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OBAF > SEC Filings for OBAF > Form 10-K on 27-Sep-2013All Recent SEC Filings

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Annual Report

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Overview of Income and Expenses


The Company has two primary sources of pre-tax income. Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.

Non-interest income is the compensation received from providing products and services and from other income. Non-interest income is primarily earned from service charges on deposit accounts, loan servicing fees, and bank owned life insurance income. The Company also earns income from the sale of residential mortgage loans and other fees and charges.

The Company recognizes gains or losses as a result of the sale of investment securities, foreclosed property, and premises and equipment. In addition, the Company recognizes losses on its investment securities that are considered other-than-temporarily impaired. Gains and losses are not a regular part of the Company's primary sources of income.


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

Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees, expenses for health care, retirement, and other employee benefits, stock based compensation, and payroll taxes

Occupancy expenses, which are fixed or variable costs associated with premises and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and cost of utilities.

Equipment expense includes expenses and depreciation charges related to office and banking equipment.

External processing fees are paid to third parties primarily for data processing services.

Other expenses include expenses for professional services, including, but not limited to, legal, accounting, and consulting services, the early repayment of certain borrowings, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.

Critical Accounting Policies and Estimates

The Notes to the Consolidated Financial Statements contain a summary of the Company's significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as, estimates made by Management, are integral to the presentation of the Company's operations and financial condition. These accounting policies require that Management make highly difficult, complex, or subjective judgments and estimates at times regarding matters that are inherently uncertain or susceptible to change. Management has discussed these significant accounting policies, the related estimates, and its judgments with the Audit Committee of the Board. Additional information regarding these policies can be found in the Notes to the Consolidated Financial Statements.

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Discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements of the Company, which are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities for the reporting periods. Management evaluates estimates on an on-going basis and bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Management believes the following critical accounting policies require the most significant judgments and estimates used in preparation of the financial statements:

Allowance for Loan Losses. Management maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the statement of condition date. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss rates for each loan group and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, or an estimate of the value of collateral. Based on the estimate of the level of allowance for loan losses required, Management records a provision for loan losses to maintain the allowance for loan losses at an appropriate level.

The determination of the allowance for loan losses is based on Management's current judgments about the loan portfolio credit quality and Management's consideration of all known relevant internal and external factors that affect loan collectability, as of the reporting date. Management cannot predict with certainty the amount of loan charge-offs that will be incurred. Management does not currently determine a range of loss with respect to the allowance for loan losses. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Company's allowance for loan losses. Such agencies may require that Management recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Accordingly, actual results could differ from those estimates.

Deferred Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be used. The recoverability of deferred tax assets is dependent upon future taxable income.

Other-Than-Temporary Impairment. In estimating other-than-temporary impairment of investment securities, securities are evaluated periodically, and at least quarterly, to determine whether a decline in their value is other than temporary.

Management considers numerous factors when determining whether potential other-than-temporary impairment exists and the period over which a debt security is expected to recover. The principal factors considered are the length of time and the extent to which the fair value has been less than the amortized cost basis, the financial condition of the issuer (and guarantor, if any), any adverse conditions specifically related to the security, industry, or geographic area, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of a security by a rating agency, and the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

For debt securities, other-than-temporary impairment is considered to have occurred if Management intends to sell the security, Management will, more likely than not, be required to sell the security before recovery of its amortized cost basis, or the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. In determining the present value of expected cash flows, Management discounts the expected cash flows at the effective interest rate implicit in the security at the date of acquisition or, for debt securities that are

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beneficial interests in securitized financial assets, at the current rate used to accrete the beneficial interest. In estimating cash flows expected to be collected, Management uses available information with respect to security prepayment speeds, expected deferral rates and severity, whether subordinated interests, if any, are capable of absorbing estimated losses and the value of any underlying collateral.


Total assets decreased $10.5 million, or 2.7%, to $381.6 million at June 30, 2013 from $392.1 million at June 30, 2012. For the fiscal year ended June 30, 2013, the Company had net income of $1.1 million, or $0.28 basic and diluted earnings per share, compared to net income of $268 thousand, or $0.07 basic and diluted earnings per share, for the fiscal year ended June 30, 2012. Net interest margin, the percentage of net interest income to average interest-earning assets, increased to 3.89% for the fiscal year ended June 30, 2013 from 3.59% for the fiscal year ended June 30, 2012. Net interest income, the difference between interest income and interest expense, increased $1.5 million to $13.8 million for the fiscal year ended June 30, 2013 from $12.3 million for the fiscal year ended June 30, 2012.

Non-performing assets totaled $697 thousand, or 0.18% of total assets, at June 30, 2013, compared to $6.1 million, or 1.55% of total assets, at June 30, 2012. The Bank had $779 thousand of loans delinquent 30 days or greater at June 30, 2013, compared to $6.1 million of such delinquencies at June 30, 2012. In addition, the Bank provided $503 thousand for loan losses during the fiscal year ended June 30, 2013 compared to a provision for loan losses of $1.1 million during the fiscal year ended June 30, 2012, or a decrease of $582 thousand.

Balance Sheet Analysis

Cash and Cash Equivalents. At June 30, 2013 and 2012, the Company had $16.2 million and $31.5 million of cash and cash equivalents, respectively. The reduction in cash and cash equivalents was primarily due to an increase in loans and securities and a decrease in borrowings partially offset by an increase in total deposits.

Loans. At June 30, 2013, total loans were $303.3 million, or 79.5% of total assets, as compared to $296.2 million, or 75.6% of total assets at June 30, 2012. During the year ended June 30, 2013, the loan portfolio increased $7.0 million, or 2.4%. The increase in loans was primarily due to an increase in commercial business, commercial real estate, and construction loans partially offset by decreases in residential mortgage loans and home equity loans and lines of credit.

Loan Portfolio Composition. The following table sets forth the composition of the Company's loan portfolio at the dates indicated.

                                                                                                          At June 30,
                                                  2013                          2012                         2011                         2010                          2009
                                          Amount        Percent         Amount        Percent        Amount        Percent        Amount        Percent        Amount         Percent
                                                                                                    (Dollars in thousands)
Real estate loans:
Residential mortgage                     $  80,529          26.6 %     $  93,266          31.5 %    $  97,285          34.5 %    $ 123,452          44.5 %    $ 151,468           53.3 %
Commercial real estate                     140,104          46.2         136,036          45.9        108,756          38.6         85,423          30.7         64,930           22.8
Construction                                13,044           4.3           1,850           0.6          1,180           0.4          1,071           0.4          4,935            1.7
Home equity loans and lines of credit       27,598           9.1          33,110          11.2         38,785          13.8         41,655          15.0         40,812           14.3
Commercial business                         42,001          13.8          31,979          10.8         35,860          12.7         26,234           9.4         22,481            7.9

Total loans                                303,276         100.0 %       296,241         100.0 %      281,866         100.0 %      277,835         100.0 %      284,626          100.0 %

Allowance for loan losses (3,473 ) (3,035 ) (2,246 ) (1,737 ) (1,167 )

Total loans, net $ 299,803 $ 293,206 $ 279,620 $ 276,098 $ 283,459

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Loan Portfolio Maturities. The following table summarizes the scheduled repayments of the loan portfolio at the dates indicated. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

                                                                                        Home Equity
                               Residential       Commercial                              Loans and          Commercial
                                Mortgage         Real Estate       Construction       Lines of Credit        Business         Total
                                                                          (In thousands)
Due during the Years Ending
June 30,
2014                          $       5,079     $      10,964     $        3,123     $             506     $      4,669     $  24,341
2015                                  4,436            12,750              9,921                   117            3,799        31,023
2016                                  4,450            20,180                 -                    119            3,657        28,406
2017 to 2018                          8,477            41,083                 -                    227            5,938        55,725
2019 to 2023                         16,880            44,318                 -                    551            2,570        64,319
2024 to 2028                         14,822             6,840                 -                  3,460               69        25,191
2029 and beyond                      26,385             3,969                 -                 22,618           21,299        74,271

Total                         $      80,529     $     140,104     $       13,044     $          27,598     $     42,001     $ 303,276

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at the date indicated:

                                                      Due after June 30, 2013
                                                Fixed        Adjustable        Total
                                                           (In thousands)
   Real estate loans:
   Residential mortgages                      $  57,657     $     17,793     $  75,450
   Commercial real estate                        90,925           38,215       129,140
   Construction                                      -             9,921         9,921
   Home equity loans and lines of credit          1,508           25,584        27,092
   Commercial business                           16,950           20,382        37,332

   Loans contractually due after one year       167,040          111,895       278,935
   Loans contractually due one year or less      17,867            6,474        24,341

   Total loans                                $ 184,907     $    118,369     $ 303,276

Securities. The following table sets forth the amortized cost and estimated fair value of the available for sale and held to maturity securities portfolios, excluding Federal Home Loan Bank of Atlanta common stock, at the dates indicated.

                                                                      At June 30,
                                             2013                         2012                         2011
                                    Amortized        Fair        Amortized        Fair        Amortized        Fair
                                      Cost          Value          Cost          Value          Cost          Value
                                                                 (Dollars in thousands)
Residential mortgage-backed
securities                         $    38,426     $ 38,604     $    35,406     $ 36,899     $    38,170     $ 39,458
Trust preferred securities                  41           40              70           54             117          115
Other securities                            50           50              50           50              50           50

Total securities                   $    38,517     $ 38,694     $    35,526     $ 37,003     $    38,337     $ 39,623

The Company's mortgage-backed securities are guaranteed by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. Total residential mortgage-backed securities increased $1.8 million to $38.6 million, or 10.1% of total assets, at June 30, 2013 from $36.9 million, or 9.4% of total assets, at June 30, 2012. The reduction in the unrealized gain in the securities portfolio as of June 30, 2013 was the result of an increase in long term market interest rates as compared to the original purchase yield of the securities.

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The Company currently owns one immaterial position in an insurance company-backed pooled trust preferred security that is performing as contractually obligated.

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2013 are summarized in the following table. Maturities are based on the final contractual maturity dates and do not reflect the impact of repayments or early redemptions that may occur. No tax-equivalent adjustments have been made, as the Company did not hold any tax-advantaged investment securities at June 30, 2013.

                                                                                   More than One Year               More than Five Years
                                                One Year or Less                   through Five Years                through Ten Years               More than Ten Years                        Total Securities
                                                              Weighted                           Weighted                         Weighted                         Weighted                                         Weighted
                                           Amortized          Average           Amortized         Average         Amortized        Average         Amortized        Average        Amortized                         Average
                                              Cost             Yield              Cost             Yield            Cost            Yield            Cost            Yield            Cost         Fair Value         Yield
                                                                                 (Dollars in thousands)
Residential mortgage-backed securities    $         -                -  %     $          -              -  %     $     5,967           3.20 %     $    32,459           2.56 %     $   38,426      $    38,604           2.66 %
Trust preferred securities                          -                -                   -              -                 -              -                 41           1.53               41               40           1.53
Other securities                                    -                -                   -              -                 -              -                 50             -                50               50             -

Total                                     $         -                -  %     $          -              -  %     $     5,967           3.20 %     $    32,550           2.55 %     $   38,517      $    38,694           2.65 %

Deposits. The Bank accepts deposits primarily from the areas in which the Bank's offices are located. Management's focus is building broader customer relationships and targeting small business customers to increase core deposits. The Bank also relies on enhanced technology and customer service to attract and retain deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank's deposit accounts consist of commercial and retail checking accounts, money market deposit accounts, savings accounts, certificates of deposit, and individual retirement accounts. The Bank accepts deposits through the CDARS program, which are classified as brokered deposits for regulatory purposes, and can accept other brokered deposits.

Interest rates paid, maturity terms, service fees, and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies, market interest rates, liquidity requirements, and the Bank's deposit growth goals.

During the fiscal year ended June 30, 2013, deposits increased $13.7 million, or 5.1%, to $283.3 million from $269.6 million at June 30, 2012. The increase primarily resulted from an increase in time certificates of deposit of $11.1 million and a $2.4 million increase in non-interest bearing demand accounts. The Bank issued, at historically low long-term interest rates, longer-term brokered certificates of deposit to match the interest rate risk characteristics of the commercial loan portfolios.

The following tables set forth the distribution of the average total deposit accounts by account type, for the years indicated.

                                                                              For the Fiscal Years Ended June 30,
                                               2013                                           2012                                           2011
                                                                                     (dollars in thousands)
                                                            Weighted                                       Weighted                                       Weighted
                              Average                       Average          Average                       Average          Average                       Average
                              Balance       Percent           Rate           Balance       Percent           Rate           Balance       Percent           Rate
Non-interest bearing         $  40,306          14.8 %             -  %     $  32,736          12.6 %             -  %     $  25,761          11.1 %             -  %
Interest bearing checking       72,414          26.5             0.43          63,684          24.4             0.58          59,917          25.9             0.57
Savings and escrow               7,402           2.7             0.12           7,181           2.8             0.32           7,134           3.1             0.43
Money Market                    91,237          33.4             0.44          88,355          33.9             0.76          68,145          29.5             0.79
Certificates of deposit         61,770          22.6             0.88          68,834          26.3             1.74          70,131          30.4             2.44

Total deposits $ 273,129 100.0 % 0.46 % $ 260,790 100.0 % 0.87 % $ 231,088 100.0 % 1.14 %

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The following table sets forth the maturities of certificates of deposit in amounts greater than or equal to $100 thousand as of the date indicated.

                                                      June 30, 2013
                                                     (In thousands)
              Three months or less                   $         9,866
              Over three months through six months             6,848
              Over six months through one year                 8,814
              Over one year to three years                    11,928
              Over three years                                 2,202

              Total                                  $        39,658

Borrowings. The Company's borrowings consist primarily of advances from the Federal Home Loan Bank of Atlanta and funds borrowed from depositors; primarily small business customers under repurchase agreements. During the fiscal year ended June 30, 2013, borrowings decreased $19.3 million, or 44.4%, to $24.2 million. At June 30, 2013, Federal Home Loan Bank advances totaled $15.6 million, or 5.0% of total liabilities, and repurchase agreements totaled $8.5 million, or 2.8% of total liabilities. The Company's sole repurchase agreement with a securities dealer matured during the fiscal year ended June 30, 2013. That matured repurchase agreement was $5.0 million and the rate was 3.23%. The Company had two long term FHLB advances, for a total of $8.0 million, mature during the fiscal year ended June 30, 2013 at an average rate of 3.06%. Also, the Company repaid $3.3 million of a longer term, $10.0 million, Federal Home Loan Bank advance, which carries a rate of 5.15%, incurring a loss of $488 thousand.

At June 30, 2013, the Company had access to additional Federal Home Loan Bank advances of up to $46.6 million. As of June 30, 2013, the Company's available credit lines and other sources of liquidity had not been reduced compared to levels from June 30, 2012.

The following table sets forth information concerning balances and interest rates on Federal Home Loan Bank advances at the dates and for the fiscal years indicated.

                                                    At or for the Years Ended June 30,
                                                2013                2012               2011
                                                          (dollars in thousands)
Balance at end of year                       $    15,623         $   26,997         $   29,618
Average balance during the year              $    22,658         $   34,082         $   35,845
Maximum outstanding at any month end         $    29,426         $   42,058         $   43,166
Weighted average interest rate at end
of year                                             4.26 %             4.00 %             3.90 %
Weighted average interest rate during
year                                                3.89 %             3.30 %             3.72 %

The following table sets forth information concerning balances and interest rates on securities dealer repurchase agreements at the dates and for the years indicated.

                                                         At or for the Years Ended June 30,
                                                      2013               2012             2011
. . .
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