ||||||
Net gains (losses) | 25 | — | ||||||
Other non-interest income | 34 | 32 | ||||||
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Total non-interest income | 221 | 200 | ||||||
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Non-Interest Expense: | ||||||||
Salaries and employee benefits | 1,855 | 1,770 | ||||||
Occupancy and equipment | 388 | 388 | ||||||
Data processing | 236 | 197 | ||||||
Directors’ fees | 91 | 94 | ||||||
FDIC assessments | 28 | 69 | ||||||
Other non-interest expense | 439 | 403 | ||||||
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Total non-interest expense | 3,037 | 2,921 | ||||||
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Income before income taxes | 537 | 422 | ||||||
Income tax expense | 223 | 162 | ||||||
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Net income | $ | 314 | $ | 260 | ||||
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Basic earnings per share | $ | 0.08 | $ | 0.07 | ||||
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Diluted earnings per share | $ | 0.08 | $ | 0.07 | ||||
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Basic weighted average shares outstanding | 3,734,822 | 3,825,224 | ||||||
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Diluted weighted average shares outstanding | 3,758,186 | 3,881,946 | ||||||
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See notes to consolidated financial statements.
6
OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
(In thousands) | ||||||||
Net income | $ | 314 | $ | 260 | ||||
Other comprehensive income (loss): | ||||||||
Net unrealized gains (losses) on available for sale securities, net of tax effect (benefit) of ($8), and $145, respectively | (11 | ) | 227 | |||||
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Other comprehensive income (loss) | (11 | ) | 227 | |||||
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Comprehensive income | $ | 303 | $ | 487 | ||||
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See notes to consolidated financial statements.
7
OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity (Unaudited)
Three Months Ended September 30, 2013 and 2012
Common Stock | Additional Paid-in Capital | Unearned ESOP Shares | Retained Earnings | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Balances at July 1, 2013 | $ | 40 | $ | 33,726 | $ | (3,055 | ) | $ | 40,531 | $ | 62 | $ | 71,304 | |||||||||||
Net income | �� | 314 | 314 | |||||||||||||||||||||
Other comprehensive income (loss), net of tax | (11 | ) | (11 | ) | ||||||||||||||||||||
Purchase and retirement of 1,000 shares of Company stock | (18 | ) | (18 | ) | ||||||||||||||||||||
Retirement of 9,430 shares for tax payments | (173 | ) | (173 | ) | ||||||||||||||||||||
Share-based compensation expense | 239 | 239 | ||||||||||||||||||||||
Tax benefit of 49,985 restricted shares vesting | 70 | 70 | ||||||||||||||||||||||
ESOP shares committed to be released (4,629 shares) | 39 | 46 | — | 85 | ||||||||||||||||||||
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Balances, September 30, 2013 | $ | 40 | 33,883 | $ | (3,009 | ) | $ | 40,845 | $ | 51 | $ | 71,810 | ||||||||||||
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Balances at July 1, 2012 | $ | 43 | $ | 38,695 | $ | (3,240 | ) | $ | 39,409 | $ | 808 | $ | 75,715 | |||||||||||
Net income | 260 | 260 | ||||||||||||||||||||||
Other comprehensive income (loss), net of tax | 227 | 227 | ||||||||||||||||||||||
Purchase and retirement of 54,416 shares of Company stock | (810 | ) | (810 | ) | ||||||||||||||||||||
Share-based compensation expense | 235 | 235 | ||||||||||||||||||||||
Tax benefit of 49,485 restricted shares vesting | 21 | 21 | ||||||||||||||||||||||
ESOP shares committed to be released (4,629 shares) | 23 | 46 | 69 | |||||||||||||||||||||
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Balances, September 30, 2012 | $ | 43 | $ | 38,164 | $ | (3,194 | ) | $ | 39,669 | $ | 1,035 | $ | 75,717 | |||||||||||
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See notes to consolidated financial statements.
8
OBA Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended September 30, | ||||||||
(in thousands) | 2013 | 2012 | ||||||
Operating Activities: | ||||||||
Net income | $ | 314 | $ | 260 | ||||
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Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 5 | 112 | ||||||
Depreciation and amortization of premises and equipment | 156 | 167 | ||||||
Net amortization of securities premiums and discounts | 67 | 93 | ||||||
Proceeds from sales of loans held for sale | 1,365 | — | ||||||
Originated loans held for sale | (926 | ) | — | |||||
Net gains on sales of loans | (25 | ) | — | |||||
Amortization of net deferred loan costs (fees) | (38 | ) | 10 | |||||
Bank owned life insurance income | (65 | ) | (73 | ) | ||||
ESOP expense | 85 | 69 | ||||||
Share-based compensation expense | 239 | 235 | ||||||
Amortization of mortgage servicing rights | 1 | 3 | ||||||
Amortization of brokered deposit premiums | 9 | — | ||||||
Tax benefit from vesting of restricted shares | (70 | ) | (21 | ) | ||||
Changes in other assets and liabilities, net | 136 | (142 | ) | |||||
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Total adjustments | 939 | 453 | ||||||
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Net cash provided by operating activities | 1,253 | 713 | ||||||
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Investing Activities: | ||||||||
Principal collections and maturities of securities available for sale | 2,413 | 2,855 | ||||||
Principal collections and maturities of securities held to maturity | 156 | 280 | ||||||
Purchases of securities available for sale | — | (16,384 | ) | |||||
Redemption of Federal Home Loan Bank stock, net | — | 607 | ||||||
Decrease in interest bearing deposits with other banks, net | 497 | 839 | ||||||
Loan originations less principal collections, net | 1,856 | (1,776 | ) | |||||
Purchases of premises and equipment | (44 | ) | (45 | ) | ||||
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Net cash provided by (used in) investing activities | 4,878 | (13,624 | ) | |||||
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Financing Activities: | ||||||||
Increase in deposits | 6,850 | 2,113 | ||||||
Increase in securities sold under agreements to repurchase | 2,047 | 427 | ||||||
Repayment of FHLB advances | (31 | ) | (5,030 | ) | ||||
Net decrease in advance payments from borrowers for taxes and insurance | (648 | ) | (750 | ) | ||||
Tax benefit from vesting of restricted shares | 70 | 21 | ||||||
Purchase and retirement of Company stock | (191 | ) | (810 | ) | ||||
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Net cash provided by (used in) financing activities | 8,097 | (4,029 | ) | |||||
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Increase (Decrease) in cash and cash equivalents | 14,228 | (16,940 | ) | |||||
Cash and cash equivalents at beginning of period | 16,173 | 31,525 | ||||||
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Cash and cash equivalents at end of period | $ | 30,401 | $ | 14,585 | ||||
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Supplemental Disclosures: | ||||||||
Interest paid | $ | 462 | $ | 680 | ||||
Income taxes paid (refunded), net | 200 | (101 | ) |
See notes to consolidated financial statements.
9
OBA Financial Services, Inc. and Subsidiary
Notes to the Consolidated Financial Statements (Unaudited)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
OBA Bank (“Bank”) is a community-oriented banking institution providing a variety of financial services to individuals and small businesses through its offices in Montgomery, Anne Arundel, and Howard Counties, Maryland. Its primary deposits are checking, money market, and time certificate accounts and its primary lending products are commercial mortgage, commercial business, construction, and residential mortgage loans.
In December 2007, the Bank reorganized into a three-tier mutual holding company structure. As part of the reorganization, the Bank converted from a mutual savings bank into a federally chartered stock savings bank and formed OBA Bancorp, Inc., a federally chartered mid-tier stock holding company, and OBA Bancorp, MHC, a federally chartered mutual holding company. The Bank became a wholly-owned subsidiary of OBA Bancorp, Inc. and OBA Bancorp, Inc. became a wholly-owned subsidiary of OBA Bancorp, MHC.
On January 21, 2010, OBA Bancorp, MHC completed its plan of conversion and reorganization from a mutual holding company to a stock holding company. In accordance with the plan, OBA Bancorp, MHC and OBA Bancorp, Inc. ceased to exist and a newly formed stock holding company, OBA Financial Services, Inc. (of which OBA Bank became a wholly owned subsidiary) sold shares of capital stock to eligible depositors of OBA Bank. OBA Financial Services, Inc.’s common stock is quoted on the NASDAQ Capital Market under the symbol “OBAF.”
In accordance with applicable regulations at the time of the conversion from a mutual holding company to a stock holding company, the Bank substantially restricted retained earnings by establishing a liquidation account. The liquidation account is maintained for the benefit of eligible account holders who keep their accounts at the Bank after conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
Basis of Presentation
The consolidated financial statements include the accounts of OBA Financial Services Inc. and OBA Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and are presented in accordance with instructions for Form 10-Q and Rule 10-01 of the SEC Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation are of a normal and recurring nature and have been included.
Operating results for the three months ended September 30, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2014 or any other interim period. The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes filed on Form 10-K for the fiscal year ended June 30, 2013.
In preparing the accompanying consolidated financial statements, the Company has evaluated subsequent events through the financial statement issue date. There were no subsequent events identified by the Company as a result of the evaluation that require recognition or disclosure in the consolidated financial statements.
Use of Estimates
In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Statement of Condition and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly sensitive to change in the near term relates to the determination of the allowance for loan losses, values related to the share-based incentive plans, and other than temporary impairment of investment securities.
10
Reclassifications
From time to time, certain amounts in the prior period consolidated financial statements are reclassified to conform with current period presentation. Such reclassifications, if any, have no material impact on consolidated net income or total stockholders’ equity.
Recent Accounting Pronouncements
Accounting Standards Update 2013-11
In July 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-11,Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update require an entity with an unrecognized tax benefit that is ‘not available’ or not intended to be used at the reporting date to present the unrecognized tax benefit as a liability that should not be combined with deferred tax assets. Otherwise, the unrecognized tax benefit should be presented as a reduction to the related deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013; early adoption is permitted. The amendments should be applied prospectively, although retroactive application is permitted. This ASU is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 2 — COMPREHENSIVE INCOME (LOSS)
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 stockholders’ equity section of the Consolidated Statement of Condition, such items, along with net income, are components of comprehensive income and accumulated other comprehensive income. The components of accumulated other comprehensive income and related tax effects are as follows:
Accumulated other comprehensive income (loss) consists of the following:
September 30, 2013 | June 30, 2013 | |||||||
(In thousands) | ||||||||
Unrealized gains (losses) on available for sale securities | $ | 83 | $ | 102 | ||||
Tax effect | 32 | 40 | ||||||
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Total | $ | 51 | $ | 62 | ||||
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11
NOTE 3 — SECURITIES
The amortized cost and fair value of securities with gross unrealized gains and losses are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
September 30, 2013 | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities(1) | $ | 34,506 | $ | 711 | $ | (628 | ) | $ | 34,589 | |||||||
Trust preferred security | 37 | — | — | 37 | ||||||||||||
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Total debt securities available for sale | 34,543 | 711 | (628 | ) | 34,626 | |||||||||||
Equity Securities | 50 | — | — | 50 | ||||||||||||
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Total securities available for sale | 34,593 | 711 | (628 | ) | 34,676 | |||||||||||
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Securities held to maturity: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities(1) | 1,288 | 89 | — | 1,377 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total debt securities held to maturity | 1,288 | 89 | — | 1,377 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment securities | $ | 35,881 | $ | 800 | $ | (628 | ) | $ | 36,053 | |||||||
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|
|
|
|
|
| |||||||||
June 30, 2013 | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities(1) | $ | 36,981 | $ | 616 | $ | (513 | ) | $ | 37,084 | |||||||
Trust preferred security | 41 | — | (1 | ) | 40 | |||||||||||
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|
|
|
|
|
|
| |||||||||
Total debt securities available for sale | 37,022 | 616 | (514 | ) | 37,124 | |||||||||||
Equity Securities | 50 | — | — | 50 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total securities available for sale | 37,072 | 616 | (514 | ) | 37,174 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Securities held to maturity: | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Residential mortgage-backed securities(1) | 1,445 | 75 | — | 1,520 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total debt securities held to maturity | 1,445 | 75 | — | 1,520 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investment securities | $ | 38,517 | $ | 691 | $ | (514 | ) | $ | 38,694 | |||||||
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|
|
|
|
|
|
(1) | All residential mortgage-backed securities were issued by FNMA, FHLMC, or GNMA. |
12
The amortized cost and fair value of debt securities by contractual maturity at September 30, 2013 are as follows:
Available for sale | Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Due after ten years | $ | 37 | $ | 37 | $ | — | $ | — | ||||||||
Residential mortgage-backed securities | 34,506 | 34,589 | 1,288 | 1,377 | ||||||||||||
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|
|
|
|
|
| |||||||||
Total | $ | 34,543 | $ | 34,626 | $ | 1,288 | $ | 1,377 | ||||||||
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|
|
|
|
|
|
At September 30, 2013 the market value of securities securing customer repurchase agreements was $10.5 million. There were no dealer repurchase agreements. At June 30, 2013, the market value of securities securing customer repurchase agreements was $12.5 million.
Information pertaining to securities with gross unrealized losses at the dates listed aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 628 | $ | 17,893 | $ | — | $ | — | $ | 628 | $ | 17,893 | ||||||||||||
Trust preferred security | — | 37 | — | — | — | 37 | ||||||||||||||||||
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|
|
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|
|
|
|
| |||||||||||||
Total | $ | 628 | $ | 17,930 | $ | — | $ | — | $ | 628 | $ | 17,930 | ||||||||||||
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|
|
|
|
|
| |||||||||||||
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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|
At September 30, 2013 and at June 30, 2013, all residential mortgage backed securities and their contractual cash flows were guaranteed by FNMA, FHLMC, or GNMA. The Company’s sole trust preferred security is a variable rate pool of trust preferred securities issued by insurance companies or their holding companies. These positions and the related unrealized losses are not material to the Company’s consolidated financial position or results of operations. The decline in the residential mortgage backed securities has been primarily caused by the movement in market interest rates. The Company has no intent or requirement to sell these securities.
NOTE 4 — CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES
Various Bank policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans, or portions of loans, classified as loss are those considered uncollectible and of such little value that their continuance as a loan is not warranted. Since such loans are written off in full, the Bank will not have any such loans classified as loss at the end of a reporting period. Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as Special Mention.
The Bank maintains an allowance for loan losses at an amount estimated to equal all credit losses in the loan portfolio that are both probable and reasonably estimable at the consolidated statement of condition date. The Bank’s determination as to the classification of loans is subject to review by the Bank’s primary federal regulator, the Office of the Comptroller of the Currency (“OCC”). The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations.
13
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 risk compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment expectations on loans secured by income-producing properties typically depend on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Commercial business loans generally have greater credit risk compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment expectations on commercial business loans typically depend on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Construction loans generally have greater credit risk compared to residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment expectations on construction loans typically depend on the successful completion of the project and the operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Generally, the Bank underwrites commercial real estate loans at a loan-to-value ratio of 75% or less and residential mortgage loans at a loan-to-value ratio not exceeding 80%. In the event that a loan becomes past due, management will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to estimate property values. The Bank may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrower’s condition. In addition, changes in the appraised value of properties securing loans can result in an increase or decrease in the general allowance for loan losses as an adjustment to the historical loss experience due to qualitative and environmental factors.
The loan portfolio is evaluated on a quarterly basis and the allowance is adjusted accordingly. While the best information available is used to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the OCC will periodically review the allowance for loan losses. The OCC may require the Bank to recognize additions to the allowance based on its analysis of information available at the time of the examination.
The classes of loans are as follows:
September 30, 2013 | June 30, 2013 | |||||||
(In thousands) | ||||||||
Commercial business | $ | 42,089 | $ | 42,321 | ||||
Commercial real estate | 144,268 | 140,104 | ||||||
Construction | 10,400 | 13,044 | ||||||
Residential mortgage | 77,498 | 80,529 | ||||||
Home equity loans and lines of credit | 27,280 | 27,336 | ||||||
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|
| |||||
Loans | 301,535 | 303,334 | ||||||
Net deferred commercial loan fees | (327 | ) | (320 | ) | ||||
Net deferred home equity costs | 251 | 262 | ||||||
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|
|
| |||||
Loans net of deferred (fees) costs | 301,459 | 303,276 | ||||||
Allowance for loan losses | 3,479 | 3,473 | ||||||
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|
| |||||
Total loans, net | $ | 297,980 | $ | 299,803 | ||||
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|
14
The following tables present the classes of the loan portfolio summarized by loan rating within the Bank’s internal risk rating system:
September 30, 2013: | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial business | $ | 38,914 | $ | 2,307 | $ | 868 | $ | — | $ | 42,089 | ||||||||||
Commercial real estate | 137,881 | 1,566 | 4,821 | — | 144,268 | |||||||||||||||
Construction | 10,400 | — | — | — | 10,400 | |||||||||||||||
Residential mortgage | 75,367 | — | 2,131 | — | 77,498 | |||||||||||||||
Home equity loans and lines of credit | 26,777 | 75 | 428 | — | 27,280 | |||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 289,339 | $ | 3,948 | $ | 8,248 | $ | — | $ | 301,535 | ||||||||||
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|
|
|
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|
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| |||||||||||
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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|
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|
Loans are generally placed on non-accrual status when payment of principal or interest is over 90 days delinquent or 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, at which point income is recognized to the extent received, or the loan returns to accrual status. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due and non-accrual status:
September 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 | $ | — | $ | — | $ | — | $ | — | $ | 42,089 | $ | 42,089 | $ | — | ||||||||||||||
Commercial real estate | — | — | — | — | 144,268 | 144,268 | — | |||||||||||||||||||||
Construction | — | — | — | — | 10,400 | 10,400 | — | |||||||||||||||||||||
Residential mortgage | 133 | — | 622 | 755 | 76,743 | 77,498 | 622 | |||||||||||||||||||||
Home equity loans and lines of credit | 309 | 136 | — | 445 | 26,835 | 27,280 | 75 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 442 | $ | 136 | $ | 622 | $ | 1,200 | $ | 300,335 | $ | 301,535 | $ | 697 | ||||||||||||||
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| |||||||||||||||
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 | ||||||||||||||
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15
There are no loans over 90 days past due that are still accruing at the dates indicated.
The Bank provides for loan losses based upon the consistent application of the documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to 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 Bank 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 and commercial business loans are reviewed individually. Loans are considered impaired if the probability exists that the Bank 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 loan’s 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 Bank applies an estimated loss rate to each loan group. The loss rates applied are based upon loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions; and |
(3) | unallocated allowances established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance. |
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, but not limited to:
• | changes in any concentration of credit (including, but not limited to, concentrations by geography, industry, or collateral type); |
• | changes in the number and amount of non-accrual loans, watch list loans, and past due loans; |
• | changes in national, state, and local economic trends; |
• | changes to other external influences including, but not limited to, legal, accounting, peer, and regulatory changes; |
• | changes in the types of loans in the loan portfolio; |
• | changes in the experience and ability of personnel and management in the loan origination and loan servicing departments; |
• | changes in the value of underlying collateral for collateral dependent loans; |
• | changes in lending strategies; and |
• | changes in lending policies and procedures. |
The following table summarizes activity in the allowance for loan losses:
Three Months Ended September 30, | ||||||||
(In thousands) | 2013 | 2012 | ||||||
Balance at beginning of period | $ | 3,473 | $ | 3,035 | ||||
Provision for loan losses | 5 | 112 | ||||||
Charge-offs | — | (8 | ) | |||||
Recoveries | 1 | 1 | ||||||
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|
| |||||
Balance at end of period | $ | 3,479 | $ | 3,140 | ||||
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16
The following tables set forth the activity in and allocation of the allowance for loan losses by loan portfolio class for the periods as listed:
Three Months Ended September 30, 2013
Commercial business | Commercial real estate | Construction | Residential mortgage | Home equity loans and lines of credit | Unallocated | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 429 | $ | 1,573 | $ | 122 | $ | 847 | $ | 270 | $ | 232 | $ | 3,473 | ||||||||||||||
Charge-offs | — | — | — | — | — | — | — | |||||||||||||||||||||
Recoveries | — | 1 | — | — | — | — | 1 | |||||||||||||||||||||
Provisions | (8 | ) | 34 | (24 | ) | (27 | ) | 11 | 19 | 5 | ||||||||||||||||||
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|
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|
|
|
|
|
|
| |||||||||||||||
Ending balance | $ | 421 | $ | 1,608 | $ | 98 | $ | 820 | $ | 281 | $ | 251 | $ | 3,479 | ||||||||||||||
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|
|
|
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|
|
Three Months Ended September 30, 2012
Commercial business | Commercial real estate | Construction | Residential mortgage | Home equity loans and lines of credit | Unallocated | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance | $ | 670 | $ | 955 | $ | 7 | $ | 772 | $ | 390 | $ | 241 | $ | 3,035 | ||||||||||||||
Charge-offs | — | (8 | ) | — | — | — | — | (8 | ) | |||||||||||||||||||
Recoveries | — | 1 | — | — | — | — | 1 | |||||||||||||||||||||
Provisions | 28 | 208 | (1 | ) | 43 | (10 | ) | (156 | ) | 112 | ||||||||||||||||||
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|
|
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|
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| |||||||||||||||
Ending balance | $ | 698 | $ | 1,156 | $ | 6 | $ | 815 | $ | 380 | $ | 85 | $ | 3,140 | ||||||||||||||
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17
The following tables present the balance in the allowance for loan losses and the recorded in investment in loans by portfolio class and based on impairment method:
September 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 | 421 | 1,608 | 98 | 672 | 281 | 251 | 3,331 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total ending allowance balance | $ | 421 | $ | 1,608 | $ | 98 | $ | 820 | $ | 281 | $ | 251 | $ | 3,479 | ||||||||||||||
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|
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| |||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Ending loan balance | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 119 | $ | 1,317 | $ | — | $ | 1,618 | $ | 428 | $ | 3,482 | ||||||||||||||||
Collectively evaluated for impairment | 41,970 | 142,951 | 10,400 | 75,880 | 26,852 | 298,053 | ||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total ending loan balance | $ | 42,089 | $ | 144,268 | $ | 10,400 | $ | 77,498 | $ | 27,280 | $ | 301,535 | ||||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||||||
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 | |||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total ending allowance balance | $ | 429 | $ | 1,573 | $ | 122 | $ | 847 | $ | 270 | $ | 232 | $ | 3,473 | ||||||||||||||
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|
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| |||||||||||||||
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 | ||||||||||||||||||||||
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|
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|
|
|
|
|
|
| |||||||||||||||||
Total ending loan balance | $ | 42,321 | $ | 140,104 | $ | 13,044 | $ | 80,529 | $ | 27,336 | $ | 303,334 | ||||||||||||||||
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18
The following tables summarize information in regards to impaired loans by portfolio class as of and for the periods ended:
September 30, 2013 | ||||||||||||||||||||
At September 30, 2013 | Three Months Ended | |||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | 119 | $ | 119 | $ | — | $ | 120 | $ | — | ||||||||||
Commercial real estate | 1,317 | 1,406 | — | 1,323 | — | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgage | 657 | 703 | — | 604 | 13 | |||||||||||||||
Home equity loans and lines of credit | 428 | 428 | — | 428 | — | |||||||||||||||
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|
|
|
|
|
|
|
| |||||||||||
Total with no allowance recorded | $ | 2,521 | $ | 2,656 | $ | — | $ | 2,475 | $ | 13 | ||||||||||
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|
|
|
|
|
|
| |||||||||||
With an Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial real estate | — | — | — | — | 19 | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgage | 961 | 961 | 148 | 963 | 7 | |||||||||||||||
Home equity loans and lines of credit | — | — | — | — | 3 | |||||||||||||||
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|
|
|
|
|
|
| |||||||||||
Total with allowance recorded | $ | 961 | $ | 961 | $ | 148 | $ | 963 | $ | 29 | ||||||||||
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|
|
| |||||||||||
Total: | ||||||||||||||||||||
Commercial business | $ | 119 | $ | 119 | $ | — | $ | 120 | $ | — | ||||||||||
Commercial real estate | 1,317 | 1,406 | — | 1,323 | 19 | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgage | 1,618 | 1,664 | 148 | 1,567 | 20 | |||||||||||||||
Home equity loans and lines of credit | 428 | 428 | — | 428 | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 3,482 | $ | 3,617 | $ | 148 | $ | 3,438 | $ | 42 | ||||||||||
|
|
|
|
|
|
|
|
|
|
September 30, 2012 | ||||||||||||||||||||
At September 30, 2012 | Three Months Ended | |||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | 8 | $ | 8 | $ | — | $ | 8 | $ | — | ||||||||||
Commercial real estate | 6,249 | 6,339 | — | 6,255 | 17 | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgage | 457 | 460 | — | 457 | 1 | |||||||||||||||
Home equity loans and lines of credit | 33 | 33 | — | 33 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total with no allowance recorded | $ | 6,747 | $ | 6,840 | $ | — | $ | 6,753 | $ | 18 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
With an Allowance Recorded: | ||||||||||||||||||||
Commercial business | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial real estate | — | — | — | — | — | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgage | 973 | 973 | 150 | 974 | 9 | |||||||||||||||
Home equity loans and lines of credit | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total with allowance recorded | $ | 973 | $ | 973 | $ | 150 | $ | 974 | $ | 9 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total: | ||||||||||||||||||||
Commercial business | $ | 8 | $ | 8 | $ | — | $ | 8 | $ | — | ||||||||||
Commercial real estate | 6,249 | 6,339 | — | 6,255 | 17 | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgage | 1,430 | 1,433 | 150 | 1,431 | 10 | |||||||||||||||
Home equity loans and lines of credit | 33 | 33 | — | 33 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 7,720 | $ | 7,813 | $ | 150 | $ | 7,727 | $ | 27 | ||||||||||
|
|
|
|
|
|
|
|
|
|
19
June 30, 2013 | ||||||||||||||||||||
At June 30, 2013 | For the year ended | |||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||
Commercial business loans | $ | 121 | $ | 121 | $ | — | $ | 65 | $ | — | ||||||||||
Commercial real estate | 1,329 | 1,418 | — | 3,886 | — | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgages | 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 loans | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial real estate | — | — | — | — | 72 | |||||||||||||||
Commercial construction | — | — | — | — | ||||||||||||||||
Residential mortgages | 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 loans | 121 | $ | 121 | $ | — | $ | 65 | $ | — | |||||||||||
Commercial real estate | 1,329 | 1,418 | — | 3,886 | 72 | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Residential mortgages | 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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following table presents troubled debt restructurings occurring during the three month periods listed below:
September 30, 2013 | September 30, 2012 | |||||||||||||||||||||||
Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | Number of Contracts | Pre-Modification Outstanding Recorded Investments | Post-Modification Outstanding Recorded Investments | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Three months ended March 31: | ||||||||||||||||||||||||
Commercial business | — | $ | — | $ | — | — | $ | — | $ | — | ||||||||||||||
Commercial real estate | — | — | — | — | — | — | ||||||||||||||||||
Residential mortgage | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total Troubled Debt Restructurings | — | $ | — | $ | — | — | $ | — | $ | — | ||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
Generally, the Bank does not forgive principal or interest on loans or modify the interest rate on loans to rates that are below market rates based on the risks associated with the modified loans. Although, loans can be modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. These troubled debt restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to financial difficulties of the borrower. During the three months ended September 30, 2013 and 2012, no loans previously classified as troubled debt restructurings subsequently defaulted.
NOTE 5 — FAIR VALUE MEASUREMENTS AND DISCLOSURES
Management uses its best judgment in estimating the fair value of the Company’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all assets and liabilities, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The
20
estimated fair value amounts have been measured as of their respective reporting dates and have not been re-evaluated or updated subsequent to those respective dates. As such, the estimated fair values of these assets and liabilities subsequent to the respective reporting dates may be different than the amounts reported at each reporting date. Accounting guidance related to fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:
Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | |
Level 2: | Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. | |
Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). |
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between fair value hierarchy levels are recognized as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between fair value hierarchy levels for the three months ended September 30, 2013 or 2012.
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) Description | September 30, 2013 | (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) | $ | 34,589 | $ | — | $ | 34,589 | $ | — | ||||||||
Trust preferred security | 37 | — | — | 37 | ||||||||||||
Equity securities | 50 | — | 50 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Securities available for sale | $ | 34,676 | $ | — | $ | 34,639 | $ | 37 | ||||||||
|
|
|
|
|
|
|
|
Description | June 30, 2013 | (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) | $ | 37,084 | $ | — | $ | 37,084 | $ | — | ||||||||
Trust preferred security | 40 | — | — | 40 | ||||||||||||
Equity securities | 50 | — | 50 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Securities available for sale | $ | 37,174 | $ | — | $ | 37,134 | $ | 40 | ||||||||
|
|
|
|
|
|
|
|
21
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2013 and 2012:
Three Months Ended September 30, | ||||||||
(In thousands) | 2013 | 2012 | ||||||
Beginning balance | $ | 40 | $ | 54 | ||||
Principal repayments | (3 | ) | (4 | ) | ||||
Unrealized gains included in other comprehensive income | — | 4 | ||||||
|
|
|
| |||||
Ending balance | $ | 37 | $ | 54 | ||||
|
|
|
|
Level 3 securities consist of one trust preferred security at September 30, 2013 and 2012 and June 30, 2013.
For assets measured at fair value on a nonrecurring basis at the dates listed, the fair value measurements by level within the fair value hierarchy are as follows:
(In thousands) | ||||||||||||||||
Description | September 30, 2013 | (Level 1) Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Impaired loans | $ | 813 | $ | — | $ | — | $ | 813 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Description | June 30, 2013 | (Level 1) Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
Impaired loans | $ | 816 | $ | — | $ | — | $ | 816 | ||||||||
|
|
|
|
|
|
|
|
The methods and assumptions used to estimate the fair values included in the above tables are included in the disclosures and tables that follow.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate fair values at September 30, 2013 and June 30, 2013:
Cash and Cash Equivalents and interest bearing deposits with other banks (Carried at Cost)
The carrying amounts of cash and short-term instruments approximate fair value and are classified within level 1 of the fair value hierarchy.
Securities Available for Sale (Carried at Fair Value)
The fair values of securities available for sale, excluding trust preferred securities, are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other pieces of information.
22
The market for pooled trust preferred securities is inactive. A significant widening of the bid/ask spreads in the markets in which these securities trade was followed by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and no new pooled trust preferred securities have been issued since 2007. Since there were limited observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using primarily unobservable Level 3 inputs. Fair value estimates for trust preferred securities were based on discounting expected cash flows using a risk-adjusted discount rate. The Company develops the risk-adjusted discount rate by considering the time value of money (risk-free rate) adjusted for an estimated risk premium for bearing the uncertainty in future cash flows and, given current adverse market conditions, a liquidity adjustment based on an estimate of the premium that a market participant would require assuming an orderly transaction. Management determined that sensitivity to inputs are not significant due to the immaterial nature of trust preferred securities as a level 3 asset.
Securities Held to Maturity (Carried at Amortized Cost)
The fair values of securities held to maturity are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other pieces of information.
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 (except impaired loans) are estimated using discounted cash flow analyses which use market rates at the statement of condition date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments, and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. Loans are classified within Level 3 of the fair value hierarchy.
Loans Held for Sale (Carried at Cost)
The carrying amount of Loans Held for Sale approximates fair value and considers secondary market offerings for loans with similar characteristics. Loans Held for Sale are classified within Level 3 of the fair value hierarchy.
Impaired Loans (Generally Carried at Fair Value)
Generally, impaired loans are those which the Company has measured impairment based on the fair value of the loan’s collateral. Fair value of real estate collateral is generally determined based upon independent third-party appraisals of the properties, which consider sales prices of similar properties in the proximate vicinity or by discounting expected cash flows from the properties by an appropriate risk adjusted discount rate. Fair value of collateral other than real estate is based on an estimate of the liquidation proceeds. Impaired loans are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of loan balances net of valuation allowances and loan balances on impaired loans in which the loan has been charged-off to its fair value.
Mortgage Servicing Rights (Carried at Lower of Cost or Fair Value)
At origination, the Company estimates the fair value of mortgage servicing rights at 1% of the principal balances of loans sold. The Company amortizes that amount over the estimated period of servicing revenues or charges the entire amount to income upon prepayment of the related loan. Due to the immaterial balance of mortgage servicing rights, the Company did not perform any further analysis or estimate their fair values. Therefore, the Company has disclosed that the carrying amounts of mortgage servicing rights approximate fair value. Mortgage servicing rights are classified within Level 3 of the fair value hierarchy. Management determined that sensitivity to inputs are not significant due to the immaterial nature of the mortgage servicing rights as a Level 3 asset.
23
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. Demand deposits and certificates of deposit are classified within Level 2 of the fair value hierarchy.
Federal Home Loan Bank Advances (Carried at Cost)
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms, and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Federal Home Loan Bank Advances are classified within Level 2 of the fair value hierarchy.
Securities Sold Under Agreement to Repurchase (Carried at Cost)
The carrying amounts of securities sold under agreements to repurchase approximate fair value for short-term obligations. The fair values for longer term repurchase agreements are based on current market interest rates for similar transactions. Securities sold under agreement to repurchase are classified within Level 2 of the fair value hierarchy.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amounts of accrued interest approximate fair value. Accrued Interest Receivable and Payable are classified within Level 2 of the fair value hierarchy.
Off-Balance-Sheet Credit-Related Instruments (Disclosures at Cost)
Fair values for off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.
Quantitative information about Level 3 Fair Value Measurement is included in the tables below:
(In thousands) | Quantitative Information about Level 3 Fair Value Measurements | |||||||||
September 30, 2013 | Fair Value Estimate | Valuation Techniques | Unobservable Inputs | Estimated Range (weighted average) | ||||||
Impaired loans | $ | 813 | Appraisal of collateral | Appraisal adjustments | 0.0% to -25.0% (-6.5%) | |||||
Liquidation expenses | -3.0% to -5.0% (-3.3%) | |||||||||
(In thousands) | Quantitative Information about Level 3 Fair Value Measurements | |||||||||
June 30, 2013 | Fair Value Estimate | Valuation Techniques | Unobservable Inputs | Estimated Range (weighted average) | ||||||
Impaired loans | $ | 816 | Appraisal of collateral | Appraisal adjustments | 0.0% to -25.0% (-6.5%) | |||||
Liquidation expenses | -3.0% to -5.0% (-3.3%) |
24
The estimated fair values of the Company’s financial instruments were as follows:
Fair Value Hierarchy at September 30, 2013 | ||||||||||||||||||||
September 30, 2013 | Quoted Prices in Active Markets For Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||
(In thousands) | Carrying Amount | Fair Value | ||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 30,401 | $ | 30,401 | $ | 30,401 | $ | — | $ | — | ||||||||||
Interest bearing deposits with other banks | 6,195 | 6,195 | 6,195 | — | — | |||||||||||||||
Securities available for sale | 34,676 | 34,676 | — | 34,639 | 37 | |||||||||||||||
Securities held to maturity | 1,288 | 1,377 | — | 1,377 | — | |||||||||||||||
Federal Home Loan Bank stock | 1,160 | 1,160 | — | 1,160 | — | |||||||||||||||
Loans held for sale | — | — | — | — | — | |||||||||||||||
Loans receivable, net | 297,980 | 304,727 | — | — | 304,727 | |||||||||||||||
Accrued interest receivable | 1,093 | 1,093 | — | 1,093 | — | |||||||||||||||
Mortgage servicing rights | 26 | 26 | — | — | 26 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 290,113 | 282,350 | — | 282,350 | — | |||||||||||||||
Securities sold under agreements to repurchase | 10,591 | 10,590 | — | 10,590 | — | |||||||||||||||
Federal Home Loan Bank Advances | 15,592 | 17,111 | — | 17,111 | — | |||||||||||||||
Accrued interest payable | 138 | 138 | — | 138 | — | |||||||||||||||
Off-Balance sheet financial instruments | — | — | — | — | — |
25
Fair Value Hierarchy at June 30, 2013 | ||||||||||||||||||||
June 30, 2013 | Quoted Prices in Active Markets For Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||
(In thousands) | Carrying Amount | Fair Value | ||||||||||||||||||
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 | — | 275,592 | — | |||||||||||||||
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 | — | — | — | — | — |
NOTE 6 — GUARANTEES
The Company has not issued any guarantees that would require liability recognition or disclosure other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of September 30, 2013, the Company had $1.2 million of outstanding letters of credit. Management believes the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. Management believes the current amount of the liability as of September 30, 2013 for guarantees under letters of credit issued is not material.
NOTE 7 — EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 2010, the Company adopted an Employee Stock Ownership Plan (“ESOP”) for eligible employees. The ESOP borrowed $3.7 million from the Company and used those funds to acquire 370,300 shares, or 8.0%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.
The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20 year term of the loan with funds from the Bank’s contributions to the ESOP and dividends payable on the stock, if any. The interest rate on the ESOP loan adjusts annually and is the prime rate on the first business day of the calendar year, as published in The Wall Street Journal.
Shares purchased by the ESOP are held by a trustee in an unallocated suspense account and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. Total ESOP shares may be reduced as a result of employees leaving the Company as 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 relating to the ESOP recognized for the three months ended September 30, 2013 and 2012 amounted to $85 thousand and $69 thousand, respectively.
26
Shares held by the ESOP trust at the dates listed were as follows:
September 30, | ||||||||
2013 | 2012 | |||||||
Allocated shares | 67,831 | 49,316 | ||||||
Unallocated shares | 300,869 | 319,384 | ||||||
|
|
|
| |||||
Total ESOP shares | 368,700 | 368,700 | ||||||
|
|
|
| |||||
Fair value of unallocated shares, in thousands | $ | 5,717 | $ | 4,839 | ||||
|
|
|
|
NOTE 8 — SHARE BASED COMPENSATION
In May 2011, the Company’s stockholders approved the OBA Financial Services, Inc. 2011 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to key officers and outside directors. Compensation expense is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards. A portion of the restricted stock award vesting is contingent upon meeting certain Company-wide performance goals.
Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 648,025. Total share-based compensation expense for the three months ended September 30, 2013 and 2012 was $239 thousand and $235 thousand, respectively.
Stock Options
The table below presents the stock option activity for the period shown:
Options | Weighted average exercise price | Remaining contractual life (years) | ||||||||||
Options outstanding at June 30, 2013 | 281,150 | $ | 14.92 | |||||||||
Granted | — | — | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | — | — | ||||||||||
Expired | — | — | ||||||||||
|
|
|
| |||||||||
Options outstanding at September 30, 2013 | 281,150 | $ | 14.92 | 7.9 | ||||||||
|
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Options | Weighted average exercise price | Remaining contractual life (years) | ||||||||||
Options outstanding at June 30, 2012 | 272,150 | $ | 14.79 | |||||||||
Granted | — | — | ||||||||||
Exercised | — | — | ||||||||||
Forfeited | — | — | ||||||||||
Expired | — | — | ||||||||||
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Options outstanding at September 30, 2012 | 272,150 | $ | 14.79 | 8.8 | ||||||||
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As of September 30, 2013, the Company had $580 thousand of unrecognized compensation costs related to stock options. The cost of stock options will be amortized in equal annual installments over the five-year vesting period, of which three remain. There were 56,230 options vested during the three months ended September 30, 2013. Stock option expense for the three months ended September 30, 2013 and 2012 was $51 thousand and $50 thousand, respectively.
Restricted Stock Awards
Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.
The table below presents the restricted stock award activity for the period shown:
Service- Restricted stock awards | Weighted average grant date fair value | Performance- Restricted stock awards | Weighted average grant date fair value | Total Restricted stock awards | Weighted average grant date fair value | |||||||||||||||||||
Non-vested at June 30, 2013 | 111,596 | $ | 14.86 | 88,872 | $ | 14.81 | 200,468 | $ | 14.84 | |||||||||||||||
Granted | — | — | — | — | ||||||||||||||||||||
Vested | 27,767 | 14.84 | 22,218 | 14.81 | 49,985 | 14.83 | ||||||||||||||||||
Forfeited | — | — | — | — | — | — | ||||||||||||||||||
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Non-vested at September 30, 2013 | 83,829 | $ | 14.87 | 66,654 | $ | 14.81 | 150,483 | $ | 14.84 | |||||||||||||||
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Service- Restricted stock awards | Weighted average grant date fair value | Performance- Restricted stock awards | Weighted average grant date fair value | Total Restricted stock awards | Weighted average grant date fair value | |||||||||||||||||||
Non-vested at June 30, 2012 | 136,363 | $ | 14.77 | 111,090 | $ | 14.81 | 247,453 | $ | 14.79 | |||||||||||||||
Granted | — | — | — | — | ||||||||||||||||||||
Vested | 27,267 | 14.77 | 22,218 | 14.81 | 49,485 | 14.79 | ||||||||||||||||||
Forfeited | — | — | — | — | — | — | ||||||||||||||||||
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Non-vested at September 30, 2012 | 109,096 | $ | 14.77 | 88,872 | $ | 14.81 | 197,968 | $ | 14.79 | |||||||||||||||
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As of September 30, 2013, the Company had $2.1 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, of which three remain. 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 three months ended September 30, 2013 and 2012 was $188 thousand and $185 thousand, respectively.
28
NOTE 9 — EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period exclusive of unallocated ESOP shares and unvested restricted stock. Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the Treasury Stock method. The table below sets forth the dilutive effect of the stock options and unvested restricted shares.
Three Months Ended September 30, | ||||||||
(Dollars in thousands, except share data) | 2013 | 2012 | ||||||
Net income | $ | 314 | $ | 260 | ||||
Weighted average number of shares used in: | ||||||||
Basic earnings per share | 3,734,822 | 3,825,224 | ||||||
Diluted common stock equivalents | 23,364 | 56,722 | ||||||
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Diluted earnings per share | 3,758,186 | 3,881,946 | ||||||
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Net income per common share, basic | $ | 0.08 | $ | 0.07 | ||||
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Net income per common share, diluted | $ | 0.08 | $ | 0.07 | ||||
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FINANCIAL REVIEW
The principal objective of this financial review is to provide an overview of the financial condition and results of operations of OBA Financial Services Inc., and its subsidiary, OBA Bank. The discussion and tabular presentations should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes.
Overview of Income and Expenses
Income
The Company has two primary sources of income; net interest income and non-interest income. Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.
Non-interest income is received from providing products and services and from other income. Non-interest income is earned from service charges on deposit accounts, bank owned life insurance income, and loan servicing fees. The Company also earns income from the sale of residential mortgage loans and other fees and charges.
The Company recognizes gains or losses as a result of sales of investment securities, foreclosed property, and premises and equipment. In addition, the Company recognizes losses on its investment securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Company’s primary sources of income.
Expenses
The non-interest expenses the Company incurs in operating its business consist primarily of salaries and employee benefits, occupancy and equipment expense, external processing fees, FDIC assessments, Director fees, and other non-interest expenses.
Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees and payroll tax, healthcare, retirement, ESOP, Equity Incentive Plan, and other employee benefit expenses.
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.
29
Data processing fees are paid to third party vendors primarily for various data processing services.
Other expenses include expenses for professional services, including, but not limited to, attorney, accountant and consultant fees, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.
Critical Accounting Policies and Estimates
There are no material changes to the critical accounting policies disclosed in OBA Financial Services, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
Comparison of Financial Condition at September 30, 2013 and June 30, 2013
Assets.Total assets increased $8.8 million to $390.4 million at September 30, 2013 from $381.6 million at June 30, 2013. The increase was primarily due to an increase in cash and cash equivalents partially offset by decreases in loans and securities.
Cash and Cash Equivalents. At September 30, 2013, cash and cash equivalents increased $14.2 million, to $30.4 million, from $16.2 million at June 30, 2013 as deposits increased $6.9 million, customer repurchase agreements increased $2.0 million, and securities and loans decreased $2.7 million and $1.8 million, respectively.
Loans.At September 30, 2013, total gross loans were $301.5 million, a slight decrease of $1.8 million, as compared to $303.3 million at June 30, 2013. The commercial loan portfolio increased $1.3 million to $196.8 million at September 30, 2013 from $195.5 million at June 30, 2013 as the Company continued its focus on originating commercial loans. The commercial real estate loan portfolio increased $4.2 million, to $144.3 million, at September 30, 2013 from $140.1 million at June 30, 2013. This increase was primarily offset by decreases of $2.6 million, to $10.4 million, and $3.0 million, to $77.5 million, in the construction and residential mortgage loan portfolios, respectively. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying consolidated financial statements.
Allowance for Loan Losses.
The following table summarizes activity in the allowance for loan losses:
Three Months Ended September 30, | ||||||||
(in thousands) | 2013 | 2012 | ||||||
Balance at beginning of period | $ | 3,473 | $ | 3,035 | ||||
Provision for loan losses | 5 | 112 | ||||||
Charge-offs | — | (8 | ) | |||||
Recoveries | 1 | 1 | ||||||
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Balance at end of period | $ | 3,479 | $ | 3,140 | ||||
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Ratios: | ||||||||
Net charge-offs to average loans | — | % | — | % | ||||
Allowance for loan losses to loans | 1.15 | 1.05 |
At September 30, 2013, the allowance for loan losses was $3.5 million compared to $3.5 million at June 30, 2013. The allowance for loan losses as a percentage of total loans at September 30, 2013 was 1.15% compared to 1.15% at June 30, 2013. There were effectively no net charge-offs as a percentage of average loans for the three months ended September 30, 2013 and 2012. The Bank had $3.5 million in impaired loans at September 30, 2013 as compared to $3.4 million at June 30, 2013. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying consolidated financial statements.
30
Non-performing Assets. Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless well secured and in the process of collection. Loans can also be placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected. At September 30, 2013, the Company had $697 thousand in total non-performing assets, which was unchanged from June 30, 2013. These totals represent two residential mortgage loans and one home equity line of credit. Of the $697 thousand in non-performing assets at September 30, 2013, $109 thousand were also troubled debt restructurings.
The following table summarizes non-performing assets:
(dollars in thousands) | September 30, 2013 | June 30, 2013 | ||||||
Non-performing assets | ||||||||
Non-accrual loans: | ||||||||
Residential mortgages | $ | 622 | 622 | |||||
Home equity loans and lines of credit | 75 | 75 | ||||||
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Total non-accrual loans | 697 | 697 | ||||||
Other real estate owned | — | — | ||||||
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Total non-performing assets | $ | 697 | $ | 697 | ||||
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Asset quality ratios: | ||||||||
Non-performing loans to total loans | 0.23 | % | 0.23 | % | ||||
Non-performing assets to total assets | 0.18 | 0.18 |
The non-performing loans to total loans ratio was 23 basis points at September 30, 2013 and June 30, 2013 and the non-performing assets to total assets ratio was 18 basis points at September 30, 2013 and June 30, 2013. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.
Troubled Debt Restructurings.At September 30, 2013 and June 30, 2013, the Bank had $3.5 million of loans which were considered troubled debt restructurings. At September 30, 2013, the Bank had $1.6 million in residential mortgage loans that were considered troubled debt restructurings and $1.3 million in commercial real estate loans that were considered troubled debt restructurings. At June 30, 2013, the Bank had $1.9 million in residential mortgage loans and home equity loans and lines of credit that were considered troubled debt restructurings and $1.6 million in commercial real estate loans that were considered troubled debt restructurings. Of the $3.5 million in loans considered troubled debt restructurings, $109 thousand were also non-performing loans. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.
Securities.At September 30, 2013, the securities portfolio totaled $36.0 million, or 9.2% of total assets, as compared to $38.6 million, or 10.1% of total assets, at June 30, 2013.
Deposits.At September 30, 2013, deposits increased $6.9 million to $290.1 million from $283.3 million at June 30, 2013. Total money market and savings accounts increased $2.4 million and certificates of deposit increased $4.2 million.
Borrowings.At September 30, 2013, total borrowings increased $2.0 million to $26.2 million from $24.2 million at June 30, 2013. Customer repurchase agreements increased $2.0 million to $10.6 million at September 30, 2013 from $8.5 million at June 30, 2013. At September 30, 2013 and June 30, 2013, Federal Home Loan Bank advances totaled $15.6 million.
At September 30, 2013, the Company had access to additional Federal Home Loan Bank advances of up to $46.5 million.
31
Equity.Equity totaled $71.8 million at September 30, 2013 and $71.3 million at June 30, 2013. At September 30, 2013, the Company had repurchased 160,098 shares of its common stock of the 210,252 shares approved in its third share repurchase program. 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, 2012, 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.
Capital and Liquidity.The Bank intends to maintain a strong capital position that supports its strategic goals while exceeding regulatory standards. At September 30, 2013, the Bank met the definition of a “well-capitalized” institution by exceeding all regulatory minimum capital requirements. The following tables summarize the consolidated and Bank capital ratios:
Ratios at | ||||||||||||
Consolidated Capital Ratios: | September 30, 2013 | June 30, 2013 | “Well-Capitalized” Minimums | |||||||||
Total Capital to risk-weighted assets | 25.83 | % | 25.64 | % | — | |||||||
Tier 1 Capital to risk-weighted assets | 24.63 | % | 24.45 | % | — | |||||||
Tier 1 Leverage | 18.38 | % | 18.67 | % | — | |||||||
Bank Capital Ratios: | ||||||||||||
Total Capital to risk-weighted assets | 22.78 | % | 22.53 | % | 10.00 | % | ||||||
Tier 1 Capital to risk-weighted assets | 21.59 | % | 21.34 | % | 6.00 | % | ||||||
Tier 1 Leverage | 16.11 | % | 16.30 | % | 5.00 | % |
The Company’s primary sources of funds are deposits, borrowed funds, amortization, prepayments, and maturities of loans, investment securities, and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and investments are a relatively predictable source of funds, deposit flows and loan and investment prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Company invests excess funds in short-term interest-earning securities and other assets which provide liquidity to meet lending requirements.
The Company is a member of the Federal Home Loan Bank of Atlanta, whose competitive advance programs provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in liquidity could result in the Company seeking other sources of funds, including, but not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of available-for-sale investment securities, and the sale of loans or other assets.
Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012
General. Net income increased $54 thousand to $314 thousand for the three months ended September 30, 2013 from net income of $260 thousand for the three months ended September 30, 2012, an increase of 20.8%. The increase in net income was primarily a result of an increase in net interest income of $103 thousand, an increase in non-interest income of $21 thousand, and a decrease in the provision for loan losses of $107 thousand, partially offset by an increase in non-interest expense of $116 thousand and an increase in income tax expense of $61 thousand.
Net Interest Income.Net interest income increased $103 thousand to $3.4 million for the three months ended September 30, 2013 as compared to $3.3 million for the three months ended September 30, 2012. Total interest expense decreased $148 thousand, or 23.2%, to $489 thousand for the three months ended September 30, 2013 as compared to $637 thousand for the three months ended September 30, 2012. The decrease in interest expense was primarily the result of the Bank decreasing deposit rates while maintaining its competitive position within the local market, paying off several matured higher costing term Federal Home Loan Bank advances, and reducing the rate on customer repurchase agreements. Interest and dividend income was effectively unchanged at $3.8 million for the three months ended September 30, 2013 as compared to $3.9 million for the three months ended September 30, 2012.
32
The net interest margin was 3.80% for the three months ended September 30, 2013 compared to 3.62% for the three months ended September 30, 2012. The increase in the net interest margin was primarily a result of a decrease in higher costing average borrowings; which were replaced by lower costing deposits, a 23 basis point decrease in the average yield of interest-bearing liabilities, and a two basis point increase in the average yield on interest-earning assets. Net interest-earning assets decreased $9.2 million and average interest-earning assets decreased $7.1 million to $350.5 million for the period ended September 30, 2013 compared to $357.6 million for the period ended September 30, 2012. Average interest-bearing liabilities increased $2.2 million to $271.1 million for the quarter ended September 30, 2013 as compared to $268.9 million for the quarter ended September 30, 2012.
Interest and Dividend Income.Interest and dividend income was effectively unchanged at $3.8 million for the three months ended September 30, 2013 as compared to $3.9 million for the three months ended September 30, 2012. Interest income on loans was unchanged at $3.6 million for the quarters ended September 30, 2013 and September 30, 2012. Interest income on investment securities decreased $44 thousand, to $226 thousand, for the three months ended September 30, 2013 from $270 thousand for the three months ended September 30, 2012. This decrease was primarily the result of average investment securities decreasing $6.2 million, to $44.9 million, for the three months ended September 30, 2013 from $51.1 million for the three months ended September 30, 2012.
The average yield on loans decreased thirteen basis points, to 4.73%, for the three months ended September 30, 2013 from 4.86% for the three months ended September 30, 2012. Total average loans increased $6.3 million, to $301.4 million, reflecting an increase in the average balance of commercial loans of $24.1 million, to $194.8 million, for the three months ended September 30, 2013. The increase in average commercial loans was offset by a decrease in average residential mortgage loans of $13.2 million to $79.0 million and a decrease in average home equity loans and lines of credit of $4.5 million, to $27.6 million, for the three months ended September 30, 2013 compared to $92.2 million and $32.1 million, respectively, for the three months ended September 30, 2012.
The average yield on securities decreased seven basis points to 2.09% for the three months ended September 30, 2013 from 2.16% for the three months ended September 30, 2012, reflecting continued low market interest rates and repayments of higher yielding securities within the mortgage backed securities portfolio.
Interest Expense.Interest expense decreased $148 thousand to $489 thousand from $637 thousand for the three months ended September 30, 2013 and 2012, respectively. Deposit expense decreased $38 thousand to $314 thousand for the three months ended September 30, 2013 compared to $352 thousand for the three months ended September 30, 2012 as the average rate paid on deposits decreased 10 basis points to 0.51% for the three months ended September 30, 2013 from 0.61% for three months ended September 30, 2012.
Interest expense on borrowings decreased $110 thousand to $175 thousand for the three months ended September 30, 2013 compared to $285 thousand for the three months ended September 30, 2012. The average cost of borrowings decreased 16 basis points to 2.66% for the three months ended September 30, 2013 compared to September 30, 2012 as a result of paying off several matured higher costing term Federal Home Loan Bank advances.
Provision for Loan Losses.The Company’s provision for loan losses for the three months ended September 30, 2013 was $5 thousand, or a decrease of $107, thousand from $112 thousand for the three months ended September 30, 2012. For further discussion related to the provision for loan losses, see “Allowance for Loan Losses” in the “Comparison of Financial Condition at September 30, 2013 and June 30, 2013.” For further discussions related to loan portfolio performance, see “Non-performing Assets” in the “Comparison of Financial Condition at September 30, 2013 and June 30, 2013” and Note 4 of the notes to the consolidated financial statements.
Non-Interest Income. The following table summarizes changes in non-interest income:
Three Months Ended September 30, | Change | |||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
(In thousands) | ||||||||||||||||
Customer service fees | $ | 93 | $ | 90 | $ | 3 | 3.3 | % | ||||||||
Loan servicing fees | 4 | 5 | (1 | ) | (20.0 | ) | ||||||||||
Bank owned life insurance income | 65 | 73 | (8 | ) | (11.0 | ) | ||||||||||
Other non-interest income | 34 | 32 | 2 | 6.3 | ||||||||||||
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Non-interest income before net gains (losses) | 196 | 200 | (4 | ) | (2.0 | ) | ||||||||||
Net gain on sale of loans | 25 | — | 25 | — | ||||||||||||
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Net gains (losses) | 25 | — | 25 | — | ||||||||||||
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Total non-interest income | $ | 221 | $ | 200 | $ | 21 | 10.5 | |||||||||
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33
Total non-interest income increased $21 thousand, to $221 thousand, for the three months ended September 30, 2013 compared to $200 thousand for the three months ended September 30, 2012. Net gains increased $25 thousand due to the sale of mortgage loans during the three months ended September 30, 2013. Net gains were offset by a net decrease in non-interest income of $4 thousand, to $196 thousand, for the three month period ended September 30, 2013. The decrease in non-interest income was primarily the result of a decrease in bank owned life insurance income of $8 thousand, to $65 thousand, during the three month period ended September 30, 2013.
Non-Interest Expense. The following table summarizes changes in non-interest expense:
Three Months Ended September 30, | Change | |||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
(In thousands) | ||||||||||||||||
Salaries and employee benefits | $ | 1,855 | $ | 1,770 | $ | 85 | 4.8 | % | ||||||||
Occupancy and equipment | 388 | 388 | — | — | ||||||||||||
Data processing | 236 | 197 | 39 | 19.8 | ||||||||||||
Directors’ fees | 91 | 94 | (3 | ) | (3.2 | ) | ||||||||||
FDIC assessments | 28 | 69 | (41 | ) | (59.4 | ) | ||||||||||
Other non-interest expense | 439 | 403 | 36 | 8.9 | ||||||||||||
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Total non-interest expense | $ | 3,037 | $ | 2,921 | $ | 116 | 4.0 | |||||||||
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Total non-interest expense increased to $3.0 million, an increase of $116 thousand, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Salaries and employee benefits, data processing expense, and other non-interest expense increased $85 thousand, $39 thousand, and $36 thousand, respectively, and were partially offset by a decrease in the Bank’s FDIC assessment of $41 thousand, to $28 thousand, due to improvements in the Bank’s credit quality. Other non-interest expense increased primarily due to an increase in operating expenses, third party service provider expenses, and legal, regulatory, and accounting fees. Salaries and employee benefits increased primarily due to an increase in the number of Bank employees and an increase in the Employee Stock Ownership Plan (“ESOP”) expense. The ESOP expense increased due to the increase in the Company’s market price on its common stock.
Income Taxes. The Company recorded income tax expense of $223 thousand for the three months ended September 30, 2013, reflecting an effective tax rate of 41.5%, compared to income tax expense of $162 thousand for the three months ended September 30, 2012, reflecting an effective tax rate of 38.4%.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required, as the Registrant is a smaller reporting company.
ITEM 4. | CONTROLS AND PROCEDURES |
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2013. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2013, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
34
PART II — OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
As of September 30, 2013, the Company was not subject to any legal actions, the outcome of which was expected to have a material effect on our financial condition or results of operations.
ITEM 1A. | RISK FACTORS |
Not required, as the Company is a smaller reporting company.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table sets forth information in connection with repurchases of the Company’s shares of common stock for the period of July 1, 2013 through September 30, 2013. All shares repurchased during the three months ended September 30, 2013 have been retired. On April 23, 2013, the Board of Directors authorized the repurchase of up to 210,377 shares, or approximately 5% of the Company’s common stock outstanding at the completion of the Company’s second repurchase program approved on March 16, 2012. The repurchase authorization has no expiration date.
Period | Total Number of Shares | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number Shares That May be Purchased the Plans or Programs | ||||||||||||
July 1, 2013 through July 31, 2013 | — | $ | — | — | 51,279 | |||||||||||
August 1, 2013 through August 31, 2013 | 1,000 | 18.25 | 1,000 | 50,279 | ||||||||||||
September 1, 2013 through September 30, 2013 | — | — | — | 50,279 | ||||||||||||
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Total | 1,000 | 18.25 | 1,000 | 50,279 | ||||||||||||
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None
ITEM 6. | EXHIBITS |
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Exhibit Index” immediately following the Signatures.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2013 | OBA FINANCIAL SERVICES, INC. (Registrant) | |||
/S/ CHARLES E. WELLER | ||||
Charles E. Weller | ||||
President and Chief Executive Officer | ||||
Date: November 14, 2013 | /S/ DAVID A. MILLER | |||
David A. Miller | ||||
Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit Number | Description | |
31.1 | Certification of Charles E. Weller, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a). | |
31.2 | Certification of David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a). | |
32 | Certification of Charles E. Weller, President and Chief Executive Officer, and David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income (Loss), (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements. |
37