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OBAF > SEC Filings for OBAF > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for OBA FINANCIAL SERVICES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for OBA FINANCIAL SERVICES, INC.


15-May-2013

Quarterly Report


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

FINANCIAL REVIEW

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

Overview of Income and Expenses

Income

The Company has two primary sources of pre-tax income; net interest income 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.

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, 2012.

Comparison of Financial Condition at March 31, 2013 and June 30, 2012

Assets. Total assets decreased $6.0 million to $386.1 million at March 31, 2013 from $392.1 million at June 30, 2012. The decrease was primarily due to a decrease in cash and cash equivalents partially offset by increases in loans and securities and an increase in other assets due to an increase in receivables that reflects trade date accounting on the issuance of long term fixed-rate brokered certificates of deposit.

Cash and Cash Equivalents. At March 31, 2013, cash and cash equivalents decreased $25.7 million, to $5.8 million, from $31.5 million at June 30, 2012 as excess cash was used to fund earning asset growth. Loans and securities available for sale increased $4.8 million and $6.7 million, respectively, while Federal Home Loan Bank advances decreased $5.6 million and repurchase agreements decreased $9.4 million.

Loans. At March 31, 2013, total gross loans were $301.0 million, an increase of $4.8 million, as compared to $296.2 million at June 30, 2012. The commercial loan portfolio increased $17.8 million to $187.9 million at March 31, 2013 from $170.1 million at


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June 30, 2012 as the Company continued its focus on originating commercial loans. This increase was offset by decreases of $8.6 million, to $84.7 million, and $4.3 million, to $28.4 million, in the residential mortgage loan and home equity loan and line of credit portfolios, respectively. For further detail, see "Note 4 - Credit Quality of Loans and Allowance for Loan Losses" in the accompanying consolidated financial statements.

Allowance for Loan Losses.

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



                                         Three Months Ended           Nine Months Ended
                                             March  31,                   March  31,
  (in thousands)                         2013           2012          2013          2012
  Balance at beginning of period       $   3,125       $ 2,619      $   3,035      $ 2,246
  Provision for loan losses                  229           270            324          646
  Charge-offs                                 -           (225 )           (8 )       (243 )
  Recoveries                                   1            -               4           15

  Balance at end of period             $   3,355       $ 2,664      $   3,355      $ 2,664


  Ratios:
  Net charge-offs to average loans            -  %        0.32 %           -  %       0.11 %
  Allowance for loan losses to loans        1.11          0.94           1.11         0.94

At March 31, 2013, the allowance for loan losses was $3.4 million compared with $2.7 million at March 31, 2012 and $3.0 million at June 30, 2012. The allowance for loan losses as a percentage of total loans at March 31, 2013 was 1.11% compared to 1.05% at December 31, 2012, 1.02% at June 30, 2012 and 0.94% at March 31, 2012. There were effectively no net charge-offs as a percentage of average loans for the three months and nine months ended March 31, 2013 compared to net charge-offs as a percentage of average loans of 0.32% and 0.11% for the three months and nine-months ended March 31, 2012, respectively. The Bank had $5.7 million in impaired loans at March 31, 2013 as compared to $7.9 million at June 30, 2012. Total impaired loans decreased as one of the two loan relationships with not-for profit entities that had collateral values well in excess of the loan values paid in full with recovery of all accrued interest and fees. The remaining balance is primarily made up of the other loan relationship with a not-for-profit entity that has collateral values well in excess of the loan value. Based on the value of the collateral, no specific allowances are required for this loan. For further detail, see "Note 4 - Credit Quality of Loans and Allowance for Loan Losses" in the accompanying financial statements.

Non-performing Assets. Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless well secured and in the process of collection. Loans can also be placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected. At March 31, 2013, the Company had $4.4 million in total non-performing assets as compared to $6.1 million at June 30, 2012. Primarily, these totals represent commercial real estate and residential mortgage loans. Total non-performing assets decreased as one of the two loan relationships with not-for profit entities that had collateral values well in excess of the loan values paid in full with recovery of all accrued interest and fees and the Company sold its sole other real estate owned property. Of the $4.4 million in non-performing assets at March 31, 2013, $3.3 million were also troubled debt restructurings.


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The following table summarizes non-performing assets:

                                                  March 31,        June 30,
         (dollars in thousands)                     2013             2012
         Non-performing assets
         Non-accrual loans:
         Commercial real estate                  $     3,625      $    5,080
         Residential mortgages                           667             891
         Home equity loans and lines of credit            75              75

         Total non-accrual loans                       4,367           6,046
         Other real estate owned                          -               40

         Total non-performing assets             $     4,367      $    6,086


         Asset quality ratios:
         Non-performing loans to total loans            1.45 %          2.04 %
         Non-performing assets to total assets          1.13            1.55

The non-performing loans to total loans ratio decreased 59 basis points to 1.45% at March 31, 2013 from 2.04% at June 30, 2012 and the non-performing assets to total assets ratio decreased 42 basis points from 1.55% at June 30, 2012 to 1.13% at March 31, 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 March 31, 2013 and June 30, 2012, the Company had $6.3 million and $5.8 million of loans, respectively, which were considered troubled debt restructurings. At March 31, 2013, the Bank had $1.0 million in residential mortgage loans that were considered troubled debt restructurings and $5.1 million in commercial real estate loans that were considered troubled debt restructurings. At June 30, 2012, the Bank had $1.1 million in residential mortgage loans that were considered troubled debt restructurings and $4.7 million in commercial real estate loans that were considered troubled debt restructurings. Of the $6.3 million in loans considered troubled debt restructurings, $3.3 million were also non-performing loans. For further detail, see "Note 4 - Credit Quality of Loans and Allowance for Loan Losses" in the accompanying financial statements.

Securities. At March 31, 2013, the securities portfolio totaled $42.8 million, or 11.1% of total assets, as compared to $36.9 million, or 9.4% of total assets, at June 30, 2012.

Deposits. At March 31, 2013, deposits increased $10.3 million to $279.9 million from $269.6 million at June 30, 2012. Total money market and savings accounts increased $1.5 million and certificates of deposit increased $9.4 million and were offset by a decrease in checking accounts of $0.6 million. The increase in certificates of deposit was primarily the result of an increase in brokered deposits of $14.4 million partially offset by a decrease in Jumbo certificates of deposit of $3.8 million. Of the $14.4 million increase in brokered certificates of deposit, $3.5 million were produced via the Certificate of Deposit Account Registry Service ("CDARS") program.

Borrowings. At March 31, 2013, total borrowings decreased $15.0 million, or 34.5%, to $28.5 million from $43.4 million at June 30, 2012. Repurchase agreements decreased $9.3 million to $7.1 million at March 31, 2013 from $16.4 million at June 30, 2012. At March 31, 2013, Federal Home Loan Bank advances totaled $21.4 million, a decrease of $5.6 million from June 30, 2012. The Bank continues its strategy of reducing its reliance on higher costing borrowings.

At March 31, 2013, the Company had access to additional Federal Home Loan Bank advances of up to $45.1 million.

Equity. Equity totaled $75.2 million at March 31, 2013 and $75.7 million at June 30, 2012. At March 31, 2013, the Company had repurchased 161,533 shares of its common stock of the 208,294 shares approved in its second share repurchase program. The Company subsequently completed the second repurchase program having repurchased 208,294 shares approved in the aforementioned program as adopted by the Company's Board of Directors as previously disclosed in the Company's 8-K filed on March 21, 2012. The Company adopted its third repurchase program as previously disclosed in the Company's 8-K filed on April 29, 2013. Under the third repurchase program, the Company is approved to repurchase up to 210,377 shares of its common stock, or approximately 5% of the current outstanding shares.


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Capital and Liquidity. The Bank intends to maintain a strong capital position that supports its strategic goals while exceeding regulatory standards. At March 31, 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
                                             March 31,           June 30,          "Well-Capitalized"
                                               2013                2012                 Minimums
Consolidated Capital Ratios:

Total Capital to risk-weighted assets             26.09 %            29.06 %                        -

Tier 1 Capital to risk-weighted assets            24.96 %            27.93 %                        -

Tier 1 Leverage                                   19.35 %            19.17 %                        -

Bank Capital Ratios:

Total Capital to risk-weighted assets             21.77 %            23.42 %                     10.00 %

Tier 1 Capital to risk-weighted assets            20.65 %            22.29 %                      6.00 %

Tier 1 Leverage                                   16.01 %            15.30 %                      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 March 31, 2013 and 2012

General. Net income increased $217 thousand to $237 thousand for the three months ended March 31, 2013 from net income of $20 thousand for the three months ended March 31, 2012. The increase in net income was primarily a result of an increase in net interest income of $288 thousand and a decrease in the provision for loan losses of $41 thousand, partially offset by an increase in tax expense of $104 thousand.

Net Interest Income. Net interest income increased $288 thousand to $3.4 million for the three months ended March 31, 2013 as compared to $3.1 million for the three months ended March 31, 2012. Total interest expense decreased $270 thousand, or 33.3%, to $540 thousand for the three months ended March 31, 2013 as compared to $810 thousand for the three months ended March 31, 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 all matured higher costing brokered certificates of deposit exclusive of the core customer-based Certificate of Deposit Account Registry Service ("CDARS") program and 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 $4.0 million for the three months ended March 31, 2013 as compared to $3.9 million for the three months ended March 31, 2012.

The net interest margin was 3.93% for the three months ended March 31, 2013 compared to 3.63% for the three months ended March 31, 2012. The increase in the net interest margin was primarily a result of an increase in average net interest-earning assets and a 35 basis point decrease in the average yield of interest-bearing liabilities partially offset by a two basis point decrease in the average yield of interest-earning assets. Net interest-earning assets increased $17.3 million as average interest-earning assets increased $5.8 million to $353.3 million for the period ended March 31, 2013 compared to $347.5 million for the period ended March 31, 2012. Average interest-bearing liabilities decreased $11.4 million to $264.9 million for the period ended March 31, 2013 as compared to $276.3 million for the period ended March 31, 2012.


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Interest and Dividend Income. Interest and dividend income was effectively unchanged at $4.0 million for the three months ended March 31, 2013 as compared to $3.9 million for the three months ended March 31, 2012. Interest income on loans increased $83 thousand to $3.7 million for the period ended March 31, 2013 from $3.6 million for the period ended March 31, 2012. This increase was partially offset by a slight decrease in interest income on investments which decreased $52 thousand to $237 thousand for the period ended March 31, 2013.

The average yield on loans decreased 13 basis points, to 5.03%, for the three months ended March 31, 2013 from 5.16% for the three months ended March 31, 2012. Total average loans increased $16.4 million to $299.2 million, reflecting an increase in the average balance of commercial loans of $30.2 million to $183.4 million for the three months ended March 31, 2013. The increase in average commercial loans was offset by a decrease in average residential mortgage loans of $7.9 million to $86.3 million and a decrease in average consumer loans of $5.8 million to $29.5 million for the three months ended March 31, 2013 as compared to $94.2 million and $35.3 million, respectively, for the three months ended March 31, 2012.

The average yield on securities decreased 37 basis points to 1.87% for the three months ended March 31, 2013 from 2.24% for the three months ended March 31, 2012, reflecting continued low market interest rates and repayments of higher yielding securities within the mortgage backed securities portfolio.

Interest Expense. Interest expense decreased $270 thousand to $540 thousand from $810 thousand for the three months ended March 31, 2013 and 2012, respectively. Deposit expense decreased $197 thousand to $287 thousand for the three months ended March 31, 2013 as compared to $484 thousand for the three months ended March 31, 2012 as the average rate paid on deposits decreased 37 basis points to 0.50% for the three months ended March 31, 2013 from 0.87% for three months ended March 31, 2012.

Interest expense on borrowings decreased $73 thousand to $253 thousand for the three months ended March 31, 2013 as compared to $326 thousand for the three months ended March 31, 2012. The average cost of borrowings increased 40 basis points to 2.81% for the three months ended March 31, 2013 as compared to March 31, 2012 as a result of paying off several matured lower costing short term Federal Home Loan Bank advances.

Provision for Loan Losses. The Company's provision for loan losses for the three months ended March 31, 2013 was $229 thousand or a decrease of $41 thousand from $270 thousand for the three months ended March 31, 2012. For further discussion related to the provision for loan losses, see "Allowance for Loan Losses" in the "Comparison of Financial Condition at March 31, 2013 and June 30, 2012." For further discussions related to loan portfolio performance, see "Non-performing Assets" in the "Comparison of Financial Condition at March 31, 2013 and June 30, 2012" and Note 4 of the notes to the consolidated financial statements.


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

                                                      Three Months Ended
                                                          March  31,                     Change
                                                      2013           2012           $            %
                                                        (In thousands)

Customer service fees                              $       79       $    90       $ (11 )        (12.2 )%
Loan servicing fees                                         3             7          (4 )        (57.1 )
Bank owned life insurance income                           69            73          (4 )         (5.5 )
Other non-interest income                                  33            32           1            3.1

Non-interest income before net gains (losses)             184           202         (18 )         (8.9 )

Net gain on sale of loans                                  28            -           28             -
Gains (losses) other real estate owned                     31           (34 )        65         (191.2 )

Net gains (losses)                                         59           (34 )        93             -


Total non-interest income                          $      243       $   168       $  75           44.6

Total non-interest income increased $75 thousand, to $243 thousand, for the three months ended March 31, 2013 as compared to $168 thousand for the three months ended March 31, 2012. Net gains increased $93 thousand due to the sale of the Bank's sole other real estate owned property and the sale of mortgage loans during the three months ended March 31, 2013. Net gains were partially offset by a decrease in non-interest income of $18 thousand, to $184 thousand, for the three month period ended March 31, 2013. The decrease in non-interest income was primarily the result of a decrease in customer service fees of $11 thousand, to $79 thousand, during the three month period ended March 31, 2013.

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

                                         Three Months Ended
                                             March  31,                  Change
                                          2013          2012         $           %
                                           (In thousands)

      Salaries and employee benefits   $    1,826      $ 1,760     $  66           3.8 %
      Occupancy and equipment                 390          394        (4 )        (1.0 )
      Data processing                         204          220       (16 )        (7.3 )
      Directors' fees                          83           91        (8 )        (8.8 )
      FDIC assessments                         68           75        (7 )        (9.3 )
      Other non-interest expense              450          398        52          13.1

      Total non-interest expense       $    3,021      $ 2,938     $  83           2.8

Total non-interest expense increased to $3.0 million, an increase of $83 thousand, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Salaries and employee benefits and other non-interest expense increased $66 thousand and $52 thousand, respectively, and were partially offset by various non-interest expense categories. Other non-interest expense increased primarily due to increased legal, regulatory, and accounting fees. Salaries and employee benefits increased due to 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 $180 thousand for the three months ended March 31, 2013, reflecting an effective tax rate of 43.2%, compared to income tax expense of $76 thousand for the three months ended March 31, 2012,


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reflecting an effective tax rate of 79.2%. The difference between the effective tax rate for the two periods is primarily due to an adjustment of $40 thousand which was recorded during that period related to the Employee Stock Ownership Plan to reflect the expected non-deductible nature of this expense and properly adjust deferred tax assets.

Comparison of Operating Results for the Nine Months Ended March 31, 2013 and 2012

General. Net income increased $704 thousand to $894 thousand for the nine months ended March 31, 2013 from net income of $190 thousand for the nine months ended March 31, 2012. The increase in net income was primarily a result of an increase in net interest income of $931 thousand and a decrease in the provision for loan losses of $322 thousand partially offset by an increase in tax expense of $494 thousand.

Net Interest Income. Net interest income increased by $931 thousand, to $10.1 million for the nine months ended March 31, 2013 as compared to $9.2 million for the nine months ended March 31, 2012. Total interest expense decreased $1.1 million, or 39.0%, to $1.8 million for the nine months ended March 31, 2013 as compared to $2.9 million for the nine months ended March 31, 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 all matured higher costing brokered certificates of deposit exclusive of the core customer-based CDARS program and several matured higher costing term Federal Home Loan Bank advances, and reducing the rate on customer repurchase agreements. Interest and dividend income decreased by $192 thousand to $11.8 million for the nine months ended March 31, 2013 as compared to $12.0 million for the nine months ended March 31, 2012. This decrease is primarily due to lower yields in the loan and investment security portfolios.

The net interest margin was 3.78% for the nine months ended March 31, 2013 compared to 3.58% for the nine months ended March 31, 2012. The increase in the net interest margin was primarily a result of an increase in average net interest-earning assets and a 51 basis point decrease in the average yield of interest-bearing liabilities partially offset by a 28 basis point decrease in the average yield of interest-earning assets. Net interest-earning assets increased $25.5 million as average interest-earning assets increased $15.8 million to $355.6 million for the period ended March 31, 2013 compared to $339.8 million for the period ended March 31, 2012. Average interest-bearing liabilities decreased $9.7 million to $267.8 million for the period ended March 31, 2013 as compared to $277.5 million for the period ended March 31, 2012.

Interest and Dividend Income. Interest and dividend income decreased $192 thousand to $11.8 million from $12.0 million for the nine months ended March 31, . . .

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